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Needs & problems of minority-owned small businesses.

This study presents the results of survey research conducted with minority-owned small businesses that are members of the Dallas Black and Hispanic Chambers of Commerce. The primary objective of the study is to identify the problems and needs of minority-owned small businesses. Secondary objectives are to:

1. Determine the awareness and use

of current IRS services of

minority-owned small businesses; 2. Determine the awareness of

basic tax responsibilities of

minority-owned small businesses; and 3. Determine the specialized

assistance desired by minority-owned

small businesses in their efforts

to comply with Federal tax laws.

The results of the study suggest that minority-owned small businesses perceive the problems of complexity and administrative burden as the two major impediments of their efforts to comply with the Federal tax laws. Additional problems discussed are uncertainty, inadequate taxpayer services and the incidence of taxation. Specific provisions and factors within each identified problem area are ranked and discussed.

A discussion of the secondary objectives of the study is also presented. The study concludes with five suggestions to the Internal Revenue Service and policy makers in order to improve the ability of small business owners to comply with the tax laws. The author also provides suggestions for future research directed toward examining the problems and needs of various ethnic groups in order to isolate compliance traits, problems and needs peculiar to these groups.

Needs and Problems of Minority-Owned Small Businesses

In testimony before the Subcommittee on Oversight House Committee on Ways and Means on April 19, 1990, IRS Commissioner Fred Goldberg testified that noncompliance among small businesses represent 31.5% of the tax gap. This group constitutes the largest source of noncompliance in the sources identified by the Commissioner. The study of the needs and problems of small businesses is essential in order to increase the level of voluntary compliance by this group.

The primary purpose of the study is to identify the problems and needs of minority-owned small businesses. Secondary objectives of the study are to:

1. Determine the awareness and use

of current IRS services by

minority-owned small businesses; 2. Determine the awareness of

basic tax responsibilities by

minority-owned small businesses and; 3. Determine the specialized

assistance desired by minority-owned

small businesses in their efforts

to comply with Federal tax laws.

Methodology

Data were obtained from a survey sent to minority-owned small businesses in the Dallas-Fort Worth area. (A copy of the survey instrument is included in the appendix to this report.) The businesses included in the survey were chosen from membership rosters for the Dallas Black and Hispanic Chambers of Commerce. After eliminating individuals and firms that did not represent business entities, 263 questionaires were mailed. Twenty-nine of the questionnaires were returned, yielding a response rate of 11%. Although a higher response rate was anticipated and desired, mail surveys with response rate as low as 5% are not uncommon. Due to the low response rate, a major limitation of this study is the possibility of nonresponse bias. However, the researcher found no evidence to substantiate that the respondents did not randomly complete or fail to complete the questionnaire which minimize the impact of nonresponse bias on the results of this study.

The questionnaire was divided into five sections. Section I was designed to obtain information on problems encountered by minority-owned small businesses in complying with Federal income tax laws. Respondents were also asked to rank the problems in terms of their severity. Section II was constructed to obtain information about the respondents' awareness and use of current IRS services. Section III was constructed to determine specialized assistance, not currently provided by the IRS, desired by small businesses to help them comply with their tax obligations.

Section IV of the questionnaire was constructed to determine the extent of awareness of the tax responsibilities of small business owners. Fourteen basic tax compliance questions were used to measure the awareness of the tax responsibilities of the respondents. Section V was constructed to obtain demographic information about the respondents and their businesses.

The questionnaire was constructed by the researcher with the assistance of three revenue agents from the Dallas District of the IRS who have extensive audit experience in the examination of small businesses. The questionnaire was pilot tested with a group of minority small business owners in the Dallas-Fort Worth area. Identified problems and concerns were addressed and the questionnaire was mailed on July 15, 1991.

Results

Problems In Complying with the Federal Tax Laws

From the original design of the questionnaire and the pilot test, five problems encountered by small business owners in complying with Federal tax laws were identified. Respondents were asked to indicate whether or not they had encountered the problems in their business operations and given the opportunity to list other problems. The frequency with which each problem was encountered is shown in Table 1.

While most respondents had encountered each of the identified problems, complexity was the problem encountered most often followed by uncertainty and the incidence of taxation which were encountered with equal frequency. Among the identified problems inadequate taxpayer services was the least encountered problem by the respondents. Other problems identified by the respondents included vagueness of the tax laws, lack of understanding on the part of the IRS, chaotic IRS administration and unqualified IRS personnel.

