The New Year will be bringing surprises to even more small businesses this year thanks to the IRS. What are these surprises? More audits and millions of additional taxpayers caught in the Alternative Minimum Tax! From Inc.com:
On November 30, President Bush signed into law an act designating $4.7 billion for enforcement, an increase of $362 million from 2005. Small-business advocates are already sensitive to heightened scrutiny of tax compliance following an announcement this summer that the IRS would conduct 5,000 random audits of small businesses over a three year time period.
That's right, the IRS now will be spend $4.7 billion just on enforcement. Although the IRS claims they will spread the pain to all categories of tax payers, in the next breath they will tell you that most of the so-called "tax gap" (uncollected taxes) results from underpayment by small business owners.
The Alternative Minimum Tax surprise is a result of the Senate failing to take any action to adjust the rules for when this tax rule applies. The rule was set up decades ago to catch the rich who were able to completely avoid income taxes.
From the Tax Foundation:
Congress enacted the AMT in 1969 following testimony by the Secretary of the Treasury that 155 people with adjusted gross income above $200,000 had paid zero federal income tax on their 1967 tax returns....In inflation-adjusted terms, those 1967 incomes would be roughly $1.17 million in today's dollars.This tax avoidance by a few high-income taxpayers was widely perceived as unfair. Rather than directly addressing the problem by eliminating the deductions and credits in the tax code that were leading to the tax avoidance, Congress laid an additional layer of complexity over the regular income tax in the form of the AMT.
But the income rates were never adjusted to reflect inflation, so now millions feel the effects of the AMT. In fact, the AMT now ensnares mostly middle and upper middle income taxpayers and not the super rich. However, the Republican led Senate has too may important things on their plate to possibly deal with a bill to fix this problem and help over 15 million middle class and small business taxpayers (that was already approved in the House).
So let's recap. The IRS code, which is now over 60,000 pages long and growing every day, is so complex that it costs small business owners thousands of dollars per employee to try and comply. And even though it is so complex that even experts within the IRS cannot give consistent answers to tax questions, we are now paying more taxes to help the IRS increase their enforcement to collect these taxes. And because it is so complex, they had to make rules to assure that rich people could no longer use these rules (created in large part by the IRS and its supporters in the tax industry) to not pay taxes. But now those same rules are really increasing the tax obligation of millions of middle class taxpayers who are just trying to take simple and common legal deductions, such as really high state income taxes and deductions for dependents. And we elected a President and Congress from a party that talks about cutting and simplifying taxes, but when given the opportunity to finally fix this crazy mess, they pass a "simplification" bill that will actually increase the complexity of the system.
Got it?
Happy New Year......
