Tax Administration: Tax Requirements of Small Businesses (Letter Report,
08/24/1999, GAO/GGD-99-133).
Small businesses--a category that includes farmers and sole
proprietorships and partnerships, S corporations, and corporations with
assets of less than $5 million--are an important segment of taxpayers
that are subjective to substantial federal tax requirements. Not only do
they account for nearly half of all taxes that the Internal Revenue
Service (IRS) collects each year, but they also have extensive
interactions with the agency as they try to meet their tax obligations.
In response to congressional interest in alleviating the burden that the
federal tax system places on small businesses, GAO is issuing a series
of reports on the magnitude of the burden that complying with tax
obligations imposes on these business. This report determines (1) the
federal filing, reporting, and deposit requirements that apply to small
businesses and (2) the actual experience of small businesses in meeting
these requirements, including their involvement in IRS' enforcement
processes.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-99-133
TITLE: Tax Administration: Tax Requirements of Small Businesses
DATE: 08/24/1999
SUBJECT: Small business
Tax return audits
Federal taxes
Tax administration
Tax law
Reporting requirements
IDENTIFIER: IRS Audit Information Management System
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United States General Accounting Office GAO Report
to the Chairman, Committee on Small Business, U.S. Senate August
1999 TAX ADMINISTRATION Tax Requirements of Small Businesses
GAO/GGD-99-133 United States General Accounting Office
General Government Division Washington, D.C. 20548 B-281009
August 24, 1999 The Honorable Christopher S. Bond Chairman,
Committee on Small Business United States Senate Dear Mr.
Chairman: Small businesses-a category that includes all farmers
and sole proprietorships and partnerships, S corporations,1 and
corporations with assets of less than $5 million-are an important
segment of taxpayers that are subject to substantial federal tax
requirements. Not only do they account for nearly half of all
taxes the Internal Revenue Service (IRS) collects annually, but
they also have extensive interactions with IRS as they attempt to
comply with their tax obligations. Because of your interest in
alleviating any unnecessary burden that the federal tax system
places on small businesses, you asked us to assess the magnitude
of the burden that complying with tax obligations imposes for
these businesses. This report is the first of a series of reports
to address your concerns. As agreed with your office, our
objectives for this report were to determine (1) the federal
filing, reporting, and deposit requirements that apply to small
businesses and (2) the actual experience of small businesses in
meeting these requirements, including their involvement in IRS'
enforcement processes. Small businesses, like large businesses,
are subject to multiple layers of Results in Brief
filing, reporting, and deposit requirements. We identified more
than 200 different IRS requirements that potentially apply to
small businesses. Through such requirements, IRS administers a
variety of tax policies- notably those associated with income,
employment, and excise taxes. In considering the implications of
the number of requirements, it is important to recognize that the
requirements reflect the many decisions that have been made by
Congress and the executive branch to accomplish their policy
goals, including those that might benefit small businesses and
other taxpayers. It is equally important to recognize that most
businesses do not need to comply with all or even most of these
requirements. The ones that 1Corporations with no more than 75
shareholders can elect to be treated as S corporations for federal
tax purposes if certain requirements are met. The main advantage
of this election is avoidance of tax at both the corporate and
shareholder level, as the income of S corporations is generally
subject to tax only at the shareholder level. Page 1
GAO/GGD-99-133 Small Business Tax Requirements B-281009 apply to a
particular small business would depend on how the business is
organized, whether it has employees, and the nature of its
business operations. Limitations in IRS' information systems
prevented us from fully determining the extent to which small
businesses filed the various forms and schedules or their
involvement in key stages of IRS' enforcement processes. IRS has
acknowledged that these limitations hinder its ability to
effectively manage small business activities and will continue to
be a serious impediment until the systems are improved. We were
able to obtain and analyze limited data on small business filings
of income tax forms and on some aspects of their involvement in
IRS' enforcement processes. Our analysis of IRS' 1995 data on the
most commonly filed income tax forms and schedules showed that
small businesses, on average, filed one secondary form in addition
to their primary income tax return, with little variation among
types of businesses. Our analysis of small business audits showed
that the audit rate for small businesses is higher than the rate
for all taxpayers and that about two-thirds of the audits of small
businesses result in recommendations for assessment of additional
taxes and penalties. Businesses in the United States (including
farmers) are generally Background structured in one of four
forms: sole proprietorship, partnership, S corporation, and
corporation.2 Each form of business has distinctive legal
characteristics and different tax consequences. Corporations are
taxed as corporations, with dividends included in the owner's
income; sole proprietors are taxed as individuals; and the income
earned by S corporations and partnerships is passed through to
their owners and taxed at the owners' rates. The Internal Revenue
Code (IRC) distinguishes small businesses from larger businesses
in a number of ways, and IRS has used different definitions of
small business for different internal operating purposes. As part
of its current reorganization effort, IRS has developed an
agencywide definition of small business, which we used in our
work. Based on that definition, small businesses include (1) all
farmers and sole proprietorships and (2) partnerships, S
corporations, and corporations that annually reported less than $5
million in assets. 2Another alternative business form that has
emerged is the limited liability company, which generally is
classified as a partnership for tax purposes, but offers the
corporate benefit of limited liability for owners. Page 2
GAO/GGD-99-133 Small Business Tax Requirements B-281009 A large
majority of all businesses are small businesses. To illustrate,
for tax year 1995, we used IRS data to identify approximately 23.4
million businesses that filed returns. Of this population, 94
percent of partnerships reported total assets of less than $5
million, and 98 percent of S corporations reported total assets of
less than $5 million. About 97 percent of U.S. corporations
reported assets of less than $5 million in 1995. Sole
proprietorships accounted for approximately 16.3 million of the
nearly 23.4 million business filers in 1995.3 To identify the
federal filing, reporting, and deposit requirements that Scope and
apply to small businesses, we examined information such as IRS
forms, Methodology publications, manuals, and related IRC
provisions. We also interviewed IRS officials who were cognizant
of small business tax issues, including officials in IRS' Office
of Public Liaison and Small Business Affairs, Compliance Research
Division, Appeals Division, and the Small Business/Self-
Employed/Supplemental Income Team.4 To help ensure completeness,
we had knowledgeable IRS officials review our listing of IRS
requirements. To develop a more comprehensive list of federal tax
requirements that apply to small businesses, we contacted the
Bureau of Alcohol, Tobacco, and Firearms (ATF) in the Department
of the Treasury for information on requirements pertaining to the
excise taxes that it administers. The ATF requirements apply
generally to any business. To determine the actual experience of
small businesses in meeting their filing, reporting, and deposit
requirements, including their involvement in IRS' enforcement
processes, we (1) interviewed IRS compliance officials
specializing in examination, appeals, and collection issues to
ascertain how small businesses are affected by the enforcement
processes and (2) obtained some computerized information from IRS
databases on the filing and enforcement experience of small
businesses. This included data from IRS' Statistics of Income
Division, Audit Information Management System (AIMS), and Accounts
Receivable databases. Throughout this review, we drew on our
previous work at IRS and on tax administration issues in general.
3According to IRS, about half of these taxpayers received the vast
majority of their income from wages, not business-related
enterprises, and should be considered as "incidental" business
filers. 4The Small Business/Self-Employed/Supplemental Income Team
is one of several IRS teams developing plans and blueprints to,
among other things, restructure IRS into four principal operating
units to better serve taxpayers. Page 3
GAO/GGD-99-133 Small Business Tax Requirements B-281009 Our work
did not address IRS activities related to small businesses that
had not filed returns. Also, we experienced several limitations
during the course of our work because much of the data we sought
were not collected in IRS' information systems and databases or
were not sufficiently reliable. To obtain and analyze the
available data, we often had to rely upon sampling, matching, and
ad hoc techniques. In addition, data were not available for a
single year across all variables, so we had to use data from
different years as needed.5 We did not verify the reliability of
the IRS data we used except for some limited checking. Appendix I
describes the data limitations we experienced in more detail. We
requested comments on a draft of this report from IRS. Their
comments are reprinted in appendix IV. Our work was performed in
accordance with generally accepted government auditing standards
between September 1998 and May 1999 at IRS headquarters in
Washington, D.C. Small businesses, like large businesses, are
subject to multiple layers of Small Businesses Face filing,
reporting, and deposit requirements that reflect how the business
is Multiple Layers of Tax organized, whether it has employees, and
the nature of its business operations.6 By our count, there are
more than 200 requirements-which Requirements
we grouped into four layers-that may apply to small businesses as
well as larger businesses and other taxpayers. The requirements
are designed to implement a variety of tax policies. They provide
a way not only to collect taxes from businesses, but also to use
businesses to collect taxes owed by third parties (e.g.,
withholding employees' personal income tax and Social Security and
Medicare (FICA) taxes). It is highly unlikely that any business
would need to complete all 200 requirements. This is because the
forms, schedules, and other requirements that apply to a
particular small business reflect how the business is organized,
whether it has employees, and the nature of its business
operations. Although a few of the requirements must be submitted
more frequently than once a year, the vast majority are submitted
annually. Appendix II provides a listing of all the requirements
that we identified. They reflect the decisions of Congress and the
executive branch in keeping with their policy goals and
objectives. 5We obtained the most recent data available from IRS;
some were for 1995 and some for 1997. 6For the purpose of this
report, requirements are the filing of a tax form or schedule and
making deposits. Schedules that were embedded in a primary return
were not counted as a separate requirement. Page 4
GAO/GGD-99-133 Small Business Tax Requirements B-281009 The
requirements with which a small business must comply depend upon
Primary Income Tax how it is organized-sole
proprietorship, partnership, S corporation, and Returns Represent
One corporation. Each business type has its own
primary income tax return, Layer of Requirements
some of which include a set of schedules embedded in the form. For
example, the primary corporate income tax return, Form 1120, U.S.