Respondents were next asked to rank the problems according to the severity each creates in efforts to comply with the law. Table 2 reflects the results of the analysis of this question.

A comparison of the responses to questions one and two reveals that the results are similar. Complexity is ranked as the most severe problem encountered by minority-owned small businesses in their efforts to comply with Federal tax laws followed by administrative burden, uncertainty and incidence of taxation (with equal rank). Inadequate taxpayer services was given the lowest rank and does not appear to be a major impediment in efforts of this group to comply with Federal tax laws.

Responses to this question suggest that the IRS should seek to reduce the complexity of the tax law; reduce the administrative burden on small business owners through less record keeping and reporting requirements; reduce uncertainty by doing all that it can to reduce the frequency of tax law changes affecting small business owners; and encourage Congress to reduce the tax burden on small business owners.

Rank of Specific Provisions and Factors Affecting Compliance

Questions 3A through 3E were included to determine which specific provisions of the tax law or aspects of administration of the law were most troublesome to minority small business owners. By focusing on specific issues, specific problem areas can be identified and studied in future tax reform efforts. Additionally, the identification of specific provisions could indicate to the IRS areas that need to be enhanced in the delivery of taxpayer services.

Question 3A required respondents to rank the complexity of nine identified tax provisions that are encountered on a recurring basis by small business owners. The respondents were given an opportunity to add other problems to the list. Table 3 reflects the ranking given by the respondents to these provisions.

Travel and entertainment expenses, depreciation, and computation of the gain or loss on the sale of assets were listed as the three most complex tax provisions encountered by the respondents. Determination of accounting method, computation of the gain or loss on the disposition of a business, and determination of the home office deduction were the three least complex provisions encountered by the respondents.

Although taxpayers were not asked to indicate the basis for their rankings, it is not surprising that travel and entertainment and depreciation expense were determined to be the most complex provisions encountered. There are numerous substantiation requirements that must be met in order to claim a deduction for travel and entertainment expenses. The depreciation rules have been changed frequently which contributes to the complexity encountered by taxpayers having to determine just what set of rules govern their situation.

Table 4 on the following page reflects the respondent's ranking of five identified activities contributing to the administrative burden that they must endure in complying with Federal tax laws. These activities relate to the record keeping and reporting requirements for small business owners.

Maintaining books and records imposes the greatest administrative burden on the respondents in this study. The respondents found each of the remaining activities almost equally burdensome. This ranking suggests that the IRS should make every effort to reduce the burden of small business owners in maintaining books and records. The choice between the automatic mileage method and the actual cost method of claiming automobile expenses is an example of how the Internal Revenue Service can ease administrative burden.

Taxpayers were next asked to rank factors that contribute to uncertainty and that are troublesome in their efforts to comply with the law. (See Table 5.)

The ranking of these factors suggest several policy implications. The respondents indicate that frequent changes in the law is the most problematic factor in creating uncertainty. This assessment suggests a reduction in the frequency with which tax laws are changed would reduce the level of uncertainty and enhance the level of compliance with Federal tax laws. This result is reasonable since decreasing the frequency of tax law changes means that taxpayers would have more time to become familiar with the application of the law.

Another major factor contributing to uncertainty is the ambiguity of the tax laws. This factor is related to complexity which has already been identified as a major impediment to compliance. Complex tax law is ambiguous tax law and both are attributes of our tax law that adversely impact the efforts of small business owners to comply.

Respondents in this study also indicate that changes in the administration of the law creates more uncertainty than changes in the tax rate structure. Analyzing the ranking of the factors contributing to uncertainty reveals that the respondents are troubled less by changes in the tax rate structure than by changes in the tax law and changes in the administration of the law.

Table 6 reflects the respondents perceptions of taxpayer services provided by the IRS in helping taxpayers comply with the Federal tax laws. Respondents were asked to rank the degree to which they perceive problems related to the sufficiency and timeliness of assistance provided by the IRS to small business owners.

The results indicate that while the IRS delivery of tax forms does not appear to be a problem, improvements need to be made in the assistance provided to taxpayers in collection matters, improving the quality of answers provided to taxpayers at local IRS offices and improving taxpayer access to taxpayer service phone lines. Several respondents suggested that the IRS should be more active in providing small business owners with information on the collection process before the business has a collection problem.

The last question in this section was designed to gather information on how the small business owners feel about their overall tax burden. Table 7 reflects the analysis of question 3E from Section I.

Although the basic tax rate structure for Federal income tax has declined through the years, the respondents in this survey are more concerned with the amount of income taxes borne by small business owners than the self-employment tax and other costs of compliance.

