Tax AdministrationEstimates of the Tax Gap for Service Providers Gao ID: GGD-95-59 December 28, 1994
This report provides information on the tax gap for sole proprietors--that is, self-employed persons. The gross income tax gap refers to the difference between the amount of income taxes owed and the amount voluntarily paid. GAO pegs the tax gap at $21 billion for 9.2 million nonfarm sole proprietors who claimed no cost of goods sold on their returns. GAO estimates the tax gap at $25.1 billion for 10.3 million nonfarm sole proprietors whose reported cost of goods sold, as a percentage of gross receipts, were at or below the average reported by all sole proprietors in the same industry. GAO estimates the tax gaps at $30.3 billion for 11.5 million nonfarm sole proprietors who were primarily service providers. This group includes all the sole proprietors covered in the second group. Of this $30.3 billion tax gap, IRS also estimated that between $2 billion and $3.5 billion was associated with potentially misclassified workers. These estimates included only service providers who received all their self-employment income from one business. The $3.5 billion figure included all such service providers. The $2 billion figure included only those receiving $20,000 or more from one payer.
GAO found that: (1) the Internal Revenue Service (IRS) considered about 9.2 million to 11.5 million nonfarm sole proprietors as potential service providers for tax year 1988; (2) IRS estimated that the income tax gap for nonfarm service providers ranged from $21 billion and $30.3 billion for 1992, which was 56 to 81 percent of the total tax gap for all nonfarm sole proprietors who filed a return; (3) informal suppliers accounted for the largest single portion of the income tax gap for sole proprietors; (4) between 0.2 million and 1.6 million of the 11.5 million service providers may have been misclassified employees; and (5) between $2 billion and $3.5 billion was associated with potentially misclassified workers.