GAO recommends IRS step up compliance efforts against sole proprietors.

The General Accounting Office issued a report to the Joint Committee on Taxation recommending the Internal Revenue Service improve its compliance efforts for sole proprietors. Recent IRS data indicate that sole proprietors are one of the least compliant segments of the individual taxpayer population.

Although only 13% of taxpayers are sole proprietors, they accounted for an estimated 40% of underreported total income by individuals in the 1988 IRS Taxpayer Compliance Measurement Program (TCMP)--the IRS's most recent TCMP data. The data also revealed that sole proprietors accounted for an estimated 36% of the $94 billion individual tax gap for 1992. Even with these compliance disparities, said the GAO report, the IRS has no comprehensive link between its compliance strategy and its efforts for sole proprietors.

The report found audits of sole proprietors were relatively low. In 1992, the IRS audited only 2.3% of the 6.6 million whose primary income was sole proprietorship due to limited audit and enforcement resources. Computer matching, it found, also is an ineffective compliance measure because information returns are not required for much sole proprietor income. (These returns largely cover income sole proprietors earn when providing services to other businesses, not from selling goods.)

TCMP data indicate truckers are among the least compliant sole proprietors. The GAO report said this is because the trucking industry often fails to keep adequate books and records.

The report recommends the IRS take several steps to reduce sole proprietor noncompliance. It urges the IRS to develop a better system to manage sole proprietor compliance projects. It also recommends the service make better use of TCMP information to identify projects that address the least compliant sole proprietor market segments and analyze underlying causes of noncompliance. It recommends working with the trucking industry and other sectors to improve recordkeeping and suggests clarifying information return filing instructions for insurance companies.

To order IRS Can Better Pursue Noncompliant Sole Proprietors (GAO/GGD-94-175), call [phone] or fax [phone]. The first copy is free; additional copies are $2 each.