Small businesses are disproportionately affected by measures to close the tax gap—the difference between taxes owed and taxes paid—according to a new study by the Small Business Administration’s Office of Advocacy
The study, researched by Quantria Strategies, highlights flaws with the overall estimates of the tax gap in 2001, 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 in a statement. “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, or NRP, suggest that underreporting of income by small businesses represents $83 billion to $99 billion of the $150 billion to $187 billion individual income tax gap for 2001. The total tax gap was $345 billion, or $290 billion after collection activities.
However, most of the underreporting of income that occurs on individual income tax returns is unintentional. IRS auditors conducting NRP examinations 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, the tax gaps at large corporations are not adequately measured. The study suggests that the estimates in the 2001 NRP are based on data from the 1970s and 1980s. The IRS did not update them for the analysis published in 2006.
Methodologically, the IRS focused its tax-gap study on individual income tax returns, and on returns not subject to withholding or third party reporting, skewing them unfairly toward small business.
The research also explores alternative approaches to improving compliance without overly burdening taxpayers.
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