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Small Firms Dodge $198B in Federal Taxes

By Stephanie Rabiner, Esq. on January 26, 2012 | Last updated on March 21, 2019

There's a lot of talk about the tax gap -- how can someone who earns $42.6 million only pay a 14% tax rate? And what about those big businesses taking advantage of tax loopholes?

But the reality is small companies and the self-employed are the biggest tax dodgers in the nation -- and they're not even doing it legally.

The IRS tracks the taxes owed but not paid -- the official tax gap. In 2006, that gap was at $385 billion. The self-employed and small companies accounted for $198 billion of those unpaid funds.

A perusal of the IRS's newly released tax gap estimates breaks that number down in the following way:

  • $122 billion in under-reported individual business income (schedule C)
  • $19 billion in under-reported small business income
  • $57 billion in under-reported self-employment income

Self-reported income is the biggest contributor to the tax gap, according to the IRS. Income not subject to third-party reporting or withholding accounts to 56% of the net misreporting rate in 2006.

What does this mean for you?

Well, there's no official word on whether the IRS will be auditing small businesses or the self-employed more thoroughly than before. However, the data suggests that many of you would be found delinquent if that were to occur.

So when you sit down this tax season, be sure to consult the instructions to Schedule C. And if you're still confused, hire a professional. It's worth it -- you won't be contributing to the tax gap.

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