oversight

Tax Administration: Tax Requirements of Small Businesses

Published by the Government Accountability Office on 1999-08-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Chairman, Committee on
                 Small Business, U.S. Senate



August 1999
                 TAX
                 ADMINISTRATION
                 Tax Requirements of
                 Small Businesses




GAO/GGD-99-133
United States General Accounting Office                                                           General Government Division
Washington, D.C. 20548




                                    B-281009
                                    August 24, 1999

                                    The Honorable Christopher S. Bond
                                    Chairman, Committee on Small Business
                                    United States Senate

                                    Dear Mr. Chairman:

                                    Small businesses—a category that includes all farmers and sole
                                                                                        1
                                    proprietorships and partnerships, S corporations, and corporations with
                                    assets of less than $5 million—are an important segment of taxpayers that
                                    are subject to substantial federal tax requirements. Not only do they
                                    account for nearly half of all taxes the Internal Revenue Service (IRS)
                                    collects annually, but they also have extensive interactions with IRS as
                                    they attempt to comply with their tax obligations.

                                    Because of your interest in alleviating any unnecessary burden that the
                                    federal tax system places on small businesses, you asked us to assess the
                                    magnitude of the burden that complying with tax obligations imposes for
                                    these businesses. This report is the first of a series of reports to address
                                    your concerns. As agreed with your office, our objectives for this report
                                    were to determine (1) the federal filing, reporting, and deposit
                                    requirements that apply to small businesses and (2) the actual experience
                                    of small businesses in meeting these requirements, including their
                                    involvement in IRS’ enforcement processes.

                                    Small businesses, like large businesses, are subject to multiple layers of
Results in Brief                    filing, reporting, and deposit requirements. We identified more than 200
                                    different IRS requirements that potentially apply to small businesses.
                                    Through such requirements, IRS administers a variety of tax policies—
                                    notably those associated with income, employment, and excise taxes. In
                                    considering the implications of the number of requirements, it is important
                                    to recognize that the requirements reflect the many decisions that have
                                    been made by Congress and the executive branch to accomplish their
                                    policy goals, including those that might benefit small businesses and other
                                    taxpayers. It is equally important to recognize that most businesses do not
                                    need to comply with all or even most of these requirements. The ones that

                                    1
                                      Corporations with no more than 75 shareholders can elect to be treated as S corporations for federal
                                    tax purposes if certain requirements are met. The main advantage of this election is avoidance of tax at
                                    both the corporate and shareholder level, as the income of S corporations is generally subject to tax
                                    only at the shareholder level.




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             apply to a particular small business would depend on how the business is
             organized, whether it has employees, and the nature of its business
             operations.

             Limitations in IRS’ information systems prevented us from fully
             determining the extent to which small businesses filed the various forms
             and schedules or their involvement in key stages of IRS’ enforcement
             processes. IRS has acknowledged that these limitations hinder its ability to
             effectively manage small business activities and will continue to be a
             serious impediment until the systems are improved. We were able to
             obtain and analyze limited data on small business filings of income tax
             forms and on some aspects of their involvement in IRS’ enforcement
             processes. Our analysis of IRS’ 1995 data on the most commonly filed
             income tax forms and schedules showed that small businesses, on average,
             filed one secondary form in addition to their primary income tax return,
             with little variation among types of businesses. Our analysis of small
             business audits showed that the audit rate for small businesses is higher
             than the rate for all taxpayers and that about two-thirds of the audits of
             small businesses result in recommendations for assessment of additional
             taxes and penalties.

             Businesses in the United States (including farmers) are generally
Background   structured in one of four forms: sole proprietorship, partnership, S
                                            2
             corporation, and corporation. Each form of business has distinctive legal
             characteristics and different tax consequences. Corporations are taxed as
             corporations, with dividends included in the owner’s income; sole
             proprietors are taxed as individuals; and the income earned by S
             corporations and partnerships is passed through to their owners and taxed
             at the owners’ rates.

             The Internal Revenue Code (IRC) distinguishes small businesses from
             larger businesses in a number of ways, and IRS has used different
             definitions of small business for different internal operating purposes. As
             part of its current reorganization effort, IRS has developed an agencywide
             definition of small business, which we used in our work. Based on that
             definition, small businesses include (1) all farmers and sole
             proprietorships and (2) partnerships, S corporations, and corporations that
             annually reported less than $5 million in assets.


             2
              Another alternative business form that has emerged is the limited liability company, which generally is
             classified as a partnership for tax purposes, but offers the corporate benefit of limited liability for
             owners.




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              A large majority of all businesses are small businesses. To illustrate, for
              tax year 1995, we used IRS data to identify approximately 23.4 million
              businesses that filed returns. Of this population, 94 percent of partnerships
              reported total assets of less than $5 million, and 98 percent of S
              corporations reported total assets of less than $5 million. About 97 percent
              of U.S. corporations reported assets of less than $5 million in 1995. Sole
              proprietorships accounted for approximately 16.3 million of the nearly 23.4
                                              3
              million business filers in 1995.

              To identify the federal filing, reporting, and deposit requirements that
Scope and     apply to small businesses, we examined information such as IRS forms,
Methodology   publications, manuals, and related IRC provisions. We also interviewed
              IRS officials who were cognizant of small business tax issues, including
              officials in IRS’ Office of Public Liaison and Small Business Affairs,
              Compliance Research Division, Appeals Division, and the Small
                                                                       4
              Business/Self-Employed/Supplemental Income Team.

              To help ensure completeness, we had knowledgeable IRS officials review
              our listing of IRS requirements. To develop a more comprehensive list of
              federal tax requirements that apply to small businesses, we contacted the
              Bureau of Alcohol, Tobacco, and Firearms (ATF) in the Department of the
              Treasury for information on requirements pertaining to the excise taxes
              that it administers. The ATF requirements apply generally to any business.

              To determine the actual experience of small businesses in meeting their
              filing, reporting, and deposit requirements, including their involvement in
              IRS’ enforcement processes, we (1) interviewed IRS compliance officials
              specializing in examination, appeals, and collection issues to ascertain
              how small businesses are affected by the enforcement processes and (2)
              obtained some computerized information from IRS databases on the filing
              and enforcement experience of small businesses. This included data from
              IRS’ Statistics of Income Division, Audit Information Management System
              (AIMS), and Accounts Receivable databases. Throughout this review, we
              drew on our previous work at IRS and on tax administration issues in
              general.



              3
              According to IRS, about half of these taxpayers received the vast majority of their income from wages,
              not business-related enterprises, and should be considered as “incidental” business filers.
              4
              The Small Business/Self-Employed/Supplemental Income Team is one of several IRS teams developing
              plans and blueprints to, among other things, restructure IRS into four principal operating units to
              better serve taxpayers.




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                         Our work did not address IRS activities related to small businesses that
                         had not filed returns. Also, we experienced several limitations during the
                         course of our work because much of the data we sought were not
                         collected in IRS’ information systems and databases or were not
                         sufficiently reliable. To obtain and analyze the available data, we often had
                         to rely upon sampling, matching, and ad hoc techniques. In addition, data
                         were not available for a single year across all variables, so we had to use
                                                               5
                         data from different years as needed. We did not verify the reliability of the
                         IRS data we used except for some limited checking. Appendix I describes
                         the data limitations we experienced in more detail.

                         We requested comments on a draft of this report from IRS. Their
                         comments are reprinted in appendix IV. Our work was performed in
                         accordance with generally accepted government auditing standards
                         between September 1998 and May 1999 at IRS headquarters in Washington,
                         D.C.

                         Small businesses, like large businesses, are subject to multiple layers of
Small Businesses Face    filing, reporting, and deposit requirements that reflect how the business is
Multiple Layers of Tax   organized, whether it has employees, and the nature of its business
                                     6
Requirements             operations. By our count, there are more than 200 requirements—which
                         we grouped into four layers—that may apply to small businesses as well as
                         larger businesses and other taxpayers. The requirements are designed to
                         implement a variety of tax policies. They provide a way not only to collect
                         taxes from businesses, but also to use businesses to collect taxes owed by
                         third parties (e.g., withholding employees’ personal income tax and Social
                         Security and Medicare (FICA) taxes).

                         It is highly unlikely that any business would need to complete all 200
                         requirements. This is because the forms, schedules, and other
                         requirements that apply to a particular small business reflect how the
                         business is organized, whether it has employees, and the nature of its
                         business operations. Although a few of the requirements must be
                         submitted more frequently than once a year, the vast majority are
                         submitted annually. Appendix II provides a listing of all the requirements
                         that we identified. They reflect the decisions of Congress and the
                         executive branch in keeping with their policy goals and objectives.


                         5
                             We obtained the most recent data available from IRS; some were for 1995 and some for 1997.
                         6
                          For the purpose of this report, requirements are the filing of a tax form or schedule and making
                         deposits. Schedules that were embedded in a primary return were not counted as a separate
                         requirement.




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Primary Income Tax                    The requirements with which a small business must comply depend upon
                                      how it is organized—sole proprietorship, partnership, S corporation, and
Returns Represent One                 corporation. Each business type has its own primary income tax return,
Layer of Requirements                 some of which include a set of schedules embedded in the form. For
                                      example, the primary corporate income tax return, Form 1120, U.S.
                                      Corporation Income Tax Return, contains eight embedded schedules. To
                                      support their primary income tax return, certain types of businesses and
                                      individuals with business income must also attach a mandatory schedule
                                      to their return. (See table 1.) For example, sole proprietorships must file
                                      Form 1040, U.S. Individual Income Tax Return, and Schedule C, Profit or
                                                            7
                                      Loss From Business. As pass-through entities, partnerships and S
                                      corporations each have two separate sets of returns–one for the entity and
                                      one for its owners. In addition to the primary income tax return filed by
                                      the entity, each owner must file a Form 1040 and a Schedule E,
                                                                        8
                                      Supplemental Income and Loss.