Corporation Income Tax Return, contains eight embedded schedules.
To support their primary income tax return, certain types of
businesses and individuals with business income must also attach a
mandatory schedule to their return. (See table 1.) For example,
sole proprietorships must file Form 1040, U.S. Individual Income
Tax Return, and Schedule C, Profit or Loss From Business.7 As
pass-through entities, partnerships and S corporations each have
two separate sets of returnsone for the entity and one for its
owners. In addition to the primary income tax return filed by the
entity, each owner must file a Form 1040 and a Schedule E,
Supplemental Income and Loss.8 Table 1: Primary Income Tax Returns
Business category Primary
income tax return Mandatory
schedulea and Mandatory Schedules Sole
proprietorship Form 1040
Schedule C Farmer
Form 1040
Schedule F Partnership
Form 1065
Schedule K-1 Partner
Form 1040
Schedule E S corporation
Form 1120S
Schedule K-1 Shareholder
Form 1040
Schedule E Corporation
Form 1120 None
Legend Form 1040, U.S. Individual Income Tax Return Form 1065,
U.S. Partnership Return of Income Form 1120, U.S. Corporation
Income Tax Return Form 1120S, U.S. Income Tax Return for an S
Corporation Schedule C, Profit or Loss From Business Schedule E,
Supplemental Income and Loss Schedule F, Profit or Loss From
Farming Schedule K-1, (form 1065) Partner's Share of Income
Schedule K-1, (form 1120S) Shareholder's Share of Income
aSchedules that are required to be filed with the primary return.
Source: IRS. 7Related to income tax, estimated tax is another
important requirement that applies to many small businesses. Many
sole proprietorships, partners, and S corporation shareholders
must pay estimated taxes quarterly for income and self-employment
tax. In making these payments, they must estimate their income for
the coming year and the amount of income, Social Security, and
Medicare taxes that will be owed on this income. Corporations must
also make installment payments of estimated tax on their income,
while S corporations must pay estimated tax only on certain tax
liabilities. 8Form 1040 and Schedule E are not generally
considered to be business returns. Page 5
GAO/GGD-99-133 Small Business Tax Requirements B-281009 A small
business' decision to hire employees adds a second layer of tax
Employment Tax Adds requirements. We identified 10
different federal employment tax deposit Another Layer of Tax
requirements that potentially apply to small businesses. The
number of Requirements employment tax filings
and deposits depends on the number of employees and the resulting
employment tax liability owed at a particular time. (See table 2
and table II.2 in app. II.) For each employee, a small business is
generally responsible for collecting and remitting several federal
taxes with varying frequency stipulationswithholding for
employees' personal income tax and the employee's share of FICA,
the employer's share of FICA, and federal unemployment tax (FUTA).
Table 2: Key Employment Tax Type of Requirements
employment tax Primary return
Deposit requirements Personal income Form 941, Employer's
Quarterly Quarterly if liability is less than and FICA tax
Federal Tax Return $1,000 per quarter withheld
and Monthly if
$50,000 or less in the employer's share
lookback perioda of FICA
Semiweekly if more than $50,000 in the lookback period Next day if
$100,000 or more accumulated on any day during a deposit period
Form 943, Employer's Annual Tax Annually if liability is less than
Return for Agricultural Employees $1,000 per year Monthly if
$50,000 or less in the lookback periodb Semiweekly if more than
$50,000 in the lookback period Next day if $100,000 or more
accumulated on any day during a deposit period Deposits made by
mail using Form 8109 or electronically using Electronic Federal
Tax Payment System FUTA tax Form 940, Employer's
Annual Deposit quarterly by mail using Unemployment Tax
Return (if Form 8109 or electronically using liability
is greater than $100 in a Electronic Federal Tax Payment tax
year) System aThe Form 941 lookback
period for 1999 covers four quarters, beginning July 1, 1997, and
ending June 30, 1998. bThe Form 943 lookback period is the second
calendar year preceding the current calendar year. Source: IRS. A
small business employer must report quarterly the amount of
personal income tax withheld and FICA taxes paid for employees on
Form 941, Employer's Quarterly Federal Tax Return. The employer
must deposit Page 6 GAO/GGD-
99-133 Small Business Tax Requirements B-281009 employee income
tax and FICA taxes withheld and the employer's share of FICA taxes
by mail or electronically either quarterly, monthly, semiweekly,
or the next business day, depending on the employers' tax
liability. If total deposits of withheld income and FICA taxes
were more than $50,000 in the second year preceding the current
year, the employer must make electronic deposits using the
Electronic Federal Tax Payment System (EFTPS).9 In addition, a
small business employer must annually report and quarterly deposit
FUTA taxes separately from FICA and withheld income tax. Lastly,
an employer must send a federal Form W-2, Wage and Earnings
Statement, to each of its employees and file federal Forms W-3,
Transmittal of Wage and Tax Statements, and W-2 with the Social
Security Administration. In sum, hiring employees-even just one
employee-is a critical decision for small businesses in terms of
their tax liability and the complexities of the tax administration
processes that they face.10 The decision to offer employee
pension, fringe, and welfare benefit plans Offering Employee
Benefits adds another layer of requirements for a small business.
Some benefit Adds a Third Layer of plans may
substantially increase the number of filing requirements that
Requirements small businesses face, while
others are simplified and entail few, if any, filing requirements.
We counted over 10 filing and reporting requirements pertaining to
benefit plans, including requirements like the Form 5500 series
and related schedules. Certain pension plans are tailored to small
businesses and self-employed individuals, offering them a tax-
favored way to save for retirement. Simplified Employee Pensions
(SEP), Savings Incentive Match Plans for Employees (SIMPLE), and
Keogh plans offer small employers and self- employed individuals a
deduction for contributions to the plan and deferral of tax on
income of the plan. Generally, SEP and SIMPLE plans are less
complex than Keogh plans, and while businesses must maintain
records about the plans, they do not have any separate filing or
reporting requirements with IRS. Keogh plans offer certain
benefits not offered by SEP and SIMPLE, but they tend to be more
complex and entail substantial filing and reporting requirements
with IRS using Form 5500 and related schedules.11 In addition,
most fringe and welfare benefit plans entail filing 9IRS has
waived penalties for most smaller businesses required to use EFTPS
that make timely deposits using paper deposit coupons. The penalty
relief applies through December 31,1999, to all taxpayers
currently required to use EFTPS if they did not make aggregate tax
deposits of more than $200,000 during the year. In addition, new
regulations increase the threshold amount from $50,000 (withheld
income and FICA taxes) to $200,000 (aggregated of the federal tax
deposits). 10Employment Taxes and Small Business (GAO/T-GGD-97-21,
Nov. 8, 1996), p. 7. 11IRS, Department of Labor, and Pension
Benefit Guaranty Corporation have consolidated their returns and
report forms to minimize the filing burden for plan administrators
and employers. Page 7
GAO/GGD-99-133 Small Business Tax Requirements B-281009 and
reporting requirements with IRS using the Form 5500 series. (For a
complete list, see table II.3 in app. II.) The remaining tax
requirements that potentially apply to small businesses Other
Business Operations depend upon the nature of the business
activities. A few of these Add a Fourth Layer of
requirements are specific to a type of business, but most are
generally Requirements applicable to all
businesses. For example, there are requirements that pertain to
the depreciation of assets, the sale of business property, and
claims for a credit to increase research activities. These
requirements, of which there are nearly 140, range across income
taxes, excise taxes, and information reporting. (For a complete
list, see tables II.4, II.5, and II.6 in app. II.) Some of these
requirements are used to implement provisions in the Internal
Revenue Code that can benefit small (and other) businesses. For
example, businesses must complete Form 8861, Welfare-to-Work
Credit, to receive a tax credit for hiring long-term family
assistance recipients. Also, businesses must complete Form 4562 to
claim deductions for depreciation and amortization of business
assets or to make the election to immediately expense the cost of
certain property. The election to expense property allows the
taxpayer to take an immediate deduction instead of using the
depreciation schedules to recover a portion of the costs annually
over the property's useful life. (The total cost that may be
expensed is $18,500 for 1998.) Among excise taxes alone, we
identified about 70 requirements that potentially apply to small
businesses. (For a complete list, see tables II.5 and II.6 in app.
