Measuring the Tax Compliance Burden of Small Businesses

I n 1998, IBM Business Consulting Services (IBM) began working withthe Internal Revenue Service (IRS) to develop a new and improvedmethodology for measuring and modeling the Federal tax compliance burden incurred by taxpayers.1 Federal tax compliance burden is defined under this methodology as the time and money that taxpayers expend each year to comply with Federal tax rules and regulations. IBM is enhancing the IRS’s ability to understand the burden caused by the Federal tax system using an incremental approach. That is, we are studying the major taxpayer sub-groups (as defined by the IRS) individually. Initially, IBM completed a study of the prefiling/filing tax compliance burden experienced by Wage and Invest-ment (W&I) taxpayers. This was followed by a study to measure and model the pre-filing/filing tax compliance burden experienced by Self-Employed (SE) taxpayers. The information collected during these two studies provided the IRS with a measure of the burden experienced by all individual taxpayers. In each of these studies, we developed and administered a large-scale survey to a representative sample of taxpayers throughout the country. The data collected in the survey were merged with IRS administrative data to serve as the input file to develop a simulation model that the IRS can use to produce burden estimates, evaluate policies, and review burden reduction ini-tiatives. IBM is currently completing a similar study for IRS of the prefiling/filing Federal tax compliance burden experienced by small business (SB) taxpayers in the United States. This research is more complex than our prior research as previous studies focused only on Federal income tax compliance burden. The SB study focuses on both Federal income and Federal employment tax com-pliance burden. In addition, businesses exhibit considerable variation in indus-try, size, and structure. This paper reports the key findings from the data collection portion of the SB study. As part of the study, IBM conducted two large-scale surveys of taxpayers. One of the surveys collected information about the Federal income tax burden that small businesses incur. The other survey focused on the burden associated with Federal employment taxes