Table 1: Primary Income Tax Returns                                                                                                         a
and Mandatory Schedules               Business category                        Primary income tax return           Mandatory schedule
                                      Sole proprietorship                      Form 1040                           Schedule C
                                      Farmer                                   Form 1040                           Schedule F
                                      Partnership                              Form 1065                           Schedule K-1
                                       Partner                                 Form 1040                           Schedule E
                                      S corporation                            Form 1120S                          Schedule K-1
                                       Shareholder                             Form 1040                           Schedule E
                                      Corporation                              Form 1120                           None
                                      Legend
                                      Form 1040, U.S. Individual Income Tax Return
                                      Form 1065, U.S. Partnership Return of Income
                                      Form 1120, U.S. Corporation Income Tax Return
                                      Form 1120S, U.S. Income Tax Return for an S Corporation
                                      Schedule C, Profit or Loss From Business
                                      Schedule E, Supplemental Income and Loss
                                      Schedule F, Profit or Loss From Farming
                                      Schedule K-1, (form 1065) Partner’s Share of Income
                                      Schedule K-1, (form 1120S) Shareholder’s Share of Income
                                      a
                                          Schedules that are required to be filed with the primary return.
                                      Source: IRS.




                                      7
                                       Related to income tax, estimated tax is another important requirement that applies to many small
                                      businesses. Many sole proprietorships, partners, and S corporation shareholders must pay estimated
                                      taxes quarterly for income and self-employment tax. In making these payments, they must estimate
                                      their income for the coming year and the amount of income, Social Security, and Medicare taxes that
                                      will be owed on this income. Corporations must also make installment payments of estimated tax on
                                      their income, while S corporations must pay estimated tax only on certain tax liabilities.
                                      8
                                          Form 1040 and Schedule E are not generally considered to be business returns.




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Employment Tax Adds           A small business’ decision to hire employees adds a second layer of tax
                              requirements. We identified 10 different federal employment tax deposit
Another Layer of Tax          requirements that potentially apply to small businesses. The number of
Requirements                  employment tax filings and deposits depends on the number of employees
                              and the resulting employment tax liability owed at a particular time. (See
                              table 2 and table II.2 in app. II.) For each employee, a small business is
                              generally responsible for collecting and remitting several federal taxes
                              with varying frequency stipulations–withholding for employees’ personal
                              income tax and the employee’s share of FICA, the employer’s share of
                              FICA, and federal unemployment tax (FUTA).

Table 2: Key Employment Tax
Requirements                  Type of
                              employment tax        Primary return                      Deposit requirements
                              Personal income       Form 941, Employer’s Quarterly      Quarterly if liability is less than
                              and FICA tax          Federal Tax Return                  $1,000 per quarter
                              withheld and                                              Monthly if $50,000 or less in the
                                                                                                          a
                              employer’s share                                          lookback period
                              of FICA                                                   Semiweekly if more than $50,000
                                                                                        in the lookback period
                                                                                        Next day if $100,000 or more
                                                                                        accumulated on any day during a
                                                                                        deposit period
                                                    Form 943, Employer’s Annual Tax Annually if liability is less than
                                                    Return for Agricultural Employees $1,000 per year
                                                                                        Monthly if $50,000 or less in the
                                                                                                          b
                                                                                        lookback period
                                                                                        Semiweekly if more than $50,000
                                                                                        in the lookback period
                                                                                        Next day if $100,000 or more
                                                                                        accumulated on any day during a
                                                                                        deposit period
                                                                                        Deposits made by mail using Form
                                                                                        8109 or electronically using
                                                                                        Electronic Federal Tax Payment
                                                                                        System
                              FUTA tax              Form 940, Employer’s Annual         Deposit quarterly by mail using
                                                    Unemployment Tax Return (if         Form 8109 or electronically using
                                                    liability is greater than $100 in a Electronic Federal Tax Payment
                                                    tax year)                           System
                              a
                               The Form 941 lookback period for 1999 covers four quarters, beginning July 1, 1997, and ending
                              June 30, 1998.
                              b
                              The Form 943 lookback period is the second calendar year preceding the current calendar year.
                              Source: IRS.

                              A small business employer must report quarterly the amount of personal
                              income tax withheld and FICA taxes paid for employees on Form 941,
                              Employer’s Quarterly Federal Tax Return. The employer must deposit



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                             employee income tax and FICA taxes withheld and the employer’s share of
                             FICA taxes by mail or electronically either quarterly, monthly, semiweekly,
                             or the next business day, depending on the employers’ tax liability. If total
                             deposits of withheld income and FICA taxes were more than $50,000 in the
                             second year preceding the current year, the employer must make
                             electronic deposits using the Electronic Federal Tax Payment System
                                       9
                             (EFTPS). In addition, a small business employer must annually report and
                             quarterly deposit FUTA taxes separately from FICA and withheld income
                             tax. Lastly, an employer must send a federal Form W-2, Wage and Earnings
                             Statement, to each of its employees and file federal Forms W-3,
                             Transmittal of Wage and Tax Statements, and W-2 with the Social Security
                             Administration. In sum, hiring employees—even just one employee—is a
                             critical decision for small businesses in terms of their tax liability and the
                                                                                                 10
                             complexities of the tax administration processes that they face.

Offering Employee Benefits   The decision to offer employee pension, fringe, and welfare benefit plans
                             adds another layer of requirements for a small business. Some benefit
Adds a Third Layer of        plans may substantially increase the number of filing requirements that
Requirements                 small businesses face, while others are simplified and entail few, if any,
                             filing requirements. We counted over 10 filing and reporting requirements
                             pertaining to benefit plans, including requirements like the Form 5500
                             series and related schedules.

                             Certain pension plans are tailored to small businesses and self-employed
                             individuals, offering them a tax-favored way to save for retirement.
                             Simplified Employee Pensions (SEP), Savings Incentive Match Plans for
                             Employees (SIMPLE), and Keogh plans offer small employers and self-
                             employed individuals a deduction for contributions to the plan and
                             deferral of tax on income of the plan. Generally, SEP and SIMPLE plans
                             are less complex than Keogh plans, and while businesses must maintain
                             records about the plans, they do not have any separate filing or reporting
                             requirements with IRS. Keogh plans offer certain benefits not offered by
                             SEP and SIMPLE, but they tend to be more complex and entail substantial
                             filing and reporting requirements with IRS using Form 5500 and related
                                         11
                             schedules. In addition, most fringe and welfare benefit plans entail filing
                             9
                              IRS has waived penalties for most smaller businesses required to use EFTPS that make timely deposits
                             using paper deposit coupons. The penalty relief applies through December 31,1999, to all taxpayers
                             currently required to use EFTPS if they did not make aggregate tax deposits of more than $200,000
                             during the year. In addition, new regulations increase the threshold amount from $50,000 (withheld
                             income and FICA taxes) to $200,000 (aggregated of the federal tax deposits).
                             10
                                  Employment Taxes and Small Business (GAO/T-GGD-97-21, Nov. 8, 1996), p. 7.
                             11
                              IRS, Department of Labor, and Pension Benefit Guaranty Corporation have consolidated their returns
                             and report forms to minimize the filing burden for plan administrators and employers.




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                            and reporting requirements with IRS using the Form 5500 series. (For a
                            complete list, see table II.3 in app. II.)

Other Business Operations   The remaining tax requirements that potentially apply to small businesses
                            depend upon the nature of the business activities. A few of these
Add a Fourth Layer of       requirements are specific to a type of business, but most are generally
Requirements                applicable to all businesses. For example, there are requirements that
                            pertain to the depreciation of assets, the sale of business property, and
                            claims for a credit to increase research activities. These requirements, of
                            which there are nearly 140, range across income taxes, excise taxes, and
                            information reporting. (For a complete list, see tables II.4, II.5, and II.6 in
                            app. II.)

                            Some of these requirements are used to implement provisions in the
                            Internal Revenue Code that can benefit small (and other) businesses. For
                            example, businesses must complete Form 8861, Welfare-to-Work Credit, to
                            receive a tax credit for hiring long-term family assistance recipients. Also,
                            businesses must complete Form 4562 to claim deductions for depreciation
                            and amortization of business assets or to make the election to immediately
                            expense the cost of certain property. The election to expense property
                            allows the taxpayer to take an immediate deduction instead of using the
                            depreciation schedules to recover a portion of the costs annually over the
                            property’s useful life. (The total cost that may be expensed is $18,500 for
                            1998.)

                            Among excise taxes alone, we identified about 70 requirements that
                            potentially apply to small businesses. (For a complete list, see tables II.5
                            and II.6 in app. II.) Generally, though, most small businesses are not
                            responsible for filing excise taxes. According to IRS, fewer than 800,000
                            small businesses filed excise tax returns in 1997. IRS and ATF administer
                            many of the federal excise taxes. The excise taxes administered by IRS
                            consist of several broad categories, including environmental taxes,
                            communications taxes, fuel taxes, retail sale of heavy trucks and trailers,
                            luxury taxes on passenger cars, and manufacturers’ taxes on a variety of
                            different products. ATF administers excise taxes on the production, sale,
                            or import of guns, tobacco, or alcohol products or the manufacture of
                            equipment for their production.




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                             Limitations in IRS’ information systems prevented us from fully
Small Businesses’            determining the extent to which small businesses actually filed various
Experience in Filing         required forms and schedules and which businesses made deposits or the
and Enforcement              extent of small businesses’ involvement in IRS’ enforcement processes. We
                             were, however, able to obtain and analyze limited data on small
Processes Could Not          businesses’ filing of income tax forms and on some aspects of small
Be Fully Determined          businesses’ involvement in IRS’ enforcement processes.

                             The data limitations currently hinder IRS’ ability to effectively manage its
                             activities and serve small businesses and, as IRS has acknowledged, will
                             continue to be a serious impediment until the systems are improved. (For a
                             more detailed discussion of IRS’ data limitations, see app. I.)


Filing Experience of Small
Businesses

Income Tax                   Although we weren’t able to obtain data on most types of requirements, we
                             were able to obtain information pertaining to small business income tax
                             requirements. Our analysis of 1995 IRS data for approximately 44 forms
                             and 46 related schedules that IRS believes are those most commonly filed
                             showed that small businesses, on average, filed one secondary form in
                             addition to their primary income tax return, with little variation among the
                             different types of business. The most commonly filed secondary income
                             tax form among the 44 was Form 4562, Depreciation and Amortization.
                             Approximately 74 percent of farmers, 62 percent of partnerships, 69
                             percent of S corporations, and 73 percent of corporations filed the
                             depreciation and amortization form in 1995. The returns for sole
                             proprietorships were lower, with slightly less than 40 percent filing the
                             depreciation and amortization form in 1995.

