Lawmakers at a congressional hearing Wednesday pressed Internal Revenue Service Commissioner Douglas Shulman to ease up on audits of small businesses.

Shulman testified before the House Small Business Committee about the agency’s plans to help entrepreneurs take advantage of tax relief in the recently passed stimulus bill, the American Recovery and Reinvestment Act. He also described the IRS’s plans to do more outreach and education to small businesses.

“The Internal Revenue Service is dedicated to helping small-business owners – primarily Schedule C filers – especially those facing hardship as a result of the economic downturn,” he said in his opening statement. “Eighty percent of small businesses use professional return preparers, and many of these taxpayers belong to industry and small-business organizations and associations.”

Committee Chair Nydia Velázquez, D-N.Y., questioned Shulman about the rising number of IRS small-business audits. A recent study shows that while IRS audits of large businesses are at an all-time low, entrepreneurs are being audited at nearly twice their rate.

The IRS audited smaller companies 41 percent more often in 2007 than in 2005, and companies with $10 million to $50 million in assets were 29 percent more likely to be investigated in 2007 than two years previously, according to a new study from the Transactional Records Access Clearing House at Syracuse University. Meanwhile, companies with more than $250 million in assets were nearly 40 percent less likely to be audited than in previous years.

“I find the IRS’s recent shift in auditing attention from large companies to small businesses troubling,” said Velázquez (pictured). “Our nation’s entrepreneurs are having a difficult enough time without the IRS stacking the deck against them.”

The committee also heard from a small-business owner, Kit Smith of Pleasant Valley, Mo., who has been tangling with the IRS over an audit since early 2007 after an employee embezzled $58,000 from his business. “Who regulates this arm of government, what oversight do they have, how far can they go, why do they have immunity from repercussions?” he asked in his opening statement. “They need checks and balances.”

Lawmakers on the committee told Shulman about entrepreneurs in their districts who feel overwhelmed by the tax system, and called on the IRS to do more to help small businesses seeking answers to their tax questions. Members of the committee also pushed the IRS for details on how it would implement the targeted tax relief contained in the American Recovery and Reinvestment Act. Under the stimulus bill, small businesses will receive an infusion of cash thanks to new net operating loss provisions, extended bonus depreciation, vehicle depreciation and energy efficiency credits.

“Like all taxpayers, entrepreneurs just want straightforward answers to questions and a clear-cut process to file their taxes,” said Velázquez. “We need our entrepreneurs to revitalize our economy, and the IRS can help by ensuring these small companies start benefiting from small-business tax relief under the recovery act.”

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