II.) Generally, though, most small businesses are not responsible
for filing excise taxes. According to IRS, fewer than 800,000
small businesses filed excise tax returns in 1997. IRS and ATF
administer many of the federal excise taxes. The excise taxes
administered by IRS consist of several broad categories, including
environmental taxes, communications taxes, fuel taxes, retail sale
of heavy trucks and trailers, luxury taxes on passenger cars, and
manufacturers' taxes on a variety of different products. ATF
administers excise taxes on the production, sale, or import of
guns, tobacco, or alcohol products or the manufacture of equipment
for their production. Page 8 GAO/GGD-
99-133 Small Business Tax Requirements B-281009 Limitations in
IRS' information systems prevented us from fully Small Businesses'
determining the extent to which small businesses actually filed
various Experience in Filing required forms and schedules
and which businesses made deposits or the extent of small
businesses' involvement in IRS' enforcement processes. We and
Enforcement were, however, able to obtain and
analyze limited data on small Processes Could Not
businesses' filing of income tax forms and on some aspects of
small Be Fully Determined businesses' involvement in
IRS' enforcement processes. The data limitations currently hinder
IRS' ability to effectively manage its activities and serve small
businesses and, as IRS has acknowledged, will continue to be a
serious impediment until the systems are improved. (For a more
detailed discussion of IRS' data limitations, see app. I.) Filing
Experience of Small Businesses Income Tax
Although we weren't able to obtain data on most types of
requirements, we were able to obtain information pertaining to
small business income tax requirements. Our analysis of 1995 IRS
data for approximately 44 forms and 46 related schedules that IRS
believes are those most commonly filed showed that small
businesses, on average, filed one secondary form in addition to
their primary income tax return, with little variation among the
different types of business. The most commonly filed secondary
income tax form among the 44 was Form 4562, Depreciation and
Amortization. Approximately 74 percent of farmers, 62 percent of
partnerships, 69 percent of S corporations, and 73 percent of
corporations filed the depreciation and amortization form in 1995.
The returns for sole proprietorships were lower, with slightly
less than 40 percent filing the depreciation and amortization form
in 1995. The number of schedules small businesses submitted
varied, depending on the type of business. This includes the
mandatory schedules filed with the primary return by certain
business types and individuals with business income as well as
secondary schedules and other schedules embedded in the primary
tax return. On average, sole proprietorships and corporations
filed approximately three schedules, while farmers filed slightly
less than three.12 Partnerships and S corporations filed more
schedules than other types of businesses. Partnerships filed
approximately 11 schedules, and S 12The results for sole
proprietorships and farmers include schedules pertaining to
nonbusiness income (e.g., wages). Page 9
GAO/GGD-99-133 Small Business Tax Requirements B-281009
corporations filed approximately 6 schedules, on average, in 1995.
The filing results are higher for partnerships and S corporations
because of their unique structure as pass-through entities.
Partnerships and S corporations must file a Schedule K-1,
Partner's or Shareholder's Share of Income, with IRS for each
partner or shareholder. As a result, Schedule K-1 filings
accounted for a significant proportion of the multiple schedules
filed by partnerships and S corporations in that year. Employment
Tax and Pensions IRS did have information on federal
employment taxes, but it could not be broken out by small
businesses. Further, IRS did not have sufficient, reliable data on
the number of small businesses that filed pension forms in 1995.
We were able to obtain very limited disaggregated data on the
number of pension forms filed in 1995. However, the results could
not be projected to the larger population of small businesses. We
worked with IRS' Employee Plans/Exempt Organizations Division to
obtain a sample of the number of small businesses that filed Form
5500, using an employer identification number match. From a sample
of 65,701 small business employer identification numbers, we
matched 11,585 that filed Form 5500. The data indicated that 1,090
sole proprietorships, 824 partnerships, and 9,671 corporations
filed forms from the Form 5500 series in 1995. IRS had limited
data on the extent to which small businesses are involved
Enforcement Experience of in both examination and collection
activities. We obtained limited data on Small Businesses
audit rates; duration; recommendations, such as refunds, no
change, or changes recommended by IRS examiners; and appeals and
petitions. When IRS has indications that a small business may have
failed to meet one or more of the aforementioned requirements, the
business can become involved in IRS' enforcement processes. These
processes are basically the same for small businesses as for other
taxpayers. They involve examining returns for potential errors or
compliance problems, notifying taxpayers of suspected
discrepancies, settling disputes over additional taxes
recommended, and collecting taxes assessed.13 (App. III provides a
simplified picture of IRS' audit and dispute resolution process.)
13See Tax Administration: IRS' Return Selection Process (GAO/GGD-
99-30, Feb. 22, 1999) and Tax Administration: IRS Measures Could
Provide a More Balanced Picture of Audit Results and Costs
(GAO/GGD-98-128, June 23, 1998). Page 10
GAO/GGD-99-133 Small Business Tax Requirements B-281009 Audits
IRS' primary technique for assessing compliance with tax laws is
to examine the accuracy of the tax reported on filed tax
returns.14 In selecting returns to be audited, IRS attempts to
focus on those it believes are most likely to have compliance
problems. IRS data showed that about 2.3 percent of the income tax
returns filed by small businesses in 1997 were audited, generally
through audits conducted by IRS' district offices.15 By contrast,
IRS audited 1.3 percent of all returns filed in 1997. The audit
rate for sole proprietors (individuals filing Schedule C) was 3.2
percent, compared to 1.2 percent for individuals not filing
Schedule C.16 According to IRS officials, the audit rate for small
business taxpayers is higher than the overall rate because small
businesses tend to have more compliance problems than other
taxpayers. A common kind of problem that small businesses can face
is in the area of employment tax compliance. A small business can
fall short of operating capital, and as a consequence, it may
divert some or all of its estimated tax deposits or employment tax
withholdings to make up the shortfall, hoping to pay IRS at a
later date. According to IRS officials, the amount of these unpaid
taxes, penalties, and interest can pyramid quickly. The danger is
that a business that must rely on these funds for working capital
is likely to have other liabilities and delinquencies that reflect
financial problems so severe that it cannot recover.17 Table 3
provides detailed information on the audit rates in 1997 for the
four types of small businesses and farmers. 14IRS audits do not
include all taxpayer contacts that can result in recommended
assessments of additional tax. In particular, notices resulting
from IRS' information matching math-error programs are generally
not counted as audits, according to IRS officials. In 1997, IRS'
information matching program generated about 2.8 million notices,
resulting in assessments totaling about $1.5 billion. We could not
identify any readily available data on how much was assessed to
small businesses. 15IRS data on audits of Schedule C filers is
limited to those who derive most of their income from their
business activities rather than from wages. These audits, when
conducted by IRS' service centers, generally involve aspects of
the Form 1040 or self-employment tax return, rather than Schedule
C. Also, the AIMS data do not take into account audits of Schedule
E filers, particularly the individual owners of partnerships or S
corporations. 16The data showed audit rates of 4.1 percent and 3.6
percent for Schedule C filers in 1995 and 1996, respectively,
compared to 1.5 percent in both years for individuals not filing
Schedule C. 17See Unpaid Payroll Taxes: Billions in Delinquent
Taxes and Penalty Assessments Are Owed (GAO/AIMD/GGD-99-211, Aug.
2, 1999), which discusses employment tax compliance. Page 11
GAO/GGD-99-133 Small Business Tax Requirements B-281009 Table 3:
Audit Rates Across Small Type of business
Size
Audit rate Business Types Sole
proprietorship Gross receipts
< $25,000
3.2% Gross receipts $25,000 < 100,000
2.6 Gross receipts $100,000 and more
4.1 All sole proprietorships
3.2 Farmer Gross
receipts < $100,000
1.3 Gross receipts $100,000 and more
2.8 All farmers
1.8 Partnershipa All
partnerships
0.6 S corporationa All
S corporations
1.0 Corporation
Assets < $250,000
1.2 Assets $ 250,000 < $1 million
3.5 Assets $1 million < $5 million
7.8 All corporations
2.1 aAbout 94 percent of partnerships and 98 percent of S
corporations were small businesses in 1995 (i.e., they had less
than $5 million in assets, based on GAO's analysis of IRS'
Statistics of Income data). Source: IRS Data Book (Publication
55B), 1997. IRS has little data on the burden imposed by its
audits of small businesses and other taxpayers.18 IRS' AIMS
database does include information on the length of audits from an
administrative perspective-that is, the number of days from when
IRS' auditors first begin working on a case until the case is
closed.19 This information, although not a complete indicator of
the burden that IRS audits imposed on small businesses, does
provide some insight on the time it takes to go through the audit
process. During an audit, a taxpayer is likely to spend some time
searching for documentation, responding to IRS' inquiries, and
meeting with IRS examiners. However, over the course of the audit,
there are also periods of time when the taxpayer is not actively
involved, such as while IRS is evaluating records and researching
issues, or when IRS examiners are temporarily reassigned to other
cases or activities. Table 4 provides data on the average length
of small business IRS audits that were closed in 1995. 18As of May
1999, IRS was working with a consultant on a multiyear project to
develop better estimates of tax compliance burden, including the
burdens associated with audits. 19Audit cases are closed in
various circumstances, such as when the case results in no
changes, the taxpayer appeals the case, or IRS officials refer the
case to the collection unit to collect the outstanding tax
liability. Thus, when audit cases are referred to either the
appeals or collection unit, IRS considers that the audit has
concluded, and the case is closed in its Examination Division.
