Business Taxes Are a Taxing Challenge Facing Government
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Connecting state and local government leaders
Three trends to watch for in business tax non-compliance.
Business taxes are a complex web of federal, state and local obligations. For example, businesses collect and pay sales and employee withholding on our behalf, and directly pay use taxes and corporate income tax to agencies. Similarly, they typically pay into a state unemployment insurance fund and pay workers’ compensation, as required, by labor departments. They also pay taxes, business license fees and permits to state, county and city governments.
While it is easy to see how a naïve business owner could fail to know about his or her responsibility to pay a tax here and there, it is also clear that businesses that want to cheat the system can easily exploit the complexity of it. It’s easy to do because federal, state and local agencies are all looking at the business through their respective silos. For example, the state labor department may be focused on whether the business is paying into the unemployment insurance fund, not whether the business has paid its county licensing fees or state corporate income tax, so data silos start to develop between local departments, agencies and even across state lines. Businesses can choose which aspect of themselves to reveal to which agencies. Simply put: there is limited visibility into the business as a whole. When businesses cheat the system by hiding between the silos and fail to pay, it adds up.
While little research exists to show how significant the problem of business tax non-compliance is, we do know the nation loses an estimated $125 billion annually in federal business income tax alone.
Consider how big this tax gap truly is when you add in additional federal, state and local taxes beyond federal business income tax across all those agencies in all those jurisdictions.
Three Trends to Watch for in Business Tax Non-compliance
Thankfully, new data, linking and analytics technologies are becoming much more accessible to federal, state and local agencies to help minimize the data silos, validate self-reported information and uncover the ‘unknown’ to ultimately help them fight business tax non-compliance. Here are three trends that agencies will embrace to mitigate the growing tax drain:
1. State and local agencies will level the competitive playing field with technology that lets them see the “whole company.”
Businesses are able to cheat easily because they can hide between silos of self-reported information. They tell different government agencies different versions of the “truth” about their company, and agencies can do little more than trust the self-reported information when data silos exist across jurisdictions. In 2017 and beyond, we will see government agencies combining data about tax, labor, permits and other regulatory responsibilities to get a “whole company” view of non-compliant business. Governments will see the business as it evolves, the way the business sees itself.
2. Agencies launch new effort against the rise in business identity fraud.
A criminal could use someone else’s name to open or start a business, or steal an owner’s past or existing business identity and credentials. Fraudsters can go online, take a business name and redirect all its information and digital manifestations for criminal purposes. Agencies are starting to use the same technologies banks, retailers and other industries use to thwart identify fraud to combat business fraudsters. Government must use it more cautiously, however, because they must not use the technologies to create barriers to business creation. This again shows the power of being able to quickly and easily see the whole business even after the initial transaction.
3. Agencies become more proactive in keeping businesses honest.
Not all business owners who misreport or underreport information to government are bad actors. Taxpayer awareness campaigns and education are key. Many simply have no idea which agencies and jurisdictions they are supposed to report to. The same data sharing technologies that state and local agencies will use to fight business fraud will also be used to create helpful, proactive platforms for helping well-intentioned businesses comply. Voluntary business compliance is the cheapest and most politically powerful kind of compliance.
Solving the challenge of business tax non-compliance is the next frontier for federal, state and local government agencies looking to recapture revenue to provide needed services to taxpayers. By investing in new data, linking and analytics technologies, squarely addressing the problem and being proactive in educating the business community about their tax obligations, agencies can begin to tackle the problem and help us keep our promises to each other.
Steve Lappenbusch, Ph.D., is the manager of platform analytics for LexisNexis Risk Solutions
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