                             The number of schedules small businesses submitted varied, depending on
                             the type of business. This includes the mandatory schedules filed with the
                             primary return by certain business types and individuals with business
                             income as well as secondary schedules and other schedules embedded in
                             the primary tax return. On average, sole proprietorships and corporations
                             filed approximately three schedules, while farmers filed slightly less than
                                    12
                             three. Partnerships and S corporations filed more schedules than other
                             types of businesses. Partnerships filed approximately 11 schedules, and S

                             12
                              The results for sole proprietorships and farmers include schedules pertaining to nonbusiness income
                             (e.g., wages).




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                              corporations filed approximately 6 schedules, on average, in 1995. The
                              filing results are higher for partnerships and S corporations because of
                              their unique structure as pass-through entities. Partnerships and S
                              corporations must file a Schedule K-1, Partner’s or Shareholder’s Share of
                              Income, with IRS for each partner or shareholder. As a result, Schedule K-1
                              filings accounted for a significant proportion of the multiple schedules
                              filed by partnerships and S corporations in that year.

Employment Tax and Pensions   IRS did have information on federal employment taxes, but it could not be
                              broken out by small businesses. Further, IRS did not have sufficient,
                              reliable data on the number of small businesses that filed pension forms in
                              1995. We were able to obtain very limited disaggregated data on the
                              number of pension forms filed in 1995. However, the results could not be
                              projected to the larger population of small businesses.

                              We worked with IRS’ Employee Plans/Exempt Organizations Division to
                              obtain a sample of the number of small businesses that filed Form 5500,
                              using an employer identification number match. From a sample of 65,701
                              small business employer identification numbers, we matched 11,585 that
                              filed Form 5500. The data indicated that 1,090 sole proprietorships, 824
                              partnerships, and 9,671 corporations filed forms from the Form 5500 series
                              in 1995.

Enforcement Experience of     IRS had limited data on the extent to which small businesses are involved
                              in both examination and collection activities. We obtained limited data on
Small Businesses              audit rates; duration; recommendations, such as refunds, no change, or
                              changes recommended by IRS examiners; and appeals and petitions.

                              When IRS has indications that a small business may have failed to meet
                              one or more of the aforementioned requirements, the business can become
                              involved in IRS’ enforcement processes. These processes are basically the
                              same for small businesses as for other taxpayers. They involve examining
                              returns for potential errors or compliance problems, notifying taxpayers of
                              suspected discrepancies, settling disputes over additional taxes
                                                                             13
                              recommended, and collecting taxes assessed. (App. III provides a
                              simplified picture of IRS’ audit and dispute resolution process.)




                              13
                               See Tax Administration: IRS’ Return Selection Process (GAO/GGD-99-30, Feb. 22, 1999) and Tax
                              Administration: IRS Measures Could Provide a More Balanced Picture of Audit Results and Costs
                              (GAO/GGD-98-128, June 23, 1998).




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Audits   IRS’ primary technique for assessing compliance with tax laws is to
                                                                          14
         examine the accuracy of the tax reported on filed tax returns. In selecting
         returns to be audited, IRS attempts to focus on those it believes are most
         likely to have compliance problems. IRS data showed that about 2.3
         percent of the income tax returns filed by small businesses in 1997 were
                                                                               15
         audited, generally through audits conducted by IRS’ district offices. By
         contrast, IRS audited 1.3 percent of all returns filed in 1997. The audit rate
         for sole proprietors (individuals filing Schedule C) was 3.2 percent,
                                                                          16
         compared to 1.2 percent for individuals not filing Schedule C.

         According to IRS officials, the audit rate for small business taxpayers is
         higher than the overall rate because small businesses tend to have more
         compliance problems than other taxpayers. A common kind of problem
         that small businesses can face is in the area of employment tax
         compliance. A small business can fall short of operating capital, and as a
         consequence, it may divert some or all of its estimated tax deposits or
         employment tax withholdings to make up the shortfall, hoping to pay IRS
         at a later date. According to IRS officials, the amount of these unpaid
         taxes, penalties, and interest can pyramid quickly. The danger is that a
         business that must rely on these funds for working capital is likely to have
         other liabilities and delinquencies that reflect financial problems so severe
                                 17
         that it cannot recover.

         Table 3 provides detailed information on the audit rates in 1997 for the
         four types of small businesses and farmers.




         14
            IRS audits do not include all taxpayer contacts that can result in recommended assessments of
         additional tax. In particular, notices resulting from IRS’ information matching math-error programs are
         generally not counted as audits, according to IRS officials. In 1997, IRS’ information matching program
         generated about 2.8 million notices, resulting in assessments totaling about $1.5 billion. We could not
         identify any readily available data on how much was assessed to small businesses.
         15
            IRS data on audits of Schedule C filers is limited to those who derive most of their income from their
         business activities rather than from wages. These audits, when conducted by IRS’ service centers,
         generally involve aspects of the Form 1040 or self-employment tax return, rather than Schedule C.
         Also, the AIMS data do not take into account audits of Schedule E filers, particularly the individual
         owners of partnerships or S corporations.
         16
          The data showed audit rates of 4.1 percent and 3.6 percent for Schedule C filers in 1995 and 1996,
         respectively, compared to 1.5 percent in both years for individuals not filing Schedule C.
         17
          See Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty Assessments Are Owed
         (GAO/AIMD/GGD-99-211, Aug. 2, 1999), which discusses employment tax compliance.




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Table 3: Audit Rates Across Small
Business Types                      Type of business                      Size                                              Audit rate
                                    Sole proprietorship                   Gross receipts < $25,000                                 3.2%
                                                                          Gross receipts $25,000 < 100,000                         2.6
                                                                          Gross receipts $100,000 and more                         4.1
                                                                          All sole proprietorships                                 3.2
                                    Farmer                                Gross receipts < $100,000                                1.3
                                                                          Gross receipts $100,000 and more                         2.8
                                                                          All farmers                                              1.8
                                                 a
                                    Partnership                           All partnerships                                         0.6
                                                  a
                                    S corporation                         All S corporations                                       1.0
                                    Corporation                           Assets < $250,000                                        1.2
                                                                          Assets $ 250,000 < $1 million                            3.5
                                                                          Assets $1 million < $5 million                           7.8
                                                                          All corporations                                         2.1
                                    a
                                     About 94 percent of partnerships and 98 percent of S corporations were small businesses in 1995
                                    (i.e., they had less than $5 million in assets, based on GAO’s analysis of IRS’ Statistics of Income
                                    data).
                                    Source: IRS Data Book (Publication 55B), 1997.


                                    IRS has little data on the burden imposed by its audits of small businesses
                                                          18
                                    and other taxpayers. IRS’ AIMS database does include information on the
                                    length of audits from an administrative perspective—that is, the number of
                                    days from when IRS’ auditors first begin working on a case until the case is
                                           19
                                    closed. This information, although not a complete indicator of the burden
                                    that IRS audits imposed on small businesses, does provide some insight on
                                    the time it takes to go through the audit process.

                                    During an audit, a taxpayer is likely to spend some time searching for
                                    documentation, responding to IRS’ inquiries, and meeting with IRS
                                    examiners. However, over the course of the audit, there are also periods of
                                    time when the taxpayer is not actively involved, such as while IRS is
                                    evaluating records and researching issues, or when IRS examiners are
                                    temporarily reassigned to other cases or activities. Table 4 provides data
                                    on the average length of small business IRS audits that were closed in
                                    1995.



                                    18
                                     As of May 1999, IRS was working with a consultant on a multiyear project to develop better estimates
                                    of tax compliance burden, including the burdens associated with audits.
                                    19
                                       Audit cases are closed in various circumstances, such as when the case results in no changes, the
                                    taxpayer appeals the case, or IRS officials refer the case to the collection unit to collect the
                                    outstanding tax liability. Thus, when audit cases are referred to either the appeals or collection unit,
                                    IRS considers that the audit has concluded, and the case is closed in its Examination Division.
                                    However, as IRS opens a new case in either its appeals or collection unit, a taxpayer may perceive this
                                    as simply a continuation of the audit.




                                    Page 12                                       GAO/GGD-99-133 Small Business Tax Requirements
                                   B-281009




Table 4: Average Length of Small                                                                                         a
Business Audits                                                                                            Duration
                                                                        Average length         Less than 6     6-12  More than
                                   Type of business                           (in days)           months months      12 months
                                   Sole proprietorship                              273               45.7%    32.5%      21.7%
                                   Farm                                             221               69.1     17.1       13.8
                                               b                                        d
                                   Partnership                                      754               30.1     16.9       52.9
                                                 c                                      d
                                   S corporation                                    308               44.2     28.7       27.1
                                   Corporation                                      335               45.8     27.2       27.0
                                   Average for all businesses                       288               46.2     31.0       22.8
                                   Note: Excludes audits recorded in IRS’ database merely because a business was partially or totally
                                   owned by a large business subject to IRS’ Coordinated Examination Program, in which IRS conducts
                                   lengthy audits of the very largest corporations.
                                   a
                                       Total percent for some business categories does not equal 100 due to rounding.
                                   b
                                    Includes all partnerships because IRS’ AIMS database does not differentiate partnerships with less
                                   than $5 million in assets.
                                   c
                                   Includes S corporations with less than $10 million in assets because IRS’ AIMS database does not
                                   differentiate S corporations with less than $5 million in assets.
                                   d
                                    According to IRS, partnership and S corporation audits assigned to service centers remain open in
                                   the AIMS database even after they are appealed. Excluding service center audits reduces the
                                   average length of partnership audits to 472 days, with 41.8 percent lasting more than 12 months, and
                                   S corporation audits to 289 days, with 25.5 percent lasting more than 12 months.
                                   Source: GAO analysis of IRS’ AIMS data.


                                   As shown in the table, on average, the audits lasted less than 1 year, and
                                   nearly half closed in less than 6 months. Still, some audits—especially
                                   those of partnerships—lasted much longer. For example, more than half of
                                   the audits of partnerships lasted more than 1 year, as did nearly 30 percent
                                   of those for S corporations and corporations. Also, although not shown in
                                   the table, 16 percent of partnership audits and from 1 to 3 percent of the
                                                                                                          20
                                   audits for other types of small businesses continued beyond 4 years.