However, as IRS opens a new case in either its appeals or
collection unit, a taxpayer may perceive this as simply a
continuation of the audit. Page 12
GAO/GGD-99-133 Small Business Tax Requirements B-281009 Table 4:
Average Length of Small
Durationa Business Audits
Average length Less than 6
6-12 More than Type of business
(in days) months months
12 months Sole proprietorship
273 45.7% 32.5%
21.7% Farm
221 69.1 17.1
13.8 Partnershipb
754d 30.1 16.9
52.9 S corporationc
308d 44.2 28.7
27.1 Corporation
335 45.8 27.2
27.0 Average for all businesses
288 46.2 31.0
22.8 Note: Excludes audits recorded in IRS' database merely
because a business was partially or totally owned by a large
business subject to IRS' Coordinated Examination Program, in which
IRS conducts lengthy audits of the very largest corporations.
aTotal percent for some business categories does not equal 100 due
to rounding. bIncludes all partnerships because IRS' AIMS database
does not differentiate partnerships with less than $5 million in
assets. cIncludes S corporations with less than $10 million in
assets because IRS' AIMS database does not differentiate S
corporations with less than $5 million in assets. dAccording to
IRS, partnership and S corporation audits assigned to service
centers remain open in the AIMS database even after they are
appealed. Excluding service center audits reduces the average
length of partnership audits to 472 days, with 41.8 percent
lasting more than 12 months, and S corporation audits to 289 days,
with 25.5 percent lasting more than 12 months. Source: GAO
analysis of IRS' AIMS data. As shown in the table, on average, the
audits lasted less than 1 year, and nearly half closed in less
than 6 months. Still, some audits-especially those of
partnerships-lasted much longer. For example, more than half of
the audits of partnerships lasted more than 1 year, as did nearly
30 percent of those for S corporations and corporations. Also,
although not shown in the table, 16 percent of partnership audits
and from 1 to 3 percent of the audits for other types of small
businesses continued beyond 4 years.20 According to IRS'
Examination Division officials, a variety of factors can lengthen
the time it takes to complete a business audit. Examples cited
included (1) difficulties in scheduling appointments with
taxpayers, (2) the time required for a taxpayer to assemble needed
information, and (3) the fact that some audits involve highly
complex business tax issues requiring extensive research and
investigation. With respect to audits of partnerships in
particular, the officials said that the audits tend to take longer
because IRS must secure and examine each partner's return in
addition to the partnership return. An audit of a partnership's
return remains open as long as any partner is in disagreement with
any audit issue.21 Also, audits of partnerships often require
special procedures and 20With certain exceptions, an assessment
must be made within 3 years after a return has been filed. 21Under
IRC section 6229, special rules apply to the period of limitations
on the assessment of partnership items. Page 13
GAO/GGD-99-133 Small Business Tax Requirements B-281009 analyses,
such as reviewing the linkages between the returns filed by the
partnership and each of the partners and checking the application
of complex tax laws affecting partnerships in some circumstances.
Recommended Additional Taxes Small business audits often result in
recommendations for the assessment and Penalties
of additional taxes and penalties. For the small business audits
closed in 1995, 67 percent resulted in a recommended change to the
reported tax liability or refundable credits, while about 33
percent resulted in no such changes. Some audits resulting in no
change to the reported tax liability did result in changes to
other return items deemed significant by IRS examiners. For
example, net loss, which can be carried forward and claimed in
future years, may have been overstated on the return and adjusted
by IRS. Table 5 provides more detailed information on IRS
examiners' recommendations on audits closed in 1995. In
considering the information presented, it is important to note
that the audit recommendations do not equate to final audit
outcomes. For example, recommendations may be partially or fully
overturned in IRS appeals or in court decisions. Table 5: Audit
Recommendations for Small Business Audits
Audits recommending Audits recommending change
no change Type of Total Additional taxes
No businessa audits and penalties
Refund Adjustmentb adjustment Sole proprietorship
298,609 63.8% 4.4% 15.7%
16.1% Farmer 13,381 59.0
6.7 10.3 23.9 Corporation
35,011 52.4 5.8 17.0
24.8 All businesses 347,001 62.4
4.6 15.6 17.3 Note: For audits closed in
1995. aPartnerships and S corporations were excluded because audit
results generally pass through to the individual business owners.
bIncludes audits that resulted in adjustments not affecting the
taxpayer's liability for the current year, such as adjustments to
reported net losses. Also includes delinquent returns secured by
IRS auditors where reported tax liability was considered accurate.
Source: GAO analysis of IRS' AIMS data. IRS' 1995 data show that
small businesses appealed to IRS or filed court petitions in 8
percent of the audits where it recommended additional tax and
penalties. Table 6 provides more detailed information on audits
that were appealed and petitioned by each small business category.
According to IRS Appeals officials, the lower appeals rates for
sole proprietorships and farms may reflect the fact that their
returns generally involve less complex tax issues, which leads to
fewer potential tax Page 14
GAO/GGD-99-133 Small Business Tax Requirements B-281009
disagreements. Similarly, the officials attribute the much higher
appeals rate for partnerships to the complexity of the tax laws
affecting partnerships and their returns. Table 6: Number of Small
Business
Audit appeals and petitions Audits Appealed or Petitioned to the
As percent of audits Courts
As percent of recommending additional Type of business
Numbera total audits taxes
and penalties Sole proprietorship
11,739 3.9
6.2 Farm
557 4.2
7.1 Partnershipb
1,031 14.6
31.7 S Corporationc
1249 7.2
15.7 Corporation
3,615 10.3
19.9 All businesses
18,216 4.9
8.0 Note: For audits closed in 1995. aLimited to appeals of audits
that recommended additional taxes and penalties. bIncludes all
partnerships because IRS' AIMS database does not differentiate
partnerships with less than $5 million in assets. cIncludes S
corporations with less than $10 million in assets because IRS'
AIMS database does not differentiate S corporations with less than
$5 million in assets. Source: GAO analysis of IRS' AIMS data.
Collections IRS' collection process
starts at the point IRS identifies a taxpayer as not having paid
the amount of tax due as determined by the tax assessment.22
First, IRS is to send a notice (or series of notices) to the
taxpayers informing them of the amount owed.23 If the amount is
not paid, IRS is authorized to employ enforcement powers to
collect what is owed. IRS can refer the delinquency to an
automated collection system call site, where an employee calls the
taxpayer by telephone and asks for payment. The payment
arrangements may include installment agreements or an offer-in-
compromise from the taxpayers if the full amount owed cannot be
paid. Information about large and chronic tax delinquencies can be
referred directly to one of IRS' 33 district offices, where IRS
revenue officers may contact the taxpayer in person. According to
IRS officials, small business audits that involve employment taxes
are often referred directly to district offices. In addition to
liens and levies, IRS collection officials have 22As we have
reported, IRS has had difficulty collecting assessments from many
taxpayers, including small businesses. (See GAO/GGD-98-128, June
23, 1998.) 23Collectively, these notices are to provide the
taxpayer with statutory notification of the tax liability, IRS'
intent to levy assets if necessary, and information on the
taxpayer's rights. Page 15
GAO/GGD-99-133 Small Business Tax Requirements B-281009 authority
to seize and sell taxpayers' property, such as cars or real
estate. Seizure is generally a last resort to get payment of the
amount owed, and the IRS Restructuring and Reform Act now requires
a district director's approval. IRS could not provide information
on the number of small businesses undergoing enforced collection
actions (i.e., liens, levies, or seizures). However, recent IRS
information shows that enforced collections, in general, have
declined dramatically since 1997. For example, in fiscal year
1997, IRS made about 10,000 seizures compared to about 2,300 in
fiscal year 1998, and fewer than 200 in fiscal year 1999. We
requested comments on a draft of this report from the Commissioner
Agency Comments of Internal Revenue. On July 23, 1999, we
received IRS' written comments, which discuss IRS' plans and
actions to assist small businesses with their filing and reporting
burdens. The comments are reprinted in appendix IV. We also met
with IRS officials, including the Deputy National Director of the
Public Liaison and Small Business Affairs Office and the Assistant
Commissioner for Forms and Submission Processing, to discuss their
technical comments, which we incorporated where appropriate. We
are sending copies of this report to Senator John Kerry, Ranking
Minority Member of your Committee; Senator William V. Roth, Jr.,
Chairman, and Senator Daniel P. Moynihan, Ranking Minority Member,
Senate Committee on Finance, and Representative Bill Archer,
Chairman, and Representative Charles B. Rangel, Ranking Minority
Member, House Committee on Ways and Means. Copies will also be
sent to the Honorable Lawrence H. Summers, Secretary of the
Treasury; the Honorable Charles O. Rossotti, Commissioner of
Internal Revenue; and the Honorable Jacob Lew, Director, Office of
Management and Budget. Copies will be made available to others
upon request. Page 16 GAO/GGD-99-133
Small Business Tax Requirements B-281009 If you or your staff have
any questions concerning this report, please contact me or Charlie
W. Daniel on (202) 512-9110. Key contributors to this report were
Robert Floren and Daniel Lynch. Sincerely yours, Margaret T.
