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    2.  » Ask The California Employment Tax And Payroll Tax Attorney – Irs Advised To Crack Down On Sole Proprietor Tax Gap

Ask The California Employment Tax And Payroll Tax Attorney – Irs Advised To Crack Down On Sole Proprietor Tax Gap

By Robert S. Schriebman

2023

Introduction

The tax gap is the difference between federal income taxes owed verses the amounts paid. This tax gap is estimated to be $496 billion annually. The IRS attributes approximately $80 billion in unpaid taxes to sole proprietors underreporting income taxes each year. This comprises 16% of the estimated annual tax gap. For example, in the year 2019, roughly 27.8 million sole proprietors filed tax returns which accounted for only about 18% of all individual taxpayers.

The Government Accountability Office (GAO) reviewed literature and conducted a survey of 25 experts and stake holders on options to improve sole proprietor compliance. The GAO also analyzed the IRS tax gap and relevant statistical data as well as interviewing Treasury and IRS officials.

Examples of Sole Proprietorship Noncompliance

What are some examples of major sole proprietor noncompliance?

  • Transportation and delivery: drivers transporting people or goods.
  • Retail: independent sellers of goods through online platforms or physical marketplaces.
  • Professional and other services: owners providing services such as construction, medical care, or graphic design.
  • Real Estate: owners selling their homes, or parking spaces for short-term rental.

These categories were adopted by the GAO from the JP Morgan and Co. Institute Report, “The Online Platform Economy in 2018: Drivers, Workers, Sellers, and Lessons. (GAO-24-105281).

Specific GAO Recommendations

The GAO found the Department of the Treasury and the IRS have not developed an overall tax gap strategy that includes specific approaches to address sole proprietor noncompliance. Sole proprietor underreporting is one of the largest segments of the tax gap. Treasury officials informed the GAO that they have no plans to develop a strategy. The IRS has not taken steps to allow for voluntary withholding such as the payment of quarterly withheld taxes. The IRS feels that this would be too burdensome and may further reduce compliance. In other words, both Treasury and the IRS appear to be clueless.

The GAO wants Congress to require Treasury to develop a tax gap strategy to improve voluntary sole proprietor compliance. And the GAO wants the IRS to implement voluntary withholding.

The three specific IRS recommendations are as follows:

  1. The IRS should assess the risks of sole proprietor noncompliance including defining objectives as part of a broader effort to enforce compliance among small business. To this the IRS has responded that they will confirm what actions they have taken in response to this recommendation and provide the GAO with updated information.
  2. The IRS should analyze existing data and forthcoming Form 1099-K data to better understand and gain insights into sole proprietor noncompliance and taxpayer burden that may be unique to sole proprietors and use that information to make decisions on enforcement and outreach priorities for sole proprietors. To this the IRS has responded that they will confirm what actions they have taken in response to this recommendation and provide the GAO with updated information.
  3. The IRS should develop and implement a communications plan focused on outreach and education to improve sole proprietorship compliance when tax laws or IRS guidance change. Communication with sole proprietors is the key here. To this the IRS has responded that they will confirm what actions they have taken in response to this recommendation and provide the GAO with updated information.

Conclusion

When I go to farmer markets, swap meets, or patronize street venders, the one thing I observe in common to all is payment in cash. The Government, both State and Federal, is pushing for a cashless society but my personal belief remains – cash is still king and this factor is perhaps the most important in considering sole proprietorship noncompliance.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.

Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.

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