Using data to solve business tax noncompliance
- By Matthew Donahue
- Jul 13, 2017
Business tax noncompliance among small to medium-sized businesses, including unpaid taxes and failure to obtain required licenses and permits, is a growing source of revenue loss for government agencies. According to the IRS, the nation loses an estimated $125 billion annually in federal business income tax alone.
About 543,000 new businesses get started in the U.S. each month, according to Forbes. Yet nearly half (48 percent) of small business income is underreported. In all, small businesses are reporting about 52 cents on the dollar on their income, according to former IRS Deputy Commissioner Mark Matthews.
No matter how or why it happens, consistent underreporting of tax obligations means federal, state and local government agencies have less money available to fund programs important to citizens’ health and safety. As state and local governments seek better ways to monitor and track business tax underreporting, they should keep these three thoughts in mind:
1. Not all those that aren’t paying their share do so on purpose
Sometimes businesses overlook their tax obligations unintentionally. Given that businesses are subject to a complex web of federal, state and local obligations, it’s easy to see how this can happen. But in other cases, businesses take advantage of the complexity of the system to dodge their obligations. Because business data is self-reported and erodes quickly, it's easy for businesses to withhold information and hide relationships.
Determining whether a business owner is an intentional cheater versus a confused party is important. An agency that approaches a confused people like cheaters is likely to scare the daylights out of them, while an agency that approaches a cheater like a confused person likely won’t ever collect the tax due. An agency can spend significant effort chasing cheaters that are never going to pay unless forced to.
When it comes to the confused, taxpayer awareness campaigns and education can help. Many business owners simply have no idea which agencies and jurisdictions they are supposed to report to. Using data sharing technologies, state and local agencies can create helpful, proactive platforms for helping well-intentioned businesses comply.
2. The underground economy is changing the tax landscape
The underground economy -- those millions of people that now work side jobs or freelance gigs -- are affecting the business tax trade. Collecting taxes from those endeavors, which is often reported as 1099 income, is not well tracked or monitored. For example, the Kogod Tax Policy Center at American University recently surveyed 40,000 members of the National Association of the Self Employed and found that many people who earned money in the gig economy were confused about how and if to report the earnings.
Fortunately, data can be examined for industries that habitually underreport and show how people are connected, even in the gig economy.
3. The data is there, but it must be connected
Fortunately, data, linking and analytics technologies are becoming much more accessible to federal, state and local agencies to help minimize data silos, validate self-reported information and uncover unreported revenue to ultimately help fight business tax noncompliance.
Advanced analytics and data-linking technologies can provide a detailed view of each business, including relationships, connections and associated individuals. With an unprecedented level of transparency into businesses and their practices, agencies can then greatly enhance the effectiveness and efficiency of audits, investigations, collections and inspections.
Solving the challenge of business tax noncompliance is the next frontier for federal, state and local government agencies looking to recapture revenue to provide needed services to taxpayers. And, voluntary business compliance is the cheapest and most politically powerful kind of compliance. By investing in new data, linking and analytics technologies, squarely addressing the problem and being proactive in educating the business community about their tax obligations, agencies can begin to tackle the problem.
Matthew Donahue is director of market planning, tax and revenue with LexisNexis Risk Solutions.