The gross Tax Gap is the amount that is owed by taxpayers before collections are taken into account. Self-employment income is frequently underreported for income tax purposes. With the growth of online platform companies in recent years, it is likely that self-employment tax underreporting will continue to be a growing problem if not addressed. The IRS commonly uses the term “sharing economy,” but it is also “referred to as the on-demand, gig, or access economy”.
The National Research Program supports measurement of taxpayer compliance with Federal tax laws. The most recent Tax Gap estimates put the underreporting of self-employment tax portion of the Tax Gap at $65 billion. In the gig economy, the online platform companies are not considered to be their employers. This creates a more complicated tax situation for individuals who, in many cases, may not understand the tax obligations of their activities.
There is no universally accepted definition of the range of activities that fall into the gig economy or who should be counted as a gig worker. With more workers engaging in self-employment, it is important that the IRS provide accurate guidance and notices about taxpayers’ self- employment tax obligations. The income that is earