Lawmaker Expresses Concern Over 'Tax Gap' Effect on Small Business Owners

Over the last few months, there has been a great deal of discussion among my colleagues about the "tax gap." I write to request your assistance in identifying the source of the $345 billion stated to be the magnitude of the "tax gap " as outlined in your recent report, "A Comprehensive Strategy for Reducing the Tax Gap." This number is critical to any strategy to deal with the tax gap, and yet there is no methodology described, or verifiable data included, in the report that would allow this amount to be independently confirmed.

I understand the 2006 report was only a first step in addressing this issue, and that you have commissioned a study to determine the origin of the $345 billion price tag. However, I'm concerned that small business owners who abide by our laws with be disproportionately targeted as contributors to this "gap." As acknowledged in the report itself, the complexity of our tax system may be a major cause of lost tax revenue, calling for a much different response than more aggressive auditing of small businesses that file returns.

Two aspects of these findings have implications for small businesses. Of the estimated 80 percent of the gross tax gap in 2001 caused by the under-reporting of tax, roughly half that amount, including self-employment taxes, was deemed attributable to under- reporting of net business income by individuals. Of the remaining 20 percent, a significant proportion was attributed to employer failures to deposit withheld income and employment taxes. These findings could mean increased burdens on businesses in the areas of information reporting and audit examinations.

Upon completion of the study to identify the origin of these lost revenues, or as soon as you have solid data on the true amount and causes of the tax gap, I would appreciate if you could provide my office with the findings. Thank you in advance. Should you or your staff have additional questions, please contact my Legislative Director, Jason Kratovil, at (202) 225-5731. I remain