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General government: Sole Proprietors (2011-61)

Many options could improve the tax compliance of sole proprietors and begin to reduce their $68 billion portion of the tax gap.

Year Identified: 2011
Area Number: 61
Area Type: Cost Savings & Revenue Enhancement

2 Total Action(s)

Action 1
Not Addressed

The Department of the Treasury's (Treasury) tax gap strategy should cover sole proprietor compliance in detail while coordinating it with broader tax gap reduction efforts. Such a strategy could include a mix of numerous options.

Type
Executive Branch
Last Updated
August 31, 2021
Progress:

No executive action taken. As of May 2021, Treasury had taken no action to address this recommendation and had not provided GAO with plans to do so. Instead, Treasury officials said that the Administration’s agenda on tax compliance as well as its budget proposals reference compliance options that could affect sole proprietors. However, the May 2021 agenda does not reference a strategy that includes a segment on improving sole proprietor compliance. Treasury's tax gap strategy does not cover sole proprietor compliance in detail while coordinating it with broader tax gap reduction efforts, as GAO recommended in July 2007.

In March 2016, Treasury officials reported to GAO that they had implemented or proposed several actions to address the tax gap among sole proprietors, such as requiring reporting on payment card payments and improving audit selection procedures for sole proprietors. However, GAO's July 2007 report noted there are many tradeoffs involved in various options for improving sole proprietor compliance. GAO maintains that without an overall strategy, Treasury has less assurance that IRS is using resources efficiently to promote sole proprietor compliance.

Implementing Entity:
Department of the Treasury
Action 2
Partially Addressed

The Internal Revenue Service (IRS) should use its ongoing research efforts to develop a better understanding of the nature of sole proprietor noncompliance, including sole proprietors improperly claiming business losses.

Type
Executive Branch
Last Updated
August 31, 2021
Progress:

IRS agreed to research sole proprietor noncompliance, as GAO recommended in September 2009. It is focusing on those who improperly claim business losses (i.e., not profits). IRS's Office of Research, Applied Analytics and Statistics is using the reporting compliance study of Form 1040 filers to gather the data on such noncompliant business losses. This research covered sampled tax returns filed for tax years 2009, 2010, and 2011 and used audits of the sampled tax returns that are filed for each tax year.

In November 2016, IRS research officials provided the initial rough estimates of the percentage of disallowed losses and associated dollar amounts for all three tax years but, as of May 2021, they had not yet indicated how these estimates helped IRS to understand the nature of the tax noncompliance. The officials cautioned that IRS's ability to develop the estimates depends on the number of observations that can be applied from each tax year. This research, when completed, could help IRS to identify noncompliant sole proprietor issues and take action to reduce losses.

Implementing Entity:
Internal Revenue Service
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