Awareness and Use of Current IRS Services

Section II of the survey was designed to determine the extent to which small business owners are aware of the current IRS services available to them and to determine the use or expected use of the services. Table 8 reflects the results of the analysis of this question for individuals who are aware of the availability of the services and the percentage use by this group.

Table 8 reveals that minority small business owners are most aware of the IRS toll free telephone service (79%); Publication 17 (72%); Walk-in Taxpayer Service (72%); and Publication 334 (69%). Each of the remaining services had an awareness rate of less than 35%. Included in the group of services with a low awareness rate is the Small Business Tax Education Program (STEP) with an awareness rate of 28%. The low awareness rate for STEP indicates that the IRS has not been successful in making the respondents of this study aware of a service that could significantly enhance their ability to comply with Federal tax laws. Student Tax Clinics received the lowest awareness rate -- 14%. This indicates that the colleges and universities with these programs should work more closely with the IRS to make the public more aware of this service.

Another interesting revelation from Table 8 is the percentage of respondents who are aware of current services but don't use them. For example, among the respondents who are aware of the IRS STEP and Business Tax Kit services, 75% do not use the services. Also note that among the respondents who are aware of the Student Tax Clinics and Community Outreach Assistance Programs, none use the services. The results are distressing and call for further study to determine why the services are not being used. Regardless of the reasons, the outcome could result in a more efficient allocation of resources by the IRS.

Table 9 reflects the number of individuals who are not aware of the availability of IRS taxpayer services and their anticipated usage of the services. Table 9 further substantiates that the IRS needs to do a better job in marketing and encouraging the use of its services to this group of taxpayers. Note that for each service in Table 9 with a high unawareness rate, the majority of the respondents expect to use the service in the future. Observe that 78% of the respondents who were not previously aware of STEP and 74% of the respondents who were not aware of the Student Tax Clinics report that they expect to use the programs in the future. The Tele-Tax Service and the Problem Resolution Programs reflect the highest percentage of expected usage. Increase usage of each of the services should prove mutually beneficial to both the Internal Revenue Service and minority small business owners.

Needs of Minority-Owned Businesses

Section III of the survey solicits information about specialized assistance desired by minority small business owners to help them comply with their tax obligations. Four items were identified and described. The results of this section are summarized in Table 10.

Based on the illustrated rankings, one can conclude that the respondents of this study most desire community based assistance centers capable of assisting small business owners with tax compliance and collection problems. The high ranking given community based assistance centers is perhaps motivated by the belief that an individual feels most comfortable discussing problems with someone that has a common interest in resolving the problems.

Community Based Assistance Centers would be an excellent way of bringing the services of the IRS to the taxpayers. Additionally, this would be one way of publicizing the existence of current services to the taxpayers which would help to reduce the problem of lack of awareness of IRS programs and services as previously discussed.

The respondents ranked the Statement of Tax Compliance Deficiencies and Workshops on the Collection Process equally desirable, but least prefer the early audit program to the other services identified.

Only one respondent identified a service in the other category, this observation was eliminated from the analysis since the request was for year round tax services which is currently provided by the Internal Revenue Service. With the exception of the request for community based assistance centers, this section did not identify a need for significant expansion taxpayer services of the Internal Revenue Service.

Awareness of Tax Responsibilities

Section IV of the survey contained fourteen questions to ascertain the extent of awareness of minority small business owners about their basic tax responsibilities. The respondents average score was 10.4; or a 74% correct response rate. As a group, the respondents demonstrated basic awareness of their tax responsibilities. The highest and lowest raw scores were 13 and 8 respectively. Table 11 summarizes the results of this section.

The group scored below average on questions 1, 2, 3, 4 and 8. The below average score may be explained by the fact that these questions, with the exception of question 4 dealt with the IRS filing requirements and 78% of the respondents have their federal income tax returns filed by professionals outside the firm. Question 4 was concerned with the retention of books and records. The low score on this question by the respondents may also be explained by the rationale just advanced. An analysis of this section suggests that minority small business owners understand their responsibilities to comply with Federal income tax laws.

Recommendations and Implications for Further Study

The following recommendations are made to the Internal Revenue Service and policy-makers as a result of this study:

1. Make every effort to reduce the

level of complexity,

administrative burden and uncertainty

encountered by small business

owners in their efforts to comply

with Federal tax laws. 2. Examine specific provisions of

the law or other factors affecting

compliance to determine whether

small business owners would be

willing to make concessions in

order to enhance their ability to

comply with the law. 3. Promote more aggressively the

current taxpayer services offered

by the IRS in order to increase

the public's awareness and use of

these existing services. 4. Consider the creation of

community base assistance centers in

order to foster the relationship

between taxpayers and tax

administrators. 5. Encourage-ethnic based

compliance research to determine

compliance traits peculiar to specific

ethnic groups.

