Thousands of small businesses may deserve tax refund

WASHINGTON – More than 3,600 small businesses may have unnecessarily paid taxes designed to snare companies that use loopholes – and they never got notices that they might deserve refunds.

Two senators said Thursday that a report describing the oversight, issued by the Treasury Department’s tax inspector general, showed that the Internal Revenue Service may have harmed small businesses at a time they could least afford it.

“Rather than paying this tax for which they were not liable, these taxpayers could have instead reinvested this money into their business in the form of either new equipment or potentially new employees,” Republicans Olympia Snowe of Maine and Christopher Bond of Missouri said in a letter to IRS Commissioner Mark Everson.

“Indeed, a refund of the overpayment would be particularly helpful to small corporations trying to weather the current economy.”

The companies together may have paid $37 million in taxes they never owed under the alternative minimum tax, a set of laws that prevent taxpayers from using so many credits and deductions that they eliminate their entire tax bill.

In 1997, lawmakers exempted businesses with average gross receipts of $7.5 million or less from the alternative minimum tax, but many continued to pay. Two years ago, lawmakers told the IRS to notify small businesses of the change and tell them they might be owed refunds.

The IRS undertook an extensive education campaign, and nearly 9,000 companies got notices. About 1,500 claimed refunds worth $12 million.

But the notices missed 3,600 other small businesses whose tax returns were filed after November 2000 and before the IRS instituted a new record-keeping system.

The alternative minimum tax ranks among the most complicated parts of the tax code. “These taxpayers invested time and expenses that they otherwise should not have, which resulted in less time and money that they had to invest in their business,” wrote Snowe and Bond.

The IRS agreed that some small companies still pay the tax in error and said it will mail notices to companies that were overlooked. It also plans to educate tax professionals that advise small businesses.