Wrightson Associate Director, Tax Policy and Administration Issues
Page 17 GAO/GGD-99-133 Small Business Tax
Requirements Contents 1 Letter 20 Appendix I IRS' Information
Systems Limit Availability of Data on Small Businesses 23 Appendix
II Tax Requirements That Potentially Apply to Small Businesses 35
Appendix III Simplified Audit and Dispute Resolution Processes 38
Appendix IV Comments From the Internal Revenue Service Table 1:
Primary Income Tax Returns and Mandatory
5 Tables Schedules Table 2: Key Employment
Tax Requirements 6 Table 3:
Audit Rates Across Small Business Types
12 Table 4: Average Length of Small Business Audits
13 Table 5: Audit Recommendations for Small Business
14 Audits Table 6: Number of Small Business Audits Appealed or
15 Petitioned to the Courts Table II.1: Layer OnePrimary Income
Tax Returns and 23 Related Schedules Table
II.2: Layer TwoEmployment Tax Requirements
25 Page 18 GAO/GGD-99-133 Small Business
Tax Requirements Contents Table II.3: Layer ThreeEmployee Benefit
Plan 26 Requirements Table II.4:
Layer FourRequirements That Depend on
27 Business Operations Table II.5: Layer FourExcise Tax
Requirements 32 Administered by
IRS Table II.6: Layer FourExcise Taxes Administered by
33 ATF Figure III.1: Simplified Audit and Dispute Resolution
36 Figures Processes
37 Abbreviations AIMS Audit Information Management
System ATF Bureau of Alcohol, Tobacco, and Firearms
EFTPS Electronic Federal Tax Payment System FICA
Federal Insurance Compensation Act FUTA Federal
Unemployment Tax Act IRC Internal Revenue Code IRS
Internal Revenue Service SEP simplified employee
pensions SIMPLE savings incentive match plans for
employees Page 19 GAO/GGD-99-133 Small
Business Tax Requirements Appendix I IRS' Information Systems
Limit Availability of Data on Small Businesses In general, the
Internal Revenue Service's (IRS) numerous information systems do
not collect or store information by taxpayer groups, such as small
businesses. Rather, IRS' current data systems reflect the agency's
stovepipe structure and transaction-based business approach. Even
if IRS' information systems maintained data by taxpayer groups,
obtaining complete account information for a taxpayer would not be
easy because IRS' systems are not linked together. Historically,
IRS has operated through functions, such as Examination or
Collection, and information about taxpayers tended to be developed
to serve each function's specific needs and its specific
interactions with taxpayers rather than IRS' overall needs or
taxpayers' needs. As a result, IRS' various and discrete databases
provide information pertaining to certain transactions, such as
seizures or the filing of income tax returns. The structure of
IRS' information systems does not easily allow for a complete
assessment of a small business taxpayer's interactions-from filing
to postfiling-with IRS. IRS maintains information about taxpayers'
filing and compliance histories in masterfile accounts, currently
housed in Martinsburg, WV. The majority of the information about
taxpayers' filing and compliance histories is stored in two
masterfiles-the individual masterfile and the business masterfile.
Neither of these files is coded to distinguish small businesses
from other taxpayers. To further complicate matters, data on
filings and payments by small businesses may be divided between
the individual and business masterfile. Data from Schedule C (sole
proprietorship), Schedule E (partnership and S corporation
shareholder), and Schedule F (farmer) are posted to the individual
masterfile. Data from Schedule 1120 for corporations, including S
corporations, are posted to the business masterfile. In addition,
all employment and excise tax data are posted to the business
masterfile. As a result, certain small businesses may have data on
both masterfiles. A similar situation exists with postfiling data,
such as that pertaining to examination and collection activities.
The data are scattered across numerous information systems and are
not coded to distinguish small businesses from other taxpayers.
The business masterfile accounts are especially complicated,
having multiple reporting requirements and being more difficult
for IRS to maintain without error or to use to access data. Also,
the information on the masterfiles is not complete because other
databases may have other related information. For example, income
received about the business from a bank or other payer that has
been reported to IRS on an information return is not included in
the masterfiles. Page 20 GAO/GGD-99-133
Small Business Tax Requirements Appendix I IRS' Information
Systems Limit Availability of Data on Small Businesses Further,
IRS updates the masterfiles weekly, after the transactions have
taken place. Most of IRS' compliance systems (e.g., Collection)
operate off uploads and downloads of selected taxpayer account
information on the masterfiles. These systems are used on-line by
IRS employees to assist taxpayers or assess their compliance. But
the account information on the systems is limited to the intended
purpose, and updates are not reflected until the masterfiles are
updated on weekends. The limitations in IRS' information systems
prevented us from fully determining the extent to which small
businesses actually filed various required forms and schedules and
made deposits. The limitations also prevented us from fully
determining the extent of small businesses' involvement in IRS'
enforcement processes. Many of the IRS databases do not allow for
a detailed analysis of the information they contain. We were
unable to separate out the four types of small businesses in some
of the databases. For example, the Form 941 that employers are to
use to file their employment taxes does not have information on
business assets or gross receipts that would have allowed us to
categorize employers by size. Without this information, our
alternative was to use information from the business masterfile.
Accessing the appropriate tax module in that file might have made
it possible to capture information on assets. However, extracting
masterfile data is a time- and resource-intensive undertaking that
is prone to errors and data reliability problems. It involves
requesting IRS' Information Services to provide an extract from
various masterfiles, working with the files to validate them, and
then merging the data into one that would be suitable for
analysis. IRS receives many internal and external requests for
data, and each request must await its turn in the queue. IRS'
resources are limited, and the request could have taken many
months for the agency to complete. Thus, we decided not to ask IRS
to make the extractions for us. Some of the information we sought
was not readily available from IRS' compliance databases. For
example, IRS' Audit Information Management System (AIMS) database
does not identify some small business taxpayers or adequately
distinguish small businesses from other businesses. Because AIMS
does not include the asset size of partnerships or S corporations,
it cannot distinguish between small and other partnerships or S
corporations. AIMS does, however, include asset data for sole
proprietorships and corporations. Page 21
GAO/GGD-99-133 Small Business Tax Requirements Appendix I IRS'
Information Systems Limit Availability of Data on Small Businesses
IRS' audits do not include all taxpayer contacts that can result
in recommended assessments of additional tax. In particular,
notices resulting from IRS' information matching math-error
programs are generally not counted as audits, according to IRS
officials. In 1997, IRS' information matching program generated
about 2.8 million notices, resulting in assessments totaling about
$1.5 billion. We could not identify any readily available data on
the proportion of these assessments directed at small businesses.
IRS is taking interim steps to address some of its data problems.
IRS expects to develop a way of linking a customer identifier to
the case information in 35 of its most important information
systems. When this "workaround" is complete, IRS managers and
frontline workers should know whether the return or information
report data they might be using are for a small sole proprietor,
partnership, S corporation, or corporation. However, the interim
solution will not provide real-time information about the full
range of transactions currently ongoing for a particular taxpayer.
Neither will the interim solution link IRS' systems to provide
comprehensive information about taxpayers' interactions with the
agency. IRS has acknowledged that its systems limitations hinder
its ability to effectively manage its activities and serve small
businesses and plans to continue making information systems
improvements as part of its ongoing modernization and
restructuring efforts. Page 22
GAO/GGD-99-133 Small Business Tax Requirements Appendix II Tax
Requirements That Potentially Apply to Small Businesses Table
II.1: Layer OnePrimary Income Tax Returns and Related Schedules
Frequency Type of
(annually unless business Tax forma
otherwise noted) Explanation Sole Form 1040, U.S.
Individual Income Tax If reporting income
from a sole proprietorship (or other proprietorship Return
individual income) Schedule C, Profit or Loss from a
If incurred profit or loss as owner of a sole proprietorship
Business (Sole Proprietor) Schedule C-EZ, Net Profit from Business
If expenses are $2,500 or less, may use Schedule C-EZ as
alternative to Schedule C Form 1040 E, Estimated Tax for
Quarterly If income and self-employment taxes expected
to be Individuals
$1,000 or more and withholding and credits are expected to be less
than the smaller of 90 percent of the tax on the current year
return or 100 percent of the tax shown on return for the previous
year. Form 2210, Underpayment of Estimated
If estimated tax filer wants to perform their own penalty Tax by
Individuals, Estates, and Trusts
calculations instead of allowing IRS to make the calculations for
them Farmer Form 1040, U.S. Individual Income Tax
If reporting income from a farm as an individual taxpayer Return
Form 1065, U.S. Partnership Return of If
reporting income from a farm and organized as a Income
partnership Schedule F, Profit or Loss from Farming
If incurred farm income or expenses Schedule J, Farm Income
Averaging If electing to figure tax
liability by averaging income over past 3 years Form 990C,
Farmers' Cooperative If a farmers'
associations operated on a cooperative Association Income Tax
Return basis Form 1040 ES,
Estimated Tax for Quarterly See explanation
above. Qualified farmers pay annually; Individuals
nonqualified farmers pay quarterly. Form 2210F, Underpayment of
Estimated If farmers or fishermen want to
perform their own penalty Tax by Farmers and Fisherman
calculations for estimated tax instead of allowing IRS to make the
calculations for them Partnership Form 1065, U.S. Partnership
Return If organized as a partnership,
unless received no income (information return)
and incurred no expenses treated as deductions or credits for
federal income tax purposes Schedule K-1, (form 1065) Partner's
If organized as a partnership with income or deductions; Share of
Income, Credits, Deductions copy filed
with IRS for each partner etc. Partner Form 1040, U.S.