                                   According to IRS’ Examination Division officials, a variety of factors can
                                   lengthen the time it takes to complete a business audit. Examples cited
                                   included (1) difficulties in scheduling appointments with taxpayers, (2) the
                                   time required for a taxpayer to assemble needed information, and (3) the
                                   fact that some audits involve highly complex business tax issues requiring
                                   extensive research and investigation. With respect to audits of
                                   partnerships in particular, the officials said that the audits tend to take
                                   longer because IRS must secure and examine each partner’s return in
                                   addition to the partnership return. An audit of a partnership’s return
                                   remains open as long as any partner is in disagreement with any audit
                                         21
                                   issue. Also, audits of partnerships often require special procedures and
                                   20
                                        With certain exceptions, an assessment must be made within 3 years after a return has been filed.
                                   21
                                    Under IRC section 6229, special rules apply to the period of limitations on the assessment of
                                   partnership items.




                                   Page 13                                          GAO/GGD-99-133 Small Business Tax Requirements
                                     B-281009




                                     analyses, such as reviewing the linkages between the returns filed by the
                                     partnership and each of the partners and checking the application of
                                     complex tax laws affecting partnerships in some circumstances.

Recommended Additional Taxes         Small business audits often result in recommendations for the assessment
and Penalties                        of additional taxes and penalties. For the small business audits closed in
                                     1995, 67 percent resulted in a recommended change to the reported tax
                                     liability or refundable credits, while about 33 percent resulted in no such
                                     changes. Some audits resulting in no change to the reported tax liability
                                     did result in changes to other return items deemed significant by IRS
                                     examiners. For example, net loss, which can be carried forward and
                                     claimed in future years, may have been overstated on the return and
                                     adjusted by IRS. Table 5 provides more detailed information on IRS
                                     examiners’ recommendations on audits closed in 1995. In considering the
                                     information presented, it is important to note that the audit
                                     recommendations do not equate to final audit outcomes. For example,
                                     recommendations may be partially or fully overturned in IRS appeals or in
                                     court decisions.

Table 5: Audit Recommendations for
Small Business Audits                                               Audits recommending                      Audits recommending
                                                                            change                                no change
                                     Type of                 Total Additional taxes                                            No
                                               a                                                                       b
                                     business               audits   and penalties  Refund                  Adjustment adjustment
                                     Sole
                                     proprietorship       298,609                     63.8%          4.4%             15.7%            16.1%
                                     Farmer                13,381                     59.0           6.7              10.3             23.9
                                     Corporation           35,011                     52.4           5.8              17.0             24.8
                                     All businesses       347,001                     62.4           4.6              15.6             17.3
                                     Note: For audits closed in 1995.
                                     a
                                      Partnerships and S corporations were excluded because audit results generally pass through to the
                                     individual business owners.
                                     b
                                      Includes audits that resulted in adjustments not affecting the taxpayer’s liability for the current year,
                                     such as adjustments to reported net losses. Also includes delinquent returns secured by IRS auditors
                                     where reported tax liability was considered accurate.
                                     Source: GAO analysis of IRS’ AIMS data.


                                     IRS’ 1995 data show that small businesses appealed to IRS or filed court
                                     petitions in 8 percent of the audits where it recommended additional tax
                                     and penalties. Table 6 provides more detailed information on audits that
                                     were appealed and petitioned by each small business category.

                                     According to IRS Appeals officials, the lower appeals rates for sole
                                     proprietorships and farms may reflect the fact that their returns generally
                                     involve less complex tax issues, which leads to fewer potential tax



                                     Page 14                                        GAO/GGD-99-133 Small Business Tax Requirements
                                       B-281009




                                       disagreements. Similarly, the officials attribute the much higher appeals
                                       rate for partnerships to the complexity of the tax laws affecting
                                       partnerships and their returns.

Table 6: Number of Small Business
Audits Appealed or Petitioned to the                                                           Audit appeals and petitions
Courts                                                                                                            As percent of audits
                                                                                               As percent of recommending additional
                                                                                           a
                                       Type of business                          Number          total audits      taxes and penalties
                                       Sole proprietorship                        11,739                  3.9                      6.2
                                       Farm                                          557                  4.2                      7.1
                                                   b
                                       Partnership                                 1,031                 14.6                     31.7
                                                     c
                                       S Corporation                                1249                  7.2                     15.7
                                       Corporation                                 3,615                 10.3                     19.9
                                       All businesses                             18,216                  4.9                      8.0
                                       Note: For audits closed in 1995.
                                       a
                                           Limited to appeals of audits that recommended additional taxes and penalties.
                                       b
                                        Includes all partnerships because IRS’ AIMS database does not differentiate partnerships with less
                                       than $5 million in assets.
                                       c
                                       Includes S corporations with less than $10 million in assets because IRS’ AIMS database does not
                                       differentiate S corporations with less than $5 million in assets.
                                       Source: GAO analysis of IRS’ AIMS data.


Collections                            IRS’ collection process starts at the point IRS identifies a taxpayer as not
                                                                                                                  22
                                       having paid the amount of tax due as determined by the tax assessment.
                                       First, IRS is to send a notice (or series of notices) to the taxpayers
                                                                               23
                                       informing them of the amount owed. If the amount is not paid, IRS is
                                       authorized to employ enforcement powers to collect what is owed.

                                       IRS can refer the delinquency to an automated collection system call site,
                                       where an employee calls the taxpayer by telephone and asks for payment.
                                       The payment arrangements may include installment agreements or an
                                       offer-in-compromise from the taxpayers if the full amount owed cannot be
                                       paid.

                                       Information about large and chronic tax delinquencies can be referred
                                       directly to one of IRS’ 33 district offices, where IRS revenue officers may
                                       contact the taxpayer in person. According to IRS officials, small business
                                       audits that involve employment taxes are often referred directly to district
                                       offices. In addition to liens and levies, IRS collection officials have

                                       22
                                        As we have reported, IRS has had difficulty collecting assessments from many taxpayers, including
                                       small businesses. (See GAO/GGD-98-128, June 23, 1998.)
                                       23
                                        Collectively, these notices are to provide the taxpayer with statutory notification of the tax liability,
                                       IRS’ intent to levy assets if necessary, and information on the taxpayer’s rights.




                                       Page 15                                        GAO/GGD-99-133 Small Business Tax Requirements
                  B-281009




                  authority to seize and sell taxpayers’ property, such as cars or real estate.
                  Seizure is generally a last resort to get payment of the amount owed, and
                  the IRS Restructuring and Reform Act now requires a district director’s
                  approval.

                  IRS could not provide information on the number of small businesses
                  undergoing enforced collection actions (i.e., liens, levies, or seizures).
                  However, recent IRS information shows that enforced collections, in
                  general, have declined dramatically since 1997. For example, in fiscal year
                  1997, IRS made about 10,000 seizures compared to about 2,300 in fiscal
                  year 1998, and fewer than 200 in fiscal year 1999.

                  We requested comments on a draft of this report from the Commissioner
Agency Comments   of Internal Revenue. On July 23, 1999, we received IRS’ written comments,
                  which discuss IRS’ plans and actions to assist small businesses with their
                  filing and reporting burdens. The comments are reprinted in appendix IV.
                  We also met with IRS officials, including the Deputy National Director of
                  the Public Liaison and Small Business Affairs Office and the Assistant
                  Commissioner for Forms and Submission Processing, to discuss their
                  technical comments, which we incorporated where appropriate.

                  We are sending copies of this report to Senator John Kerry, Ranking
                  Minority Member of your Committee; Senator William V. Roth, Jr.,
                  Chairman, and Senator Daniel P. Moynihan, Ranking Minority Member,
                  Senate Committee on Finance, and Representative Bill Archer, Chairman,
                  and Representative Charles B. Rangel, Ranking Minority Member, House
                  Committee on Ways and Means. Copies will also be sent to the Honorable
                  Lawrence H. Summers, Secretary of the Treasury; the Honorable Charles
                  O. Rossotti, Commissioner of Internal Revenue; and the Honorable Jacob
                  Lew, Director, Office of Management and Budget. Copies will be made
                  available to others upon request.




                  Page 16                           GAO/GGD-99-133 Small Business Tax Requirements
B-281009




If you or your staff have any questions concerning this report, please
contact me or Charlie W. Daniel on (202) 512-9110. Key contributors to this
report were Robert Floren and Daniel Lynch.

Sincerely yours,




Margaret T. Wrightson
Associate Director, Tax Policy and
  Administration Issues




Page 17                          GAO/GGD-99-133 Small Business Tax Requirements
Contents



Letter                                                                                               1


Appendix I                                                                                          20

IRS’ Information
Systems Limit
Availability of Data on
Small Businesses
Appendix II                                                                                         23

Tax Requirements
That Potentially Apply
to Small Businesses
Appendix III                                                                                        35

Simplified Audit and
Dispute Resolution
Processes
Appendix IV                                                                                         38

Comments From the
Internal Revenue
Service
Tables                    Table 1: Primary Income Tax Returns and Mandatory                          5
                            Schedules
                          Table 2: Key Employment Tax Requirements                                   6
                          Table 3: Audit Rates Across Small Business Types                          12
                          Table 4: Average Length of Small Business Audits                          13
                          Table 5: Audit Recommendations for Small Business                         14
                            Audits
                          Table 6: Number of Small Business Audits Appealed or                      15
                            Petitioned to the Courts
                          Table II.1: Layer One–Primary Income Tax Returns and                      23
                            Related Schedules
                          Table II.2: Layer Two–Employment Tax Requirements                         25



                          Page 18                        GAO/GGD-99-133 Small Business Tax Requirements
          Contents




          Table II.3: Layer Three–Employee Benefit Plan                                  26
            Requirements
          Table II.4: Layer Four–Requirements That Depend on                             27
            Business Operations
          Table II.5: Layer Four–Excise Tax Requirements                                 32
            Administered by IRS
          Table II.6: Layer Four–Excise Taxes Administered by                            33
            ATF


Figures   Figure III.1: Simplified Audit and Dispute Resolution                          36
            Processes
                                                                                         37




          Abbreviations

          AIMS           Audit Information Management System
          ATF            Bureau of Alcohol, Tobacco, and Firearms
          EFTPS          Electronic Federal Tax Payment System
          FICA           Federal Insurance Compensation Act
          FUTA           Federal Unemployment Tax Act
          IRC            Internal Revenue Code
          IRS            Internal Revenue Service
          SEP            simplified employee pensions
          SIMPLE         savings incentive match plans for employees




          Page 19                             GAO/GGD-99-133 Small Business Tax Requirements
Appendix I

IRS’ Information Systems Limit Availability of
Data on Small Businesses

               In general, the Internal Revenue Service’s (IRS) numerous information
               systems do not collect or store information by taxpayer groups, such as
               small businesses. Rather, IRS’ current data systems reflect the agency’s
               stovepipe structure and transaction-based business approach. Even if IRS’
               information systems maintained data by taxpayer groups, obtaining
               complete account information for a taxpayer would not be easy because
               IRS’ systems are not linked together.

