Tax gap blamed on solo businesses

The Internal Revenue Service should focus on tax noncompliance of sole practitioners to reduce the tax gap, according to a new report from the Government Accountability Office. The IRS estimates that $68 billion of the annual $345 billion gross tax gap for 2001, or 20 percent, was due to 61 percent of sole proprietors, who own unincorporated businesses by themselves, underreporting their net income. The GAO found that the IRS’s two main sole proprietor enforcement programs, the Automated Underreporter Program and audits, have limited reach and contact less than 3 percent of estimated noncompliant sole proprietors. This is in part due to inconvenient information reporting, said GAO. Also, examinations of sole proprietors yield less in additional tax assessed and cost more to conduct than examinations for other taxpayers.