IRS Reports Which Small Businesses Are Least Likely to Pay Their Share of Taxes Published June 24, 2013

According to a 70-page IRS compliance study on sole proprietors, the IRS with the help of an outside research company, was able to determine which type of business would be most likely to underreport their income. This underreporting makes up for the largest portion of the tax gap (i.e. taxes not voluntarily and timely paid).

Therefore, now armed with this data, it makes sense that the IRS wants to create a “profile” of those small businesses who are most likely not in compliance. While IRS profiling is an obvious hot button issue these days, we’re going to stay away from that one for now!

So what did they find out? If the business is a real-estate related business with a lot of employees run by a non-native-English-speaking man who distrusts his tax preparer, and participates in local organizations, watch out. Uh, ok (?).

We know that lenders are lending money every day to small businesses around the country. And we know that there is no way lenders are going to build their due diligence around this speculative data, but it’s of interest to us all to understand the variables at play when measuring the IRS’ risk when lending.

There are a handful of profiles that this study attributes to the identification of non-compliant small business. And there are more data points than anyone could reasonably use to make a funding decision. From our years of identifying businesses with tax issues, the reality is this–it’s about cash flow. Simply put, businesses that are dealing with cash flow issues, for any reason, are the ones that typically find themselves with tax problems. Therefore, identify businesses that are not in full tax compliance and your risk management and underwriting processes will be that much more lock tight.

Looking for more deep data?

Dive into the full IRS Taxpayer Advocate report on Small Business Tax Compliance here.