               Historically, IRS has operated through functions, such as Examination or
               Collection, and information about taxpayers tended to be developed to
               serve each function’s specific needs and its specific interactions with
               taxpayers rather than IRS’ overall needs or taxpayers’ needs. As a result,
               IRS’ various and discrete databases provide information pertaining to
               certain transactions, such as seizures or the filing of income tax returns.
               The structure of IRS’ information systems does not easily allow for a
               complete assessment of a small business taxpayer’s interactions—from
               filing to postfiling—with IRS.

               IRS maintains information about taxpayers’ filing and compliance histories
               in masterfile accounts, currently housed in Martinsburg, WV. The majority
               of the information about taxpayers’ filing and compliance histories is
               stored in two masterfiles—the individual masterfile and the business
               masterfile. Neither of these files is coded to distinguish small businesses
               from other taxpayers. To further complicate matters, data on filings and
               payments by small businesses may be divided between the individual and
               business masterfile. Data from Schedule C (sole proprietorship), Schedule
               E (partnership and S corporation shareholder), and Schedule F (farmer)
               are posted to the individual masterfile. Data from Schedule 1120 for
               corporations, including S corporations, are posted to the business
               masterfile. In addition, all employment and excise tax data are posted to
               the business masterfile. As a result, certain small businesses may have data
               on both masterfiles. A similar situation exists with postfiling data, such as
               that pertaining to examination and collection activities. The data are
               scattered across numerous information systems and are not coded to
               distinguish small businesses from other taxpayers.

               The business masterfile accounts are especially complicated, having
               multiple reporting requirements and being more difficult for IRS to
               maintain without error or to use to access data. Also, the information on
               the masterfiles is not complete because other databases may have other
               related information. For example, income received about the business
               from a bank or other payer that has been reported to IRS on an
               information return is not included in the masterfiles.



               Page 20                          GAO/GGD-99-133 Small Business Tax Requirements
Appendix I
IRS’ Information Systems Limit Availability of Data on Small Businesses




Further, IRS updates the masterfiles weekly, after the transactions have
taken place. Most of IRS’ compliance systems (e.g., Collection) operate off
uploads and downloads of selected taxpayer account information on the
masterfiles. These systems are used on-line by IRS employees to assist
taxpayers or assess their compliance. But the account information on the
systems is limited to the intended purpose, and updates are not reflected
until the masterfiles are updated on weekends.

The limitations in IRS’ information systems prevented us from fully
determining the extent to which small businesses actually filed various
required forms and schedules and made deposits. The limitations also
prevented us from fully determining the extent of small businesses’
involvement in IRS’ enforcement processes.

Many of the IRS databases do not allow for a detailed analysis of the
information they contain. We were unable to separate out the four types of
small businesses in some of the databases. For example, the Form 941 that
employers are to use to file their employment taxes does not have
information on business assets or gross receipts that would have allowed
us to categorize employers by size. Without this information, our
alternative was to use information from the business masterfile. Accessing
the appropriate tax module in that file might have made it possible to
capture information on assets.

However, extracting masterfile data is a time- and resource-intensive
undertaking that is prone to errors and data reliability problems. It
involves requesting IRS’ Information Services to provide an extract from
various masterfiles, working with the files to validate them, and then
merging the data into one that would be suitable for analysis. IRS receives
many internal and external requests for data, and each request must await
its turn in the queue. IRS’ resources are limited, and the request could have
taken many months for the agency to complete. Thus, we decided not to
ask IRS to make the extractions for us.

Some of the information we sought was not readily available from IRS’
compliance databases. For example, IRS’ Audit Information Management
System (AIMS) database does not identify some small business taxpayers
or adequately distinguish small businesses from other businesses. Because
AIMS does not include the asset size of partnerships or S corporations, it
cannot distinguish between small and other partnerships or S
corporations. AIMS does, however, include asset data for sole
proprietorships and corporations.




Page 21                                 GAO/GGD-99-133 Small Business Tax Requirements
Appendix I
IRS’ Information Systems Limit Availability of Data on Small Businesses




IRS’ audits do not include all taxpayer contacts that can result in
recommended assessments of additional tax. In particular, notices
resulting from IRS’ information matching math-error programs are
generally not counted as audits, according to IRS officials. In 1997, IRS’
information matching program generated about 2.8 million notices,
resulting in assessments totaling about $1.5 billion. We could not identify
any readily available data on the proportion of these assessments directed
at small businesses.

IRS is taking interim steps to address some of its data problems. IRS
expects to develop a way of linking a customer identifier to the case
information in 35 of its most important information systems. When this
“workaround” is complete, IRS managers and frontline workers should
know whether the return or information report data they might be using
are for a small sole proprietor, partnership, S corporation, or corporation.
However, the interim solution will not provide real-time information about
the full range of transactions currently ongoing for a particular taxpayer.
Neither will the interim solution link IRS’ systems to provide
comprehensive information about taxpayers’ interactions with the agency.
IRS has acknowledged that its systems limitations hinder its ability to
effectively manage its activities and serve small businesses and plans to
continue making information systems improvements as part of its ongoing
modernization and restructuring efforts.




Page 22                                 GAO/GGD-99-133 Small Business Tax Requirements
Appendix II

Tax Requirements That Potentially Apply to
Small Businesses

Table II.1: Layer One–Primary Income Tax Returns and Related Schedules
                                                          Frequency
Type of                                                   (annually unless
                            a
business          Tax form                                otherwise noted) Explanation
Sole              Form 1040, U.S. Individual Income Tax                    If reporting income from a sole proprietorship (or other
proprietorship Return                                                      individual income)
                  Schedule C, Profit or Loss from a                        If incurred profit or loss as owner of a sole proprietorship
                  Business (Sole Proprietor)
                  Schedule C-EZ, Net Profit from Business                  If expenses are $2,500 or less, may use Schedule C-EZ
                                                                           as alternative to Schedule C
                  Form 1040 E, Estimated Tax for          Quarterly        If income and self-employment taxes expected to be
                  Individuals                                              $1,000 or more and withholding and credits are expected
                                                                           to be less than the smaller of 90 percent of the tax on the
                                                                           current year return or 100 percent of the tax shown on
                                                                           return for the previous year.
                  Form 2210, Underpayment of Estimated                     If estimated tax filer wants to perform their own penalty
                  Tax by Individuals, Estates, and Trusts                  calculations instead of allowing IRS to make the
                                                                           calculations for them
Farmer            Form 1040, U.S. Individual Income Tax                    If reporting income from a farm as an individual taxpayer
                  Return
                  Form 1065, U.S. Partnership Return of                    If reporting income from a farm and organized as a
                  Income                                                   partnership
                  Schedule F, Profit or Loss from Farming                  If incurred farm income or expenses
                  Schedule J, Farm Income Averaging                        If electing to figure tax liability by averaging income over
                                                                           past 3 years
                  Form 990C, Farmers' Cooperative                          If a farmers' associations operated on a cooperative
                  Association Income Tax Return                            basis
                  Form 1040 ES, Estimated Tax for         Quarterly        See explanation above. Qualified farmers pay annually;
                  Individuals                                              nonqualified farmers pay quarterly.
                  Form 2210F, Underpayment of Estimated                    If farmers or fishermen want to perform their own penalty
                  Tax by Farmers and Fisherman                             calculations for estimated tax instead of allowing IRS to
                                                                           make the calculations for them
Partnership       Form 1065, U.S. Partnership Return                       If organized as a partnership, unless received no income
                  (information return)                                     and incurred no expenses treated as deductions or
                                                                           credits for federal income tax purposes
                  Schedule K-1, (form 1065) Partner’s                      If organized as a partnership with income or deductions;
                  Share of Income, Credits, Deductions                     copy filed with IRS for each partner
                  etc.
 Partner          Form 1040, U.S. Individual Income Tax                    See explanation above
                  Return
                  Schedule E, Supplemental Income and                      If a partner in a partnership (even if no income received)
                  Loss (part II)                                           to report share of partnership income or loss
                  Form 1040 ES, Estimated Tax for         Quarterly        See explanation above
                  Individuals
                  Form 2210, Underpayment of Estimated                     See explanation above
                  Tax by Individuals, Estates, and Trusts
S corporation Form 1120S, U.S. Income Tax Return for                       If elected to be an S corporation to report income, gains,
                  an S Corporation                                         losses, etc.
                                                                                                                               (continued)




                                               Page 23                                 GAO/GGD-99-133 Small Business Tax Requirements
                                            Appendix II
                                            Tax Requirements That Potentially Apply to Small Businesses




