Small Businesses: Backbone of the Economy or Back Breaker?
Small businesses are seldom held accountable for underreporting income, yet the consequences for doing so affect the economy, surrounding communities, and the owners themselves.
NEW ORLEANS, LA September 17, 2019-- Year after year, small businesses continue to be the biggest culprits of underreporting income and failing to file taxes, according to an article by the Tax Foundation. Though many recognize some risks (facing consequences as daunting as audits, penalties, fees, or even criminal charges), some businesses may not realize that tax fraud can also put their future ability to sell at stake. Funds from selling a business could be an owner’s retirement fund.
Accurate tax returns are necessary for insurance in case of theft, for legal protection in case of injury (to the business), and for credit in case of borrowing needs. All of these are vital in securing a business’s future. Furthermore, when thinking long term, these tax returns will help ensure that the business will be sold for its true value when the time comes, which is especially important for less sophisticated sellers.
Russell Bernstein, a New Orleans business broker and Certified Business Intermediary (the only CBI within 50 miles), explains, “Tax Returns are usually the only proof of profitability that small business owners keep as records, and savvy business buyers often exploit a lack of records in negotiations with less sophisticated sellers from more humble beginnings.” To more experienced business investors, small businesses without accurate tax returns have much less reliable information overall since, without tax returns, there is often not much information collected in a small business to support the assumptions that establish a proposed value.
“Not reporting taxes essentially means - more or less - that you are taking value out of your business that you would have otherwise sold it for. In a way, your business is already sold to itself,” Bernstein says. It’s here that we see how small business owners risk the integrity of the economy because the smallest businesses don’t have the patience to wait for their earnings upon a sale. However, according to the International Business Brokers Association, only 2 of 5 businesses actually sell, which usually results in more vacancies in commercial space and, thus, an inaccurate perception of the true viability of locations to do business. In Bernstein’s words, “If small businesses paid taxes and then were sold, they would sell more often and likely at their true value. This cycle would more accurately reflect the commercial potential within the community and nourish the local economy on an ongoing basis.”
Therefore, when small businesses evade taxes, they do not only disadvantage themselves; they also disadvantage the economy through hindering the development and sustainability of the local community. Even on the most basic level, evading taxes costs the community the benefits of taxes. Taxes fund education, research, and infrastructure; since small businesses can only succeed with the support of a thriving community, any tax-dishonesty is counterproductive.
Still, the problem is not only that businesses underreport income; the problem is also systemic. There is also a lack of accountability.
It’s obvious to both the community and to the government that small businesses report less income than truly earned, yet no one truly holds them accountable. Sure, there are audits, but according to The New York Times article titled “Why the I.R.S. Fails to Crack the Small-Business Tax Nut”, these audits are hardly effective. One study conducted by the Taxpayer Advocate Service found that audits hardly deter small business owners from tax-dishonesty--after being audited, individuals typically are 7% less likely to report inaccurately, but this effect disappears five years after the initial audit.
Perhaps, one day, we will be able to guarantee that the individual business owners take action due to advancements in technology. Even now, businesses who make above $500,000 are forced to report taxes on most or all of their income. With that amount of money, they tend to have to use more advanced technology to record data. It then becomes more difficult and risky to rework technology’s data and merely attempt to underreport.
As for today, the smallest businesses may not yet feel the need to report true earnings because most transactions are in cash, which can easily go unrecorded. In fact, according to the New York Times, “63 percent of ‘low visibility’ income, the kind that isn’t captured by outside parties on tax information documents, is not disclosed on tax forms”. In the future, however, all businesses, even the smallest ones, may have to report taxes accurately just because of indisputable data from non-cash transactions. In a day of credit cards and Apple Pay, no one can deny the amount of income made; whereas, with cash, you can simply pay “under the table.” Perhaps, with the end of cash, the end of tax-dishonesty will be possible, and more businesses can be sold, more frequently, and for higher prices.
About the Tax Foundation
The Tax Foundation is an independent tax policy nonprofit that began in 1937. According to the Tax Foundation’s official website, the purpose of the foundation is to “improve lives through tax policies that lead to greater economic growth and opportunity.” The foundation employs a team of researchers who analyze data and distribute it so that individuals can become better informed on the subject of tax policy. For more information, visit https://taxfoundation.org/about-us/.
About the New York Times
The New York Times is an American newspaper that reports on a multitude of topics such as politics, technology, business, and more. According to the New York Times mission statement, the purpose of the NY Times is to provide people with a resource for ethical journalism. Now it remains one of the largest United States news outlets. For more information, visit https://www.nytco.com/company/.
About The Taxpayer Advocate Service
The Taxpayer Advocate Service is an independent subsidiary organization under the Internal Revenue Service (IRS). The organization serves to protect the rights of taxpayers as well as resolve tax-related issues that cannot be handled on an individual level. For more information, visit https://taxpayeradvocate.irs.gov/.
About Russell Bernstein
Russell Bernstein is a registered commercial real estate agent with an esteemed real estate franchise, Keller Williams, named the #1 real estate franchise in the USA and the #1 training company of any size and type in the world. Bernstein is also a “business broker,” assisting clients with transactions involving the transfer of businesses and the real estate associated with them. Bernstein serves as a member of both the International Business Brokers’ Association (IBBA) and the Commercial Investment Division (CID). He is one of only 500 people in the USA with a Certified Business Intermediary (CBI) designation, and he further sets himself apart from others by also being a Certified International Property Specialist (CIPS). Bernstein also has an MBA in Financial Decision Systems from Loyola Marymount University. For more information, visit www.russellbernstein.biz
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