According to NASE, the proposal to fix the tax gap, puts more burden on micro businesses.  Some of the proposals are:

  • Withholding tax payments from non-employee contractors.  (Yikes!)
  • Obtaining and verifying TIN numbers of independent contractors.
  • Requiring credit and debit card companies to report to the IRS the gross total receipts a business made.

Source: NASE Press Release, “Tax Gap Proposal Will Hinder Micro Business, Says NASE National Tax Advisor,” April 27, 2007.

NASE’s testimonial to Congress: “Fairness in Tax Compliance.”

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In my opinion, the most costly and time consuming is if we need to start withhold tax payments for independent contractors.  It would be hard to manage this task without a payroll service of some kind which means less money in the owners pockets.

Many micro businesses operate as sole proprietors or LLC and do not have employees; they use independent contractors such as web designers, virtual assistants, accountants, etc.  They use personal income tax returns and estimated tax payments rather than payroll services.

For those companies with employees, the cost of payroll services would increase because a larger number of transactions need to occur.

The other methods, verifying EIN numbers and having credit and debit companies report transactions to the IRS do not affect the tax gap.  The tax gap is mostly due to cash transactions with no receipts.  Many companies and individuals that earn tips and take cash for services rendered do not report all of their earnings.