                                                           Frequency
Type of                                                    (annually unless
                         a
business        Tax form                                   otherwise noted) Explanation
S corporation   Schedule K-1 (form 1120S),                                  If an S corporation, copy filed with IRS for each
                Shareholder's Share of Income, Credits,                     shareholder
                Deductions
                Estimated Tax, Form 8109, Tax Deposit      Quarterly            If tax expected to be $500 or more for certain specified
                Coupon or EFTPS                                                 taxes
 Shareholder    Form 1040, U.S. Individual Income Tax                           See explanation above
                Return
                Schedule E, Supplemental Income and                             If a shareholder in an S corporation (even if no income
                Loss (part II)                                                  received) to report share of S corporation income or
                                                                                losses
                Form 1040 ES, Estimated Tax for         Quarterly               See explanation above
                Individuals
                Form 2210, Underpayment of Estimated                            See explanation above
                Tax by Individuals, Estates, and Trusts
Corporation     Form 1120, U.S. Corporation Income Tax                          If a domestic corporation, regardless of taxable income,
                Return                                                          unless meeting requirements for specialized forms or
                                                                                exempt under section 501
                Form 1120-A, U.S. Corporation Short                             If gross receipts, total income, and total assets each
                Form Income Tax Return                                          under $500,000 and certain other requirements met
                Estimated Tax, Form 8109, Tax Deposit      Quarterly            If income tax expected to be $500 or more
                Coupon or EFTPS
                Form 2220, Underpayment of Estimated                            If corporation is using annualized income installment
                Tax by Corporations                                             method or adjusted seasonal installment method or a
                                                                                large corporation figuring first required installment based
                                                                                on prior year’s tax
Other           Form 1120-H, Income Tax Return for                              If a qualified homeowners association and form 1120-H
corporation     Homeowners Associations (attach to                              yields lower tax than form 1120
returns         1120)
                Form 1120-IC-DISC, Interest Charge                              If at least 95 percent of gross receipts during the tax year
                Domestic International Sales Corporation                        are qualified export receipts and certain other
                Return (also must file three Schedules–                         requirements met
                K, P, and Q, form 1120-IC-DISC)
                Form 1120-L, U.S. Life Insurance                                If a domestic life insurance company (or a foreign
                Company Income Tax Return                                       corporation that would qualify as a life insurance
                                                                                company if it were a U.S. corporation)
                Form 1120-PC, U.S. Property and                                 If a domestic nonlife insurance company (or a foreign
                Casualty Insurance Company Income                               corporation that would qualify as a nonlife insurance
                Tax Return                                                      company if it were a U.S. corporation)
                Form 1120-REIT, U.S. Income Tax                                 If a corporation, trust or association meeting specified
                Return for Real Estate Investment Trusts                        conditions and electing to be treated as a Real Estate
                                                                                Investment Trust
                Form 1120-RIC, U.S. Income Tax Return                           If a domestic corporation that elects to be treated as an
                for Regulated Investment Companies                              Regulated Investment Company
                Form 1120-SF, U.S. Income Tax Return                            If structured as a section 468B designated and qualified
                for Settlement Funds                                            settlement fund
                                            a
                                             We did not count schedules that are embedded in a primary return as separate requirements.
                                            Source: GAO compilation of IRS information.




                                            Page 24                                       GAO/GGD-99-133 Small Business Tax Requirements
                                            Appendix II
                                            Tax Requirements That Potentially Apply to Small Businesses




Table II.2: Layer Two–Employment Tax Requirements
Type of tax     Tax form                                     Frequency                 Explanation
Withheld        Form 941, Employer's Quarterly Federal Tax   Quarterly                 If business has employees they are to report
income          Return                                                                 withheld taxes
and FICA
                Schedule B (form 941), Employer's Record     As required: quarterly, If business has employees
                of Federal Tax Liability (attach to 941)     monthly, semiweekly
                Form 941C, Supporting Statement to Correct   As needed to correct If business has employees
                Information                                  withholding errors from
                                                             prior quarters
               Form 941–M, Employer's Monthly Federal        Monthly                 If business has employees
               Tax Return
               Deposit (form 941 payments), by mail using Quarterly if liability <     If business has employees and withholds taxes.
               Form 8109, Federal Tax Deposit Coupon, or  $1,000 per quarter;          Electronic deposit if annual liability greater than
               by EFTPS                                   monthly if < $50,000         $50,000
                                                                                 a
                                                          in lookback period;
                                                          semiweekly if >
                                                          $50,000 in lookback
                                                          period; or next day if >
                                                          $100,000 undeposited
               Form 943, Employer’s Annual Tax Return for Annually                     If withheld income and employment taxes on
               Agricultural Employees                                                  wages paid to agricultural employees
               Deposit (form 943 payments), by mail       Annually if liability <      Same as above
               using Form 8109, Federal Tax Deposit       $1000 for the year;
               Coupon, or by EFTPS                        monthly if < $50,000
                                                                                 b
                                                          in lookback period;
                                                          semiweekly if >
                                                          $50,000 in lookback
                                                          period; next day if >
                                                          $100,000 undeposited
               Form 945, Annual Return of Withheld        Annually                     If income tax withheld from nonpayroll payments
               Federal Income Tax
FUTA           Form 940, Employer's Annual Federal        Annually                     If business has employees and liability is greater
               Unemployment Tax Return                                                 than $100 in tax year
               Form 940EZ                                 Annually                     If business has employees and if certain
                                                                                       conditions are met for state unemployment taxes
               Deposit (Form 940 payments) Form 8109,        Quarterly                 If liability greater than $100 in tax year
               Federal Tax Deposit Coupon or EFTPS
Information    Form W-2, Wages and Compensation Paid         Annually                  If business has employees (must file on magnetic
returns        to Employees                                                            media if 250 or more Form W-2s)

               Form W–3, transmittal of W–2s                 Annually                  If business has employees (shows totals from
                                                                                       Form W2s, same filing as W2)
Self-          Schedule SE, Self-Employment Tax              Annually                  If received net earnings of $400 or more from self-
employment                                                                             employment
                                            a
                                             The Form 941 lookback period for 1999 covers four quarters, beginning July 1, 1997 and ending
                                            June 30, 1998.
                                            b
                                            The Form 943 lookback period is the second calendar year preceding the current calendar year.
                                            Source: GAO compilation of IRS information.




                                            Page 25                                       GAO/GGD-99-133 Small Business Tax Requirements
                                            Appendix II
                                            Tax Requirements That Potentially Apply to Small Businesses




Table II.3: Layer Three–Employee Benefit Plan Requirements
Tax form                                           Frequency         Explanation
Form 5500, Annual Return/Report of Employee         Annually         If plan has 100 or more participants
Benefit Plan
Form 5500-EZ, Annual Return/Report of One-          Annually         If only one participant and certain other conditions met
Participant Retirement Plan
Form 5500-C/R, Annual Return/Report of Employee     Annually         If fewer than 100 participants
Benefit Plan
Schedule A (form 5500), Insurance Information       Annually         If any plan benefits provided by insurance company
Schedule B (form 5500), Actuarial Information       Annually         If plan set up as "defined benefit" rather than "defined
                                                                     contribution" and subject to minimum funding standard
Schedule C (form 5500), Service Provider and           Annually      If compensation paid to any trustee or others providing services to
Trustee Information                                                  the plan exceeds a certain threshold, generally $5,000 per year
Schedule E (form 5500), Employee Stock Ownership       Annually      If an employer with a pension benefit plan that contains ESOP
Plan (ESOP) Annual Information                                       benefits
Schedule F (form 5500), Fringe Benefit Plan Annual     Annually      If an employer with a cafeteria plan, educational assistance
Information Return                                                   program, or adoption assistance program
Schedule G (form 5500), Financial Schedules            Annually      If filing form 5500
Schedule P (form 5500), Annual Return of Fiduciary     Annually      If a trustee of a trust created as part of an employee benefit plan
of Employee Benefit Trust                                            or a custodian of a custodial account
Schedule SSA (form 5500), Annual Registration          Annually      If filing form 5500, to report participants with vested benefits who
Statement Identifying Separated Participants With                    were separated from the company during the year
Deferred Vested Benefits
                                            Source: GAO compilation of IRS information.




                                            Page 26                                       GAO/GGD-99-133 Small Business Tax Requirements
                                               Appendix II
                                               Tax Requirements That Potentially Apply to Small Businesses




Table II.4: Layer Four–Requirements That Depend on Business Operations
                                                            Frequency
Form                                                        (annually unless
applicability     Tax form                                  otherwise noted) Explanation
Potentially any Schedule D, Capital Gains and Losses                         If business sold or exchanged capital assets
business          Form 1116, Foreign Tax Credit                              If filing as an individual, estate, or trust and paid certain
                                                                             foreign taxes to a foreign country or U.S. possession
                  Form 3468, Investment Credit                               If claiming investment in building rehabilitation,
                                                                             alternative energy, or reforestation
                  Form 3800, General Business Credit                         If more than one type business credit claimed
                  Form 4255, Recapture of Investment Credit                  If required to refigure investment credit (e.g., when
                                                                             investment credit property sold)
                  Form 4562, Depreciation and Amortization                   If depreciating, amortizing, or expensing certain
                                                                             business property
                  Form 4684, Casualties and Thefts                           If deducting losses due to fire, storm, theft, or other
                                                                             casualty
                  Form 4797, Sales of Business Property                      If sold or exchanged business property
                  Form 4952, Investment Interest Expense                     If filing as an individual, estate, or trust and claiming
                  Deduction                                                  deduction for investment interest expense
                  Form 5884, Work Opportunity Credit                         If claiming the work opportunity credit for wages paid to
                                                                             targeted groups of employees
                  Form 6198, At-Risk Limitations                             If incurred loss from specified "at risk activities" (e.g.,
                                                                             farming, exploring for oil, others)
                  Form 6251, AMT Individuals                                 If tax on alternative minimum tax income is greater
                                                                             than tax reported on form 1040
                  Form 6252, Installment Sale Income                         If reporting income from casual sales (other than
                                                                             inventory) where payments received in a tax year after
                                                                             the year of sale
                  Form 6478, Alcohol Used as Fuel Credit                     If claiming the credit for alcohol used as fuel
                  Form 6765, Increasing Research Credit                      If claiming the credit for increasing research activities
                  Form 6781, Gains and Losses from Section                   If claiming gains or losses from (1) section 1256
                  1256 Contracts and Straddles                               contracts under the marked-to-market rules (such as
                                                                             regulated futures contracts) or (2) straddles (offsetting
                                                                             positions that decrease the risk of loss)
                  Form 8275, Disclosure Statement                            If disclosing items that are otherwise not adequately
                                                                             disclosed for the purpose of avoiding penalties
                  Form 8275-R, Regulation Disclosure                         If disclosing positions taken on a tax return that are
                  Statement                                                  contrary to Treasury regulations
                  Form 8404, Interest Charge on DISC-                        If a shareholder in a Interest Charge Domestic
                  Related Deferred Tax Liability                             International Sales Corporation and receiving deferred
                                                                             DISC income that increases taxable income
                  Form 8582, Passive Activity Loss                           If reporting a net loss from "passive activities" (e.g.,
                  Limitations                                                most real estate investments)
                  Form 8586, Low Income Housing Credit                       If an owner of certain low-income housing projects and
                                                                             claiming credit
                  Form 8594, Asset Acquisition Statement                     If bought or sold a trade or business and goodwill or
                                                                             going-concern value attaches or could attach to assets
                                                                                                                              (continued)




                                               Page 27                                 GAO/GGD-99-133 Small Business Tax Requirements
                                               Appendix II
                                               Tax Requirements That Potentially Apply to Small Businesses




