At least 61 percent of sole proprietor companies are underreporting their net business income, but a small proportion of them account for the bulk of understated taxes, according to a report by the Government Accountability Office.
The GAO found that both gross income and expenses were misreported, but that most of the understated taxes were in relatively small amounts. Half the understatements found by IRS examiners were less than $903.
However, 10 percent of the tax understatements, made by over 1 million sole proprietors, were above $6,200. In that top group, the average understated tax was $18,000.
The GAO found that the IRS's two main enforcement programs -- the Automated Underreporter Program, which computer-matches information on a tax return with information submitted to the IRS by third parties, and examinations such as audits -- had limited reach in uncovering the underreporting by sole proprietor businesses. The two programs contact less than 3 percent each year of noncompliant sole proprietor businesses.
The GAO recommends that the Treasury Department ensure that its tax gap strategy covers sole proprietor compliance. The IRS estimated that $68 billion of the $345 billion tax gap in 2001 was due to underreporting of sole proprietor companies.
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