Individual Income Tax See explanation
above Return Schedule E, Supplemental Income and
If a partner in a partnership (even if no income received) Loss
(part II) to
report share of partnership income or loss Form 1040 ES, Estimated
Tax for Quarterly See explanation above
Individuals Form 2210, Underpayment of Estimated
See explanation above Tax by Individuals, Estates, and Trusts S
corporation Form 1120S, U.S. Income Tax Return for
If elected to be an S corporation to report income, gains, an S
Corporation losses,
etc. (continued) Page 23
GAO/GGD-99-133 Small Business Tax Requirements Appendix II Tax
Requirements That Potentially Apply to Small Businesses Frequency
Type of
(annually unless business Tax forma
otherwise noted) Explanation S corporation Schedule K-1 (form
1120S), If an S corporation,
copy filed with IRS for each Shareholder's Share of Income,
Credits, shareholder Deductions Estimated
Tax, Form 8109, Tax Deposit Quarterly If tax
expected to be $500 or more for certain specified Coupon or EFTPS
taxes Shareholder Form 1040, U.S. Individual Income Tax
See explanation above Return Schedule E, Supplemental Income and
If a shareholder in an S corporation (even if no income Loss (part
II) received) to
report share of S corporation income or losses Form 1040 ES,
Estimated Tax for Quarterly See explanation
above Individuals Form 2210, Underpayment of Estimated
See explanation above Tax by Individuals, Estates, and Trusts
Corporation Form 1120, U.S. Corporation Income Tax
If a domestic corporation, regardless of taxable income, Return
unless meeting requirements for specialized forms or exempt under
section 501 Form 1120-A, U.S. Corporation Short
If gross receipts, total income, and total assets each Form Income
Tax Return under $500,000
and certain other requirements met Estimated Tax, Form 8109, Tax
Deposit Quarterly If income tax expected to be
$500 or more Coupon or EFTPS Form 2220, Underpayment of Estimated
If corporation is using annualized income installment Tax by
Corporations method or
adjusted seasonal installment method or a large corporation
figuring first required installment based on prior year's tax
Other Form 1120-H, Income Tax Return for
If a qualified homeowners association and form 1120-H corporation
Homeowners Associations (attach to
yields lower tax than form 1120 returns 1120) Form 1120-IC-
DISC, Interest Charge If at least 95
percent of gross receipts during the tax year Domestic
International Sales Corporation are
qualified export receipts and certain other Return (also must file
three Schedules requirements met K, P, and
Q, form 1120-IC-DISC) Form 1120-L, U.S. Life Insurance
If a domestic life insurance company (or a foreign Company Income
Tax Return corporation that
would qualify as a life insurance company if it were a U.S.
corporation) Form 1120-PC, U.S. Property and
If a domestic nonlife insurance company (or a foreign Casualty
Insurance Company Income corporation
that would qualify as a nonlife insurance Tax Return
company if it were a U.S. corporation) Form 1120-REIT, U.S. Income
Tax If a corporation, trust or
association meeting specified Return for Real Estate Investment
Trusts conditions and electing to be
treated as a Real Estate Investment Trust Form 1120-RIC, U.S.
Income Tax Return If a domestic
corporation that elects to be treated as an for Regulated
Investment Companies Regulated
Investment Company Form 1120-SF, U.S. Income Tax Return
If structured as a section 468B designated and qualified for
Settlement Funds
settlement fund aWe did not count schedules that are embedded in a
primary return as separate requirements. Source: GAO compilation
of IRS information. Page 24
GAO/GGD-99-133 Small Business Tax Requirements Appendix II Tax
Requirements That Potentially Apply to Small Businesses Table
II.2: Layer TwoEmployment Tax Requirements Type of tax Tax form
Frequency Explanation Withheld Form 941,
Employer's Quarterly Federal Tax Quarterly
If business has employees they are to report income Return
withheld taxes and FICA Schedule B (form 941), Employer's
Record As required: quarterly, If business has employees
of Federal Tax Liability (attach to 941) monthly,
semiweekly Form 941C, Supporting Statement to Correct As needed to
correct If business has employees Information
withholding errors from prior quarters Form 941M, Employer's
Monthly Federal Monthly If business
has employees Tax Return Deposit (form 941 payments), by mail
using Quarterly if liability < If business has employees
and withholds taxes. Form 8109, Federal Tax Deposit Coupon, or
$1,000 per quarter; Electronic deposit if annual
liability greater than by EFTPS
monthly if < $50,000 $50,000 in lookback period;a semiweekly if >
$50,000 in lookback period; or next day if > $100,000 undeposited
Form 943, Employer's Annual Tax Return for Annually
If withheld income and employment taxes on Agricultural Employees
wages paid to agricultural employees Deposit (form 943 payments),
by mail Annually if liability < Same as above
using Form 8109, Federal Tax Deposit $1000 for the
year; Coupon, or by EFTPS monthly if
< $50,000 in lookback period;b semiweekly if > $50,000 in lookback
period; next day if > $100,000 undeposited Form 945, Annual Return
of Withheld Annually If income
tax withheld from nonpayroll payments Federal Income Tax FUTA
Form 940, Employer's Annual Federal Annually
If business has employees and liability is greater Unemployment
Tax Return
than $100 in tax year Form 940EZ
Annually If business has employees and if
certain conditions are met for state unemployment taxes Deposit
(Form 940 payments) Form 8109, Quarterly
If liability greater than $100 in tax year Federal Tax Deposit
Coupon or EFTPS Information Form W-2, Wages and Compensation
Paid Annually If business has
employees (must file on magnetic returns to Employees
media if 250 or more Form W-2s) Form W3, transmittal of W2s
Annually If business has employees (shows
totals from Form W2s, same filing as W2) Self- Schedule
SE, Self-Employment Tax Annually
If received net earnings of $400 or more from self- employment
employment aThe Form 941 lookback period for 1999 covers four
quarters, beginning July 1, 1997 and ending June 30, 1998. bThe
Form 943 lookback period is the second calendar year preceding the
current calendar year. Source: GAO compilation of IRS information.
Page 25 GAO/GGD-99-133
Small Business Tax Requirements Appendix II Tax Requirements That
Potentially Apply to Small Businesses Table II.3: Layer
ThreeEmployee Benefit Plan Requirements Tax form
Frequency Explanation Form 5500, Annual Return/Report of Employee
Annually If plan has 100 or more participants Benefit Plan
Form 5500-EZ, Annual Return/Report of One-
Annually If only one participant and certain other conditions
met Participant Retirement Plan Form 5500-C/R, Annual
Return/Report of Employee Annually If fewer than
100 participants Benefit Plan Schedule A (form 5500), Insurance
Information Annually If any plan benefits
provided by insurance company Schedule B (form 5500), Actuarial
Information Annually If plan set up as "defined
benefit" rather than "defined contribution" and subject to minimum
funding standard Schedule C (form 5500), Service Provider and
Annually If compensation paid to any trustee or others
providing services to Trustee Information
the plan exceeds a certain threshold, generally $5,000 per year
Schedule E (form 5500), Employee Stock Ownership
Annually If an employer with a pension benefit plan that
contains ESOP Plan (ESOP) Annual Information
benefits Schedule F (form 5500), Fringe Benefit Plan Annual
Annually If an employer with a cafeteria plan, educational
assistance Information Return
program, or adoption assistance program Schedule G (form 5500),
Financial Schedules Annually If filing form
5500 Schedule P (form 5500), Annual Return of Fiduciary
Annually If a trustee of a trust created as part of an
employee benefit plan of Employee Benefit Trust
or a custodian of a custodial account Schedule SSA (form 5500),
Annual Registration Annually If filing form
5500, to report participants with vested benefits who Statement
Identifying Separated Participants With
were separated from the company during the year Deferred Vested
Benefits Source: GAO compilation of IRS information. Page 26
GAO/GGD-99-133 Small Business Tax Requirements Appendix II Tax
Requirements That Potentially Apply to Small Businesses Table
II.4: Layer FourRequirements That Depend on Business Operations
Frequency Form
(annually unless applicability Tax form
otherwise noted) Explanation Potentially any Schedule D, Capital
Gains and Losses If business sold or
exchanged capital assets business Form 1116, Foreign Tax
Credit If filing as an
individual, estate, or trust and paid certain foreign taxes to a
foreign country or U.S. possession Form 3468, Investment Credit
If claiming investment in building rehabilitation, alternative
energy, or reforestation Form 3800, General Business Credit
If more than one type business credit claimed Form 4255, Recapture
of Investment Credit If required to
refigure investment credit (e.g., when investment credit property
sold) Form 4562, Depreciation and Amortization
If depreciating, amortizing, or expensing certain business
property Form 4684, Casualties and Thefts
If deducting losses due to fire, storm, theft, or other casualty
Form 4797, Sales of Business Property
If sold or exchanged business property Form 4952, Investment
Interest Expense If filing as an
individual, estate, or trust and claiming Deduction
deduction for investment interest expense Form 5884, Work
Opportunity Credit If claiming the
work opportunity credit for wages paid to targeted groups of
employees Form 6198, At-Risk Limitations
If incurred loss from specified "at risk activities" (e.g.,
farming, exploring for oil, others) Form 6251, AMT Individuals
If tax on alternative minimum tax income is greater than tax
reported on form 1040 Form 6252, Installment Sale Income
If reporting income from casual sales (other than inventory) where
payments received in a tax year after the year of sale Form 6478,
Alcohol Used as Fuel Credit If claiming
the credit for alcohol used as fuel Form 6765, Increasing Research
Credit If claiming the credit for
increasing research activities Form 6781, Gains and Losses from
