There is a lot of news about how large corporations evade taxes. Businesses commit tax evasion the same way individuals do: they under-report income, overstate deductions, claim too many tax credits, and sometimes hide money through laundering or illegal accounting schemes.

The Tax Gap is the difference between how much the IRS should collect and how much it actually collects; in 2010, the Tax Gap was $458 billion.

However, small business owners are actually the largest single contributor to the Tax Gap. Before the recession, a quarter of sole proprietors reported losses; among those, 70% were estimated to be noncompliant.

Under-reporting of business income and self-employment tax by small business owners accounts for $190 billion, or 41% of the $458 billion Tax Gap.
Corporate under-reporting accounted for $41 billion or 9% of the Tax Gap.
Large corporations (whose assets exceed $10 million) accounted for $28 billion, or only 6.1% of the $458 billion Tax Gap.
In summary, small business owners and the self-employed under-reported $190 billion, over six and a half times more than the $28 billion under-reported by large corporations!

After reading these statistics, do you find it surprising that small businesses are under-reporting income so much more than large corporations?
Explain why these figures may (or may not) surprise you.
Why do you think small business owners are under-reporting so much more than the large corporations?

Sample Solution

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