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How the IRS Thinks About Small Business Tax Scofflaws

How the IRS Thinks About Small Business Tax Scofflaws

Photograph by Corbis


There’s a story from Bloomberg BNA this week that does a good job describing the conventional wisdom on how the Internal Revenue Service thinks about policing small business owners.

The story (subscription required) is about an increase in criminal cases against small businesses believed to be shirking employment tax obligations. That generally means companies that fail to remit federal income, Social Security, and unemployment taxes, according to an IRS report on criminal investigations (pdf). The IRS doesn’t say how many employment tax prosecutions the agency initiated recently, but it’s a pretty tiny area: The agency’s criminal investigations unit recommended a total of 3,700 prosecutions for misdeeds of all stripes for the year ending September 2012.

Small business owners are more likely to be targeted for employment tax prosecutions because they’re more likely to trample the law, according to lawyers quoted by Bloomberg BNA. Here’s the money quote:

“We are seeing these cases in some of the smaller dollar amounts lately, and I think part of the reason why is that that’s where you sometimes have some of the more egregious conduct with these small business owners, as opposed to larger entities who for the most part are maybe going to make more of an effort to do things right,” said Sarah Wirskye of Meadows Collier Reed Cousins Crouch & Ungerman.

It’s also the prevailing view that the self-employed are more likely to be audited because they have more room to cheat on their taxes. And research from the National Taxpayer Advocate has also shown that certain types of small businesses (pdf)—including construction contractors and real estate rental agents—are more likely to attract auditors’ attention.

The IRS isn’t the only government body in the news for targeting small businesses. This week the New York Attorney General’s office announced it had spent a year investigating small businesses that planted fake reviews about themselves on websites like Yelp (YELP) and CitySearch (IACI)—a probe that ultimately landed agreements with 19 companies and about $350,000 in fines. In view of these kind of cases targeting little guys, it’s worth noting another factor contributing to them: The little guys generally put up less of a fight than the bigger ones.

Clark is a reporter for Bloomberg Businessweek.

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