Although demographic data were gathered in this study, no attempt was made to analyze the data for differences that might exist between the two groups surveyed -- Blacks and Hispanics. Future research should be directed toward examining the problems and needs of specific ethnic groups in order to isolate compliance traits, problems and needs peculiar to each group. Research should also be directed toward determining why small business owners who are aware of services offered by the Internal Revenue Service don't use the services. These research efforts should prove beneficial to taxpayers, the IRS and tax policy makers in improving the level of voluntary compliance in the U.S.

Table 1

Problems In Complying with Tax Laws
 Percentage
Problem Responding
Complexity 83%
Uncertainty 72.4%
Incidence of Taxation 72.4%
Administrative Burden 69%
Inadequate Taxpayer Services 55%
Other 17.2%


Table 2

Ranks of Compliance Problems
Problems Mean Rank
Complexity 2.36
Administrative Burden 2.81
Uncertainty 2.85
Incidence of Taxation 2.85
Other 3.33
Inadequate Taxpayer Services 4.18


Table 3

Rank of Complexity Provisions
Provision Mean Rank
Travel and Entertainment Expenses 3.58
Depreciation Expense 3.64
Gain or Loss on Assets 3.82
Automobile Expenses 4.36
Employment Taxes 4.52
Personal Versus Business Expenses 4.95
Accounting Method 5.17
Gain or Loss on Sale of Business 5.37
Home Office 5.56
Other N/A


Table 4

Rank of Administrative Burden Activities
Activity Mean Rank
Maintaining Books & Records 2.28
Filing & Depositing Employment Taxes 3.00
Responding to IRS Inquiries 3.00
Time Required to File Tax Returns 3.04
Frequency of Filing Estimated Taxes 3.24


Table 5

Rank of Factors Creating Uncertainty
Factor Mean Rank
Frequent Changes in the Law 2.03
Ambiguity of the Law 2.15
Changes in Administration of Law 2.61
Changes in Rates 3.08


Table 6

Rank of Taxpayer Services
Problem Mean Rank
Assistance in Collection Matters 2.17
Answers to Questions at IRS Office 2.43
Access to Taxpayers Service Phone Lines 2.57
Information About IRS Workshops 3.74
Delivery of Tax Forms 4.05


Table 7

Rank of Incidence of Taxation
Expenditure Mean Rank
Income Tax 1.64
Self-Employment Tax 2.08
Cost of Compliance 2.40


Table 10

Rank of Desired Assistance
Assistance Mean Rank
Community Based Assistance Centers 1.87


Statement of Tax Compliance
Deficiencies 2.52
Workshops on Collection Process 2.52
Early Audit Program 3.09


Table 11

Awareness of Tax Responsibilities
 Percentage Percentage
Question Correct Incorrect
 1 64% 36%
 2 32% 68%
 3 39% 61%
 4 61% 39%
 5 93% 7%
 6 89% 11%
 7 86% 14%
 8 64% 36%
 9 97% 3%
 10 79% 21%
 11 75% 25%
 12 86% 14%
 13 93% 7%
 14 93% 7%


John Ellis Price, PhD, is an associate professor of accounting and director of the Student Tax Clinic at the University of North Texas in Denton, Texas. He also serves as the faculty advisor for the UNT Student Chapter of the National Association of Black Accountants and director of the Department of Accounting Patricia Roberts Harris Graduate and Professional Study Program. Previously an assistant professor of accounting at the University of Southern Mississippi and dean of the School of Business at Jackson State University, he received his bachelors and masters degrees in business administration and accounting from the University of Southern Mississippi.

He received his PhD in accounting in 1981 from the University of North Texas. The co-author of accounting and taxation texts, he has also published numerous articles in professional journals in the area of tax accounting. Dr. Price is a member of the Mississippi Society of Certified Public Accountants, the American Institute of Certified Public Accountants, the American Accounting Association and the American Taxation Association. He is also a member of the IRS Commissioner's Advisory Group chairing a sub-committee on Ethics and Integrity.
COPYRIGHT 1992 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Author:Price, John Ellis
Publication:The National Public Accountant
Date:Feb 1, 1992
Words:3567
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