Section If claiming gains or losses from
(1) section 1256 1256 Contracts and Straddles
contracts under the marked-to-market rules (such as regulated
futures contracts) or (2) straddles (offsetting positions that
decrease the risk of loss) Form 8275, Disclosure Statement
If disclosing items that are otherwise not adequately disclosed
for the purpose of avoiding penalties Form 8275-R, Regulation
Disclosure If disclosing positions
taken on a tax return that are Statement
contrary to Treasury regulations Form 8404, Interest Charge on
DISC- If a shareholder in a Interest
Charge Domestic Related Deferred Tax Liability
International Sales Corporation and receiving deferred DISC income
that increases taxable income Form 8582, Passive Activity Loss
If reporting a net loss from "passive activities" (e.g.,
Limitations
most real estate investments) Form 8586, Low Income Housing Credit
If an owner of certain low-income housing projects and claiming
credit Form 8594, Asset Acquisition Statement
If bought or sold a trade or business and goodwill or going-
concern value attaches or could attach to assets (continued) Page
27 GAO/GGD-99-133 Small Business
Tax Requirements Appendix II Tax Requirements That Potentially
Apply to Small Businesses Frequency Form
(annually unless applicability Tax form
otherwise noted) Explanation Potentially any Form 8609, Low-Income
Housing Credit If obtaining a
housing credit allocation in order to claim business
Allocation Certification
low-income housing credit Form 8697, Interest Computation under
the If required to figure interest on
certain long-term Look-Back Method for Completed Long-
contracts under the "lookback" method of section term Contracts
460(b)(2) Form 8801, Credit for Prior Year Minimum
If filing as individual, estate, or trust and claiming the Tax
minimum tax credit for alternative minimum tax incurred in a prior
year Form 8816, Special Loss Discount Account
If an insurance company and electing an additional and Special
Estimated Tax Payments for deduction
under section 847 Insurance Companies Form 8817, Allocation of
Patronage and If organized as a
cooperative and reporting income or Nonpatronage Income and
Deductions deductions from
patronage or nonpatronage sources Form 8820, Orphan Drug Credit
If claiming an orphan drug credit Form 8824, Like-kind Exchanges
If exchanged business or investment property for property that is
of a like kind Form 8826, Disabled Access Credit
If an eligible small business (with not more than $1 million in
gross receipts or 30 employees) and claiming the Disabled Access
Credit Form 8830, Enhanced Oil Recovery Credit
If claiming the enhanced oil recovery credit Form 8834, Qualified
Electric Vehicle Credit If claiming the
credit for a qualified electric vehicle placed in service during
the tax year Form 8835, Renewable Electricity
If claiming the renewable electricity production credit Production
Credit Form 8844, Empowerment Zone
If claiming the empowerment zone employment credit Employment
Credit for
qualified wages and other expenses paid or incurred on behalf of
any qualified zone employee Form 8845, Indian Employment Credit
If employed American Indian(s) meeting certain criteria Form 8846,
Credit for Employer Social If
claiming credit for Social Security and Medicare Security and
Medicare Taxes Paid on taxes
incurred on employees' tip income Certain Employee Tips Form 8847,
Credit for Contributions to If
claiming the credit for contributions to a selected Selected
Community Development Corps
Community Development Corporation Form 8850, Pre-Screening Notice
and No later than 21 If an employer and claiming the
Work Opportunity Certification Request for the Work
days after job Credit or the Welfare-to-Work Credit
Opportunity and Welfare-to-Work Credits applicant begins
working Form 8861, Welfare-to-Work Credit
If an employer and claiming the welfare-to-work credit for wages
paid or incurred to long-term family assistance recipients Form
1096, Annual Summary and If
certain information returns filed, including paper Transmittal of
Information Returns forms 1099
Form 1098, Mortgage Interest Statement
If business receives $600 or more in mortgage interest from any
person(s) Form 1099-A, Acquisition or Abandonment
If acquired property as security for loan of Secured Property Form
1099-B, Proceeds from Broker or If
business operates as a broker or barter exchange, it Barter
Exchange Transactions must
report proceeds from transactions (continued) Page 28
GAO/GGD-99-133 Small Business Tax Requirements Appendix II Tax
Requirements That Potentially Apply to Small Businesses Frequency
Form
(annually unless applicability Tax form
otherwise noted) Explanation Potentially any
If certain financial institutions cancel debt of $600 or business
Form 1099-C, Cancellation of Debt
more Form 1099-DIV, Dividends and
If paid dividends or made certain other distributions of
Distributions
stock Form 1099-INT, Interest Income
If paid interest income exceeding specified amounts; also shows
backup withholding Form 1099-LTC, Long-Term Care and
If an insurance company or other payer of long-term Accelerated
Death Benefits care
benefits Form 1099-MISC, Miscellaneous Income
If made certain payments in the course of a trade or business,
e.g., payments to independent contractors Form 1099-MSA,
Distributions From If made
distributions from employees' medical savings Medical Savings
Accounts accounts Form
1099-OID, Original Issue Discount If
issued debt instrument with $10 or more of original issue discount
Form 1099-PATR, Taxable Distributions
If a consumer cooperative and issued patronage Received From
Cooperatives dividends of
$10 or more Form 1099-R, Distributions From Pensions,
If business distributed $10 or more from retirement or Annuities,
Profit Sharing and Retirement profit-
sharing plan Plans, etc. Form 1099-S, Proceeds From Real Estate
If received proceeds from the sale or exchange of real
Transactions
estate Form 4789, Currency Transaction Report No later
than 15 If customer of financial institution enters transaction of
days after $10,000 or more in currency transaction Form
5498, IRA Contribution Information If
maintained IRAs for any person(s) Form 5498, MSA Information
If maintained a medical savings account for any person(s) Form
8027, Employer's Annual Information If a
food and beverage establishment with more than Return of Tip
Income and Allocated Tips 10 employees
who work a total of more than 8 business hours on a typical
business day (and tipping is a customary practice) Form 8281,
Information Return for Publicly Within 30 days of If issued
publicly offered debt instrument having Offered Original Issue
Discount Instruments issuance of OID original issue discount
instrument Form 8282, Donee Information Return 125 days
after If a donee organization that sells or otherwise
disposes disposition of of certain charitable deduction
property within 2 years charitable after the date of
receipt property Form 8271, Investor Reporting of Tax
If claiming a tax benefit or reporting income from a Shelter
Registration Number
"registration-required" tax shelter Form 8300, Report of Cash
Payments Over No later than 15 If business received cash payment
of $10,000 or more $10,000 Received in a Trade or Business
days after in one transaction transaction Form 8329,
Lender's Information Return for If made a
loan that is a certified indebtedness amount Mortgage Credit
Certificates on any mortgage
credit certificate Form 8362, Currency Transaction Report
Daily If a casino in the U.S. with annual gross
gaming by Casinos
revenues in excess of $1 million, to report currency transactions
of $10,000 or more (continued) Page 29
GAO/GGD-99-133 Small Business Tax Requirements Appendix II Tax
Requirements That Potentially Apply to Small Businesses Frequency
Form
(annually unless applicability Tax form
otherwise noted) Explanation Potentially any Form 8703, Annual
Certification of a business Residential Rental Project
If operating a qualified residential rental project Form 8852,
Currency Transaction Report 15th day after the If a Nevada
casino with annual gross gaming revenue by CasinosNevada
transaction of more than $10 million to report currency
transactions of $10,000 or more Form 926, Return by a U.S.
Transferor of Day of transfer If transferred property to
a foreign corporation, estate, Property to a Foreign Corporation
trust, or partnership Farmers Form 4835, Farm Rental
Income and If a landowning farmer
reporting farm rental income Expenses
based on crops or livestock produced by tenant Partnerships
Schedule D (Form 1065), Capital Gains
If sale of capital assets allocated to partnership, not and S
and Losses
partners corporations Schedule D (Form 1120S), Capital Gains
If sold or exchanged capital assets and to report gains and Losses
and Built-in Gain on
distributions to shareholders of appreciated capital assets; also
used to report any built in gains tax Form 8308, Report of a Sale
or Exchange If sold or exchanged a
partner's interest in a section of Certain Partnership Interests
751a exchange Form 8621, Return by a Shareholder of a
If an owner or shareholder of a passive foreign Passive Foreign
Investment Company or investment
company Qualified Electing Fund Form 8752, Required Payment or
Refund If elected to have an
alternate tax year Under Section 7519 Form 8825, Rental Real
Estate Income and If business had income
or deductible expenses from Expenses of a Partnership or an S
rental real estate activities Corporation Partners and Form
4952, Investment Interest Expense If a
partner or other individual, estate or trust claiming shareholders
Deduction
a deduction for investment interest expense, unless certain
conditions apply Form 8082, Notice of Inconsistent
If items treated differently on schedule E and form Treatment or
Administrative Adjustment 1065 or form
1120S Request Corporations Schedule D (Form 1120), Capital
Gains If sold or exchanged capital
assets and have gains on and Losses
distributions to shareholders of appreciated capital assets
Schedule H (form 1120), Section 280H
If a personal service corporation did not meet certain Limitations
for a Personal Service
distribution requirements Corporation Schedule PH (form 1120),
U.S. Personal If a personal holding
