Small business owners have been hampered by complicated tax forms and processes that kept them from claiming pandemic-related tax credits and payroll tax deferrals, according to a new government report. Only up to 7% of small business owners were able to claim the tax relief, and they fell mainly within specific racial, ethnic and gender groups.
The report, released Wednesday by the Government Accountability Office, found the tax forms for claiming the paid sick and family leave credits and payroll tax deferrals for employers and the self-employed, as well as the Employee Retention Credit, were too complex. They had difficulty getting help from both the Internal Revenue Service and even from tax professionals.
While accountants and tax pros largely found the COVID-19 aid boosted their services to clients to help them claim Economic Impact Payments, tax credits and Small Business Administration programs like the Paycheck Protection Program and Economic Injury Disaster Loans offered through pandemic relief packages like the CARES Act, the Families First Coronavirus Response Act and the American Rescue Plan Act, many small businesses and self-employed taxpayers still had trouble getting assistance. The GAO report found limited use of the tax provisions by small businesses, with less than 7% of eligible small businesses within the study population using the employer and self-employed leave credits or payroll tax deferrals.
COVID-19 tax provisions were aimed at helping employers and the self-employed maintain payroll and address health-related leave. But we found that some small business owners struggled to use these tax provisions — partly because they didn’t know how.
“Our review of relevant tax forms found that claiming the provisions was a complex process,” said the report. “Small business representatives said it was hard to get clear information from the IRS and to access professional tax help.”
The GAO recommended the IRS should evaluate how it can improve outreach to small businesses, especially when tax provisions are introduced or changed. The agency may also need to do outreach to specific populations as well. The IRS doesn’t break out the racial, ethnic and gender demographics of small business taxpayers in its statistical data, but the report nevertheless looked at the demographics of the small businesses who did receive COVID tax relief, using data from other federal agencies, other taxpayer information and analytical methods to help identify or estimate taxpayers’ demographic characteristics. The GAO analyzed the use of COVID-19 tax provisions among a study population of single-owner businesses in tax year 2020, matching the data from different agencies such as the U.S. Census Bureau and the Social Security Administration to identify the recorded sex of business owners and estimated race and ethnicity of selected taxpayers using a method that calculates the probability that a person with a given surname and residential location will identify with selected racial and ethnic groups.
For example, for self-employed leave credits, the GAO estimated that eligible Black or African American- and Hispanic-owned businesses were more likely to use these credits compared to Asian- and white-owned businesses. For the employee retention credit, the GAO found that a slightly higher percentage of female-owned and Asian-owned businesses claimed the ERC compared to other businesses filing employment tax returns.
The GAO talked to some organizations and agencies representing small businesses, and nearly all of those interviewed cited a poor understanding of the tax provisions as a potential cause of the limited use, especially among very small businesses. The information and recordkeeping requirements are another potential barrier contributing to limited use. The report acknowledged the IRS did provide information to small businesses about the provisions and used some measures to evaluate its outreach, including informal feedback and compliance data, but GAO believes those measures didn’t provide relevant and complete information.
The period of eligibility has largely passed for the COVID-19 provisions studied by the GAO, but the report points out that evaluating outreach could improve the IRS’s preparations for communicating tax relief information to taxpayers during future emergencies. That could also help with communicating about tax relief to specific demographic groups. A January 2021 executive order from the White House on advancing racial equity asked agencies to assess their programs and policies to see if they perpetuate systemic inequalities among groups, while the Treasury Department’s strategic plan includes equity goals involving outreach and education to underserved communities. The report noted that evaluation of ongoing outreach efforts could help the IRS develop information that could be useful to groups with different needs, including very small businesses and owners from various demographic backgrounds.
The GAO recommended that the IRS evaluate its outreach efforts to very small businesses and owners with diverse backgrounds, using relevant and complete information, to inform future outreach. The IRS agreed with this recommendation, but pointed to the complexity of evaluating outreach without demographic data.
“The unprecedented COVID-19 pandemic illustrates the significant role that the IRS plays in the overall health of our country,” wrote IRS chief risk officer Mark Pursley in response to the report. “We were called upon to take on new responsibilities impacting almost every American during this national crisis while also fulfilling our routine responsibilities of tax administration.”