The Government Accountability Office (GAO) recently released a report citing that a majority of businesses in the U.S. between 1998 and 2005 reported no income tax liability to the Internal Revenue Service (IRS) in at least one of those years. The report focuses on the differences in tax liabilities between foreign-controlled domestic corporations and U.S.-controlled companies. The study also evaluates how company age, size, and industry impact overall tax liability claims.

GAO found that foreign-controlled domestic corporations—particularly those with assets in excess of $250 million--reported lower tax liabilities than U.S.-controlled corporations and had the highest rate of reporting no tax liability. Specifically, 72 percent of foreign companies and 55 percent of U.S. companies reported no tax liability for at least one year. The report also found that a much higher percentage (45 percent) of U.S. companies reported a tax liability for all eight years than foreign companies (28 percent.)

The two primary mechanisms that enabled companies not to claim tax liability were the deduction for salaries and wages, and "other deductions," which include all allowable deductions that are not deductible elsewhere on Form 1120.

According to the Census Bureau, there were 20.3 million sole-proprietors without employees in 2005, an overwhelming majority of which file their taxes as pass-through entities meaning tax liabilities for their business are reported on the individual’s income tax reporting. The GAO report only analyzed corporate tax returns meaning that small business was largely unrepresented in the study.

The GAO report shows a clear lapse of judgment with the current IRS strategy of targeting small business as a means to close the so-called tax gap. In their efforts to raise additional revenue, the IRS has focused on self-employed individuals and pass-through entities such as partnerships, S Corps and Limited Liability Corporations—those essentially not included in the GAO report citing such broad tax avoidance by larger companies.

According to IRS data analyzed by the Transactional Records Access Clearinghouse, audits on small business have increased 41 percent between 2005 and 2007. However, audits on large corporations plunged in 2007 to its lowest level in the last 20 years. NSBA urges the IRS and Congress to fully analyze this report and reevaluate their push to raise revenues through increased enforcements and negative policies that affect America’s small-business community.