                                                             Frequency
Form                                                         (annually unless
applicability   Tax form                                     otherwise noted) Explanation
Potentially any Form 8609, Low-Income Housing Credit                          If obtaining a housing credit allocation in order to claim
business        Allocation Certification                                      low-income housing credit
                Form 8697, Interest Computation under the                     If required to figure interest on certain long-term
                Look-Back Method for Completed Long-                          contracts under the "lookback" method of section
                term Contracts                                                460(b)(2)
                Form 8801, Credit for Prior Year Minimum                      If filing as individual, estate, or trust and claiming the
                Tax                                                           minimum tax credit for alternative minimum tax
                                                                              incurred in a prior year
                Form 8816, Special Loss Discount Account                      If an insurance company and electing an additional
                and Special Estimated Tax Payments for                        deduction under section 847
                Insurance Companies
                Form 8817, Allocation of Patronage and                        If organized as a cooperative and reporting income or
                Nonpatronage Income and Deductions                            deductions from patronage or nonpatronage sources
                Form 8820, Orphan Drug Credit                                 If claiming an orphan drug credit
                Form 8824, Like-kind Exchanges                                If exchanged business or investment property for
                                                                              property that is of a like kind
                Form 8826, Disabled Access Credit                             If an eligible small business (with not more than $1
                                                                              million in gross receipts or 30 employees) and claiming
                                                                              the Disabled Access Credit
                Form 8830, Enhanced Oil Recovery Credit                       If claiming the enhanced oil recovery credit
                Form 8834, Qualified Electric Vehicle Credit                  If claiming the credit for a qualified electric vehicle
                                                                              placed in service during the tax year
                Form 8835, Renewable Electricity                              If claiming the renewable electricity production credit
                Production Credit
                Form 8844, Empowerment Zone                                   If claiming the empowerment zone employment credit
                Employment Credit                                             for qualified wages and other expenses paid or
                                                                              incurred on behalf of any qualified zone employee
                Form 8845, Indian Employment Credit                           If employed American Indian(s) meeting certain criteria
                Form 8846, Credit for Employer Social                         If claiming credit for Social Security and Medicare
                Security and Medicare Taxes Paid on                           taxes incurred on employees' tip income
                Certain Employee Tips
                Form 8847, Credit for Contributions to                        If claiming the credit for contributions to a selected
                Selected Community Development Corps                          Community Development Corporation
                Form 8850, Pre-Screening Notice and          No later than 21 If an employer and claiming the Work Opportunity
                Certification Request for the Work           days after job   Credit or the Welfare-to-Work Credit
                Opportunity and Welfare-to-Work Credits      applicant begins
                                                             working
                Form 8861, Welfare-to-Work Credit                             If an employer and claiming the welfare-to-work credit
                                                                              for wages paid or incurred to long-term family
                                                                              assistance recipients
                Form 1096, Annual Summary and                                 If certain information returns filed, including paper
                Transmittal of Information Returns                            forms 1099
                Form 1098, Mortgage Interest Statement                        If business receives $600 or more in mortgage interest
                                                                              from any person(s)
                Form 1099-A, Acquisition or Abandonment                       If acquired property as security for loan
                of Secured Property
                Form 1099-B, Proceeds from Broker or                          If business operates as a broker or barter exchange, it
                Barter Exchange Transactions                                  must report proceeds from transactions
                                                                                                                                (continued)




                                               Page 28                                 GAO/GGD-99-133 Small Business Tax Requirements
                                             Appendix II
                                             Tax Requirements That Potentially Apply to Small Businesses




                                                            Frequency
Form                                                        (annually unless
applicability   Tax form                                    otherwise noted) Explanation
Potentially any                                                              If certain financial institutions cancel debt of $600 or
business        Form 1099-C, Cancellation of Debt                            more
                Form 1099-DIV, Dividends and                                 If paid dividends or made certain other distributions of
                Distributions                                                stock
                Form 1099-INT, Interest Income                               If paid interest income exceeding specified amounts;
                                                                             also shows backup withholding
                Form 1099-LTC, Long-Term Care and                            If an insurance company or other payer of long-term
                Accelerated Death Benefits                                   care benefits
                Form 1099-MISC, Miscellaneous Income                         If made certain payments in the course of a trade or
                                                                             business, e.g., payments to independent contractors
                Form 1099-MSA, Distributions From                            If made distributions from employees’ medical savings
                Medical Savings Accounts                                     accounts
                Form 1099-OID, Original Issue Discount                       If issued debt instrument with $10 or more of original
                                                                             issue discount
                Form 1099-PATR, Taxable Distributions                        If a consumer cooperative and issued patronage
                Received From Cooperatives                                   dividends of $10 or more
                Form 1099-R, Distributions From Pensions,                    If business distributed $10 or more from retirement or
                Annuities, Profit Sharing and Retirement                     profit-sharing plan
                Plans, etc.
                Form 1099-S, Proceeds From Real Estate                       If received proceeds from the sale or exchange of real
                Transactions                                                 estate
                Form 4789, Currency Transaction Report      No later than 15 If customer of financial institution enters transaction of
                                                            days after       $10,000 or more in currency
                                                            transaction
                Form 5498, IRA Contribution Information                      If maintained IRAs for any person(s)
                Form 5498, MSA Information                                   If maintained a medical savings account for any
                                                                             person(s)
                Form 8027, Employer's Annual Information                     If a food and beverage establishment with more than
                Return of Tip Income and Allocated Tips                      10 employees who work a total of more than 8
                                                                             business hours on a typical business day (and tipping
                                                                             is a customary practice)
                Form 8281, Information Return for Publicly Within 30 days of If issued publicly offered debt instrument having
                Offered Original Issue Discount Instruments issuance of OID original issue discount
                                                            instrument
                Form 8282, Donee Information Return         125 days after   If a donee organization that sells or otherwise disposes
                                                            disposition of   of certain charitable deduction property within 2 years
                                                            charitable       after the date of receipt
                                                            property
                Form 8271, Investor Reporting of Tax                         If claiming a tax benefit or reporting income from a
                Shelter Registration Number                                  "registration-required" tax shelter
                Form 8300, Report of Cash Payments Over No later than 15 If business received cash payment of $10,000 or more
                $10,000 Received in a Trade or Business     days after       in one transaction
                                                            transaction
                Form 8329, Lender's Information Return for                   If made a loan that is a certified indebtedness amount
                Mortgage Credit Certificates                                 on any mortgage credit certificate
                Form 8362, Currency Transaction Report      Daily            If a casino in the U.S. with annual gross gaming
                by Casinos                                                   revenues in excess of $1 million, to report currency
                                                                             transactions of $10,000 or more
                                                                                                                             (continued)




                                             Page 29                                 GAO/GGD-99-133 Small Business Tax Requirements
                                           Appendix II
                                           Tax Requirements That Potentially Apply to Small Businesses




                                                            Frequency
Form                                                        (annually unless
applicability   Tax form                                    otherwise noted) Explanation
Potentially any Form 8703, Annual Certification of a
business        Residential Rental Project                                     If operating a qualified residential rental project
                Form 8852, Currency Transaction Report      15th day after the If a Nevada casino with annual gross gaming revenue
                by Casinos–Nevada                           transaction        of more than $10 million to report currency
                                                                               transactions of $10,000 or more
               Form 926, Return by a U.S. Transferor of     Day of transfer    If transferred property to a foreign corporation, estate,
               Property to a Foreign Corporation                               trust, or partnership
Farmers        Form 4835, Farm Rental Income and                               If a landowning farmer reporting farm rental income
               Expenses                                                        based on crops or livestock produced by tenant
Partnerships   Schedule D (Form 1065), Capital Gains                           If sale of capital assets allocated to partnership, not
and S          and Losses                                                      partners
corporations   Schedule D (Form 1120S), Capital Gains                          If sold or exchanged capital assets and to report gains
               and Losses and Built-in Gain                                    on distributions to shareholders of appreciated capital
                                                                               assets; also used to report any built in gains tax
               Form 8308, Report of a Sale or Exchange                         If sold or exchanged a partner's interest in a section
               of Certain Partnership Interests                                751a exchange

               Form 8621, Return by a Shareholder of a                         If an owner or shareholder of a passive foreign
               Passive Foreign Investment Company or                           investment company
               Qualified Electing Fund
               Form 8752, Required Payment or Refund                           If elected to have an alternate tax year
               Under Section 7519
               Form 8825, Rental Real Estate Income and                        If business had income or deductible expenses from
               Expenses of a Partnership or an S                               rental real estate activities
               Corporation
Partners and   Form 4952, Investment Interest Expense                          If a partner or other individual, estate or trust claiming
shareholders   Deduction                                                       a deduction for investment interest expense, unless
                                                                               certain conditions apply
               Form 8082, Notice of Inconsistent                               If items treated differently on schedule E and form
               Treatment or Administrative Adjustment                          1065 or form 1120S
               Request
Corporations   Schedule D (Form 1120), Capital Gains                           If sold or exchanged capital assets and have gains on
               and Losses                                                      distributions to shareholders of appreciated capital
                                                                               assets
               Schedule H (form 1120), Section 280H                            If a personal service corporation did not meet certain
               Limitations for a Personal Service                              distribution requirements
               Corporation
               Schedule PH (form 1120), U.S. Personal                          If a personal holding company
               Holding Company Tax
               Form 1118, Foreign Tax Credit (form 1120);                      If electing to claim the foreign tax credit; separate
               (attached to form 1118 are Schedule I,                          forms 1118 must be filed for each of nine limitation
               Reduction of Oil and Gas Extraction Taxes                       categories that apply
               and Schedule J, Separate Limitation Loss
               Allocations)
               Form 2438, Undistributed Capital Gains                          If a Regulated Investment Company or Real Estate
               (attach to form 1120-RIC or 1120-REIT)                          Investment Trust and had undistributed capital gains
                                                                                                                          (continued)




                                           Page 30                                  GAO/GGD-99-133 Small Business Tax Requirements
                                            Appendix II
                                            Tax Requirements That Potentially Apply to Small Businesses




                                                            Frequency
Form                                                        (annually unless
applicability   Tax form                                    otherwise noted) Explanation
Corporations                                                                 If taxable income or loss before the net operating loss
                Form 4626, Alternative Minimum Tax:                          deduction, plus adjustments and preferences, totals
                Corporations (file with form 1120)                           more than $40,000
                Form 5735, Possessions Corporation Tax                       If a domestic corporation engaged in a trade or
                Credit                                                       business within a U.S. possession on Oct. 13, 1995
                                                                             and elected the benefits of the possessions credit
                Form 8810, Corporate Passive Activity                        If a personal service corporation or closely held
                Loss and Credit Limitations                                  corporation with losses or credits from passive
                                                                             activities
                Form 8827, Credit for Prior Minimum Tax                      If incurred an AMT liability in previous year and meet
                (file with form 1120)                                        certain criteria
                Form 8860, Qualified Zone Academy Bond                       If a bank, insurance company, or other corporation that
                Credit                                                       lends money and an eligible holder of qualified zone
                                                                             academy bonds
                Form 5452, Corporate Report of                               If made nondividend distributions to shareholders
                Nondividend Distributions
                Form 5472, Information Return of a 25%                       If had a reportable transaction with a foreign or
                Foreign-Owned U.S. Corporation or a                          domestic related party
                foreign corporation engaged in a U.S. trade
                or business
                Form 8842, Election to Use Different                         If electing to use an annualization option under the
                Annualization Periods for Corporate                          annualized income installment method to figure
                Estimated Tax                                                estimated tax payments
                Form W-2G, Certain Gambling Winnings                         If business paid out reportable gambling winnings
                                            Source: GAO compilation of IRS information.




