The Entrepreneurial Mind

For the past year or so I have been cautioning about growing signs that the IRS is targeting small businesses for audits. A story in the Tennessean (Nashville's local paper) offers a stark example of what this can mean for entrepreneurs.

Michael Crowder retired from the Bristol, Tenn., police force with simple plans.

He and his wife, Caroline, set up a home-based business a few years ago and started selling health-care products. The income rolled in. But they ran into trouble when they decided to deduct some of the cost of a home office, business equipment and client-related trips from their federal income taxes.

The Internal Revenue Service audited the couple in late 2005, originally saying they owed almost $100,000 in taxes and penalties, Crowder said. After months of talks, and with a court date looming in March, the IRS has now reduced that to roughly 5 percent of the original sum, Crowder said.

"Especially in the beginning, we lost tons and tons of sleep," he said. "I never would have imagined that keeping good records and receipts wouldn't be enough."

The root of the problem is not with the owners of small businesses. It is the system. The IRS targets hundreds of thousands of small business owners for audits each year, usually over questionable deductions. But with 60,000 pages of tax code how can anyone, even expert tax preparers, navigate this labyrinth without exposing themselves to the risk of an audit? And when the force of the federal government, particularly the enforcement division of the IRS, comes after a small business owner there is little doubt as to the outcome -- the small business owner most often loses.

The current system is inefficient and ineffective for our new economy. We waste billions of dollars on government enforcement and tax payer compliance. Things will only get worse as more of the economy is driven by small business over the coming years and as the tax code continues to get more and more complex.

An entrepreneurial economy needs a system that is fair in its burden of taxes, efficient in the collection of taxes owed, and not a financial burden when it comes to compliance. And while I'm dreaming, let's make it politician-proof to avoid a recurrence of the mess they have created with the current system.