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The Tax Gap and Small Business
Washington, D.C. – Small businesses are disproportionately affected by measures to close the tax gap—the difference between taxes owed and taxes paid—according to an Office of Advocacy study, An Examination of the 2001 IRS Tax Gap Estimates’ Effect on Small Business, released today. The study, researched by Quantria Strategies, highlights flaws with the overall estimates, particularly as they relate to large corporations and international tax transactions.
“The tax gap estimates have led to increased audits and information reporting requirements for small businesses, such as the new 1099 reporting requirement,” said Chief Counsel for Advocacy Winslow Sargeant. “A better strategy for the IRS to increase their compliance would be through outreach and education programs, and a more balanced approach to enforcement.”
The tax gap estimates generated by the National Research Program (NRP) suggest that underreporting of income by small businesses represents $83-$99 billion of the $150-$187 billion individual income tax gap for 2001. The total tax gap was $345 billion, $290 billion after collection activities.
However, most of the underreporting of income that occurs on individual income tax returns is uninten¬tional. IRS auditors conducting NRP examina¬tions found that only 1 percent of all issues examined resulted from deliberate or intentional failures to report income properly.
At the same time, according to the study, large corporation tax gaps are not adequately measured. The study suggests that these estimates in the 2001 NRP are based on data from the 1970s and 1980s. The IRS did not update them for the analysis pub¬lished in 2006. Methodologically, the IRS focused its tax-gap study on individual income tax returns, and on returns not subject to withhold¬ing or third party reporting, skewing them unfairly toward small business.
The research also explores alternative approaches to improving compliance without overly burdening taxpayers. The full study is available online at www.sba.gov/advocacy.
The Office of Advocacy of the U.S. Small Business Administration (SBA) is an independent voice for small business within the federal government. The presidentially appointed Chief Counsel for Advocacy advances the views, concerns, and interests of small business before Congress, the White House, federal agencies, federal courts, and state policymakers. For more information, visit www.sba.gov/advo, or call (202) 205-6533.