                                            Page 31                                       GAO/GGD-99-133 Small Business Tax Requirements
                                             Appendix II
                                             Tax Requirements That Potentially Apply to Small Businesses




Table II.5: Layer Four–Excise Tax Requirements Administered by IRS
Tax form                                        Frequency          Explanation
Form 637, Application for Registration          As needed          If engaging in activities with excise taxes, entity must register
Form 720, Quarterly Federal Excise Tax Return   Quarterly          If engaging in activities with excise taxes; Form 720 covers most
                                                                   excise taxes (environmental, communications, air transport, fuel,
                                                                   retail, luxury, manufacturing, foreign insurance)
Form 11-C, Occupational Tax and Registration    Annually           If principal operator or employee-agent of businesses that accept
Return for Wagering                                                wagers
Form 730, Tax on Wagering                       Monthly for the    If involved in the business of accepting wagers or conducting
                                                periods reporting wagering pools or lotteries
                                                taxable wagers
Form 1363, Export Exemption Certificate         As needed          If exporting property by continuous movement must file to claim
                                                                   exemption from the tax on transportation of property by air
Form 2290, Heavy Vehicle Use Tax Return         Annually (unless Any entity with a taxable highway motor vehicle, vehicles greater
                                                used for a partial than 55,000 pounds
                                                year)
Form 4136, Credit for Federal Tax Paid on Fuels Annually           If claiming the credit for federal excise tax paid on fuels;
                                                                   generally partnerships cannot file this form
Form 5330, Return of Excise Taxes Related to    Annually           If there were nondeductible contributions or prohibited
Employee Benefit Plans                                             transactions or failure to meet certain other employee benefit
                                                                   plan requirements
Form 6197, Gas Guzzler Tax (attach to form 720) Quarterly as       If manufacturer and importers (including individuals) that sell or
                                                needed             use automobiles that do not meet fuel economy standards
Form 6627, Environmental Taxes (attach to Form Quarterly as        If manufacturers or importer of ozone-depleting chemicals
720)                                            needed             (ODCs) and entities that hold for sale or sell those products
Form 8849, Claim for Refund of Excise Taxes     As needed          If business paid excise taxes
                                             Source: GAO compilation of IRS information.




                                             Page 32                                       GAO/GGD-99-133 Small Business Tax Requirements
                                              Appendix II
                                              Tax Requirements That Potentially Apply to Small Businesses




Table II.6: Layer Four–Excise Taxes Administered by ATF
                           a
Form number          Title
F 5000.19            Tax Information Authorization
F 5000.24            Excise Tax Return
F 5000.25            Excise Tax Return–Alcohol and Tobacco (Puerto Rico)
F 5000.25A           Excise Tax Return–Alcohol and Tobacco (Puerto Rico)
F 5100.12            Specific Transportation Bond-Distilled Spirits or Wines Withdrawn for Transportation to Manufacturing Bonded
                     Warehouse–Class Six
F 5100.25            Specific Export Bond–Distilled Spirits or Wine
F 5110.31            Application and Permit to Ship Puerto Rico Spirits to the United States Without Payment of Tax
F 5120.20            Certification of Tax Determination–Wine
F 5120.24            Drawback on Wine Exported
F 5130.6             Drawback on Beer Exported
F 5130.12            Beer for Exportation
F 5170.7             Application and Permit to Ship Liquors and Articles of Puerto Rico Manufacture Tax Paid to the United States
F 5200.17            Bond, Drawback of Tax on Tobacco Products, Cigarette Papers,or Tubes
F 5210.5             Monthly Report – Manufacturer of Tobacco Products
F 5210.8             Computation of Tax Agreement to Pay Tax on Puerto Rican Cigars or Cigarettes
F 5210.9             Inventory–Manufacturer of Tobacco Products
F 5300.27            Federal Firearms and Ammunition Excise Tax Deposit
F 5620.7             Claim for Drawback of Tax on Tobacco Products, Cigarette Papers, or Cigarette Tubes
F 5620.8             Claim–Alcohol, Tobacco, and Firearms Taxes
F 5630.5             Special Tax Registration and Return (Alcohol and Tobacco)
F 5320.4             Application for Tax Paid transfer and Registration of a Firearm
F 5320.5             Application for Tax-Exempt Transfer and Registration of a Firearm
F 1610.2             Special Occupational Tax Printing Request
F 5100.30            Continuing Export Bond–Distilled Spirits and Wine
F 5110.67            Continuing Transportation Bond Distilled Spirits Or Wines Withdrawn for Transportation to Manufacturing Bonded
                     Warehouse –Class Six
F 5110.68            Drawback Bond–Distilled Spirits and Wine
F 5130.16            Tax Deferral Bond–Beer (Puerto Rico)
F 5200.9             Certification of Prepayment of Tax on Puerto Rico Cigars, Cigarettes, Cigarette Papers, or Cigarette Tubes
                     Report of Multiple Sales or Other Disposition of Pistols and Revolvers
F 5300.9             Firearms Transaction Record Part I–Over-the-Counter
F 5300.24            Firearms Transaction Record Part I–Low Volume–Over-the-Counter
F 5300.9             Firearms Transaction Record Part I–Intra-State Over-the-Counter (English-Spanish)
F 5300.9             Firearms Transaction Record Part II–Non-Over-the-Counter
F 5300.9             Firearms Transaction Record Part II–Low Volumne–Intra-State Non-Over-the-Counter
F 5000.28            Floor Stocks Tax Return
F 5000.28T           1993 Floor Stocks Tax Return (Cigarettes)
F 5100.4             Certificate of Taxpaid Alcohol
F 5110.3             Drawback on Distilled Spirits Exported
F 5110.5             Tax Deferred Bond–Distilled Spirits
F 5200.23            Floor Stocks Tax Return–Pipe Tobacco
F 5300.26            Federal Firearms and Ammunition Excise Tax Return
F 5300.28            Application for Registration for Tax Free Transactions Under 26 USC 4221 (Firearms and Ammunition)
F 55600.8            Statement of Adjustment to the Puerto Rico or Virgin Islands Tax Account
                                                                                                                            (continued)




                                              Page 33                                GAO/GGD-99-133 Small Business Tax Requirements
                                      Appendix II
                                      Tax Requirements That Potentially Apply to Small Businesses




                  a
Form number   Title
F 5600.26     Tax Collection Waiver
F5600.33      Certification of Ultimate Vendor for Use in Tax Refund Claim Under Section 6416 (b) (2) of the Internal Revenue
              Code (27 CFR 53.179 (b) (iii))
F 5600.34     Purchaser’s Certificate of Tax-Free Purchase for Use as Supplies for Vessels and Aircraft (27 CFR 53.134 (d) (2))
F 5600.35     Purchaser’s Certificate of Tax-Free Purchase for State or Local Government Use (27 CFR 53.135 (c) (1))
F 5600.36     Vendor’s Certificate of Tax-Free Purchase for Resale for Export (27 CFR 53.133 (d) (2))
F 5600.37     Vendor’s Certificate of Tax-Free Purchase for Resale for Further Manufacture (27 CFR 53.132 (c) (2))
F 5600.38     Application for Extension of Time for Payment of Excise Tax
F 5610.6      Consent to Extend the Time to Assess ATF Excise Tax
F 5630.5R     Special Tax “Renewal” Registration and Return
F 5630.5RC    Special Tax Location Registration Listing
F 5630.6A     Special Tax Stamp
F 5630.7      Special Tax Registration and Return National Firearms Act (NFA)
F 5632.1      Special Occupational Tax Inquiry Letter
F 5640.5      IRC Guideline/Worksheet for Late Excise Payment/Deposit or Tax Return
F 5150.35     Bond for Spirits or Distilled Spirits or Rum Brought Into the US Free of Tax (used by Virgin Islands)
F 5150.36     Bond for Articles Brought Into the U.S. Free of Tax (used by Virgin Islands)
                                      a
                                       We did not compile information regarding the applicability or frequency of ATF excise tax
                                      requirements.
                                      Source: GAO compilation of IRS information.




                                      Page 34                                       GAO/GGD-99-133 Small Business Tax Requirements
Appendix III

Simplified Audit and Dispute Resolution
Processes

               This appendix illustrates a simplified process for auditing tax returns,
               resolving disputed taxes, and collecting taxes owed. For the small
               percentage of returns that are audited, most tax issues are resolved during
               the audit process. However, some audited taxpayers dispute their
               additional taxes to Appeals, and a few seek to resolve their disputes with
               IRS in the courts.




               Page 35                          GAO/GGD-99-133 Small Business Tax Requirements
                                           Appendix III
                                           Simplified Audit and Dispute Resolution Processes




Figure III.1: Simplified Audit and Dispute Resolution Processes




                                           Page 36                                GAO/GGD-99-133 Small Business Tax Requirements
Appendix III
Simplified Audit and Dispute Resolution Processes




Page 37                                GAO/GGD-99-133 Small Business Tax Requirements
Appendix IV

Comments From the Internal Revenue Service




              Page 38     GAO/GGD-99-133 Small Business Tax Requirements
Appendix IV
Comments From the Internal Revenue Service




Page 39                              GAO/GGD-99-133 Small Business Tax Requirements
Page 40   GAO/GGD-99-133 Small Business Tax Requirements
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