company Holding Company Tax Form 1118, Foreign Tax Credit (form
1120); If electing to claim the foreign
tax credit; separate (attached to form 1118 are Schedule I,
forms 1118 must be filed for each of nine limitation Reduction of
Oil and Gas Extraction Taxes categories
that apply and Schedule J, Separate Limitation Loss Allocations)
Form 2438, Undistributed Capital Gains
If a Regulated Investment Company or Real Estate (attach to form
1120-RIC or 1120-REIT) Investment
Trust and had undistributed capital gains (continued) Page 30
GAO/GGD-99-133 Small Business Tax Requirements Appendix II Tax
Requirements That Potentially Apply to Small Businesses Frequency
Form
(annually unless applicability Tax form
otherwise noted) Explanation Corporations
If taxable income or loss before the net operating loss Form 4626,
Alternative Minimum Tax:
deduction, plus adjustments and preferences, totals Corporations
(file with form 1120) more than
$40,000 Form 5735, Possessions Corporation Tax
If a domestic corporation engaged in a trade or Credit
business within a U.S. possession on Oct. 13, 1995 and elected the
benefits of the possessions credit Form 8810, Corporate Passive
Activity If a personal service
corporation or closely held Loss and Credit Limitations
corporation with losses or credits from passive activities Form
8827, Credit for Prior Minimum Tax If
incurred an AMT liability in previous year and meet (file with
form 1120) certain
criteria Form 8860, Qualified Zone Academy Bond
If a bank, insurance company, or other corporation that Credit
lends money and an eligible holder of qualified zone academy bonds
Form 5452, Corporate Report of
If made nondividend distributions to shareholders Nondividend
Distributions Form 5472, Information Return of a 25%
If had a reportable transaction with a foreign or Foreign-Owned
U.S. Corporation or a domestic
related party foreign corporation engaged in a U.S. trade or
business Form 8842, Election to Use Different
If electing to use an annualization option under the Annualization
Periods for Corporate annualized
income installment method to figure Estimated Tax
estimated tax payments Form W-2G, Certain Gambling Winnings
If business paid out reportable gambling winnings Source: GAO
compilation of IRS information. Page 31
GAO/GGD-99-133 Small Business Tax Requirements Appendix II Tax
Requirements That Potentially Apply to Small Businesses Table
II.5: Layer FourExcise Tax Requirements Administered by IRS Tax
form Frequency
Explanation Form 637, Application for Registration
As needed If engaging in activities with excise taxes,
entity must register Form 720, Quarterly Federal Excise Tax Return
Quarterly If engaging in activities with excise taxes;
Form 720 covers most excise taxes (environmental, communications,
air transport, fuel, retail, luxury, manufacturing, foreign
insurance) Form 11-C, Occupational Tax and Registration
Annually If principal operator or employee-agent of
businesses that accept Return for Wagering
wagers Form 730, Tax on Wagering
Monthly for the If involved in the business of accepting
wagers or conducting periods reporting wagering pools or lotteries
taxable wagers Form 1363, Export Exemption Certificate
As needed If exporting property by continuous movement
must file to claim exemption from the tax on transportation of
property by air Form 2290, Heavy Vehicle Use Tax Return
Annually (unless Any entity with a taxable highway motor vehicle,
vehicles greater used for a partial than 55,000 pounds year) Form
4136, Credit for Federal Tax Paid on Fuels Annually
If claiming the credit for federal excise tax paid on fuels;
generally partnerships cannot file this form Form 5330, Return of
Excise Taxes Related to Annually If there were
nondeductible contributions or prohibited Employee Benefit Plans
transactions or failure to meet certain other employee benefit
plan requirements Form 6197, Gas Guzzler Tax (attach to form 720)
Quarterly as If manufacturer and importers (including
individuals) that sell or needed use automobiles that
do not meet fuel economy standards Form 6627, Environmental Taxes
(attach to Form Quarterly as If manufacturers or
importer of ozone-depleting chemicals 720)
needed (ODCs) and entities that hold for sale or sell
those products Form 8849, Claim for Refund of Excise Taxes
As needed If business paid excise taxes Source: GAO
compilation of IRS information. Page 32
GAO/GGD-99-133 Small Business Tax Requirements Appendix II Tax
Requirements That Potentially Apply to Small Businesses Table
II.6: Layer FourExcise Taxes Administered by ATF Form number
Titlea F 5000.19 Tax Information Authorization F 5000.24
Excise Tax Return F 5000.25 Excise Tax ReturnAlcohol and
Tobacco (Puerto Rico) F 5000.25A Excise Tax ReturnAlcohol
and Tobacco (Puerto Rico) F 5100.12 Specific
Transportation Bond-Distilled Spirits or Wines Withdrawn for
Transportation to Manufacturing Bonded WarehouseClass Six F
5100.25 Specific Export BondDistilled Spirits or Wine F
5110.31 Application and Permit to Ship Puerto Rico
Spirits to the United States Without Payment of Tax F 5120.20
Certification of Tax DeterminationWine F 5120.24 Drawback
on Wine Exported F 5130.6 Drawback on Beer Exported F
5130.12 Beer for Exportation F 5170.7
Application and Permit to Ship Liquors and Articles of Puerto Rico
Manufacture Tax Paid to the United States F 5200.17 Bond,
Drawback of Tax on Tobacco Products, Cigarette Papers,or Tubes F
5210.5 Monthly Report Manufacturer of Tobacco Products
F 5210.8 Computation of Tax Agreement to Pay Tax on
Puerto Rican Cigars or Cigarettes F 5210.9
InventoryManufacturer of Tobacco Products F 5300.27
Federal Firearms and Ammunition Excise Tax Deposit F 5620.7
Claim for Drawback of Tax on Tobacco Products, Cigarette Papers,
or Cigarette Tubes F 5620.8 ClaimAlcohol, Tobacco, and
Firearms Taxes F 5630.5 Special Tax Registration and
Return (Alcohol and Tobacco) F 5320.4 Application for
Tax Paid transfer and Registration of a Firearm F 5320.5
Application for Tax-Exempt Transfer and Registration of a Firearm
F 1610.2 Special Occupational Tax Printing Request F
5100.30 Continuing Export BondDistilled Spirits and Wine
F 5110.67 Continuing Transportation Bond Distilled
Spirits Or Wines Withdrawn for Transportation to Manufacturing
Bonded Warehouse Class Six F 5110.68 Drawback
BondDistilled Spirits and Wine F 5130.16 Tax Deferral
BondBeer (Puerto Rico) F 5200.9 Certification of
Prepayment of Tax on Puerto Rico Cigars, Cigarettes, Cigarette
Papers, or Cigarette Tubes Report of Multiple Sales or Other
Disposition of Pistols and Revolvers F 5300.9 Firearms
Transaction Record Part IOver-the-Counter F 5300.24
Firearms Transaction Record Part ILow VolumeOver-the-Counter F
5300.9 Firearms Transaction Record Part IIntra-State
Over-the-Counter (English-Spanish) F 5300.9 Firearms
Transaction Record Part IINon-Over-the-Counter F 5300.9
Firearms Transaction Record Part IILow VolumneIntra-State Non-
Over-the-Counter F 5000.28 Floor Stocks Tax Return F
5000.28T 1993 Floor Stocks Tax Return (Cigarettes) F
5100.4 Certificate of Taxpaid Alcohol F 5110.3
Drawback on Distilled Spirits Exported F 5110.5 Tax
Deferred BondDistilled Spirits F 5200.23 Floor Stocks Tax
ReturnPipe Tobacco F 5300.26 Federal Firearms and
Ammunition Excise Tax Return F 5300.28 Application for
Registration for Tax Free Transactions Under 26 USC 4221 (Firearms
and Ammunition) F 55600.8 Statement of Adjustment to the
Puerto Rico or Virgin Islands Tax Account
(continued) Page 33 GAO/GGD-99-133
Small Business Tax Requirements Appendix II Tax Requirements That
Potentially Apply to Small Businesses Form number Titlea F
5600.26 Tax Collection Waiver F5600.33 Certification of
Ultimate Vendor for Use in Tax Refund Claim Under Section 6416 (b)
(2) of the Internal Revenue Code (27 CFR 53.179 (b) (iii)) F
5600.34 Purchaser's Certificate of Tax-Free Purchase for Use
as Supplies for Vessels and Aircraft (27 CFR 53.134 (d) (2)) F
5600.35 Purchaser's Certificate of Tax-Free Purchase for
State or Local Government Use (27 CFR 53.135 (c) (1)) F 5600.36
Vendor's Certificate of Tax-Free Purchase for Resale for Export
(27 CFR 53.133 (d) (2)) F 5600.37 Vendor's Certificate of
Tax-Free Purchase for Resale for Further Manufacture (27 CFR
53.132 (c) (2)) F 5600.38 Application for Extension of Time
for Payment of Excise Tax F 5610.6 Consent to Extend the
Time to Assess ATF Excise Tax F 5630.5R Special Tax "Renewal"
Registration and Return F 5630.5RC Special Tax Location
Registration Listing F 5630.6A Special Tax Stamp F 5630.7
Special Tax Registration and Return National Firearms Act (NFA) F
5632.1 Special Occupational Tax Inquiry Letter F 5640.5
IRC Guideline/Worksheet for Late Excise Payment/Deposit or Tax
Return F 5150.35 Bond for Spirits or Distilled Spirits or Rum
Brought Into the US Free of Tax (used by Virgin Islands) F 5150.36
Bond for Articles Brought Into the U.S. Free of Tax (used by
Virgin Islands) aWe did not compile information regarding the
applicability or frequency of ATF excise tax requirements. Source:
GAO compilation of IRS information. Page 34
GAO/GGD-99-133 Small Business Tax Requirements Appendix III
Simplified Audit and Dispute Resolution Processes This appendix
illustrates a simplified process for auditing tax returns,
resolving disputed taxes, and collecting taxes owed. For the small
percentage of returns that are audited, most tax issues are
resolved during the audit process. However, some audited taxpayers
dispute their additional taxes to Appeals, and a few seek to
resolve their disputes with IRS in the courts. Page 35
GAO/GGD-99-133 Small Business Tax Requirements Appendix III
Simplified Audit and Dispute Resolution Processes Figure III.1:
Simplified Audit and Dispute Resolution Processes Page 36
GAO/GGD-99-133 Small Business Tax Requirements Appendix III
Simplified Audit and Dispute Resolution Processes Page 37
GAO/GGD-99-133 Small Business Tax Requirements Appendix IV
Comments From the Internal Revenue Service Page 38 GAO/GGD-99-
133 Small Business Tax Requirements Appendix IV Comments From the
Internal Revenue Service Page 39
GAO/GGD-99-133 Small Business Tax Requirements Page 40 GAO/GGD-
99-133 Small Business Tax Requirements Ordering Information The
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