The Romance of an IRS Audit

In the new movie Stranger Than Fiction, Will Ferrell plays Harold Crick, an Internal Revenue Service auditor who becomes attracted to a bakery owner he's auditing. I haven't seen it, but the possibility of romance between an auditor and a small-business owner seems about as far-fetched as the movie's premise that Crick's life is being dictated by a novelist afflicted with writer's block. Especially this year.

Months ago, the IRS announced that there was a $345 billion hole of unpaid taxes in 2001, with nonfarm proprietors accounting for 68 percent of that. As a result, it began stepping up audits, especially on small companies such as people working out of their homes or running cash-based businesses. According to a Government Accountability Office report released this week, the crackdown is paying off. This year, the agency has picked up record revenue of $48.7 billion, up 3 percent from last year. It has increased audits of small businesses by 8 percent. And audits of people earning more than $100,000 rose 18 percent, to the highest level ever.

The GAO report says that 83 percent of the tax-collection gap comes from people underreporting their income, but it adds that the errors aren't always willful. Many small-business owners don't understand the tax code, and that creates confusion about how to report income. The IRS hopes that a website it set up to help small-business owners navigate the code will clarify tax matters. But small-business lobbying groups still worry that tax code confusion, combined with stepped-up audits, will create huge costs for small business. On the upside, of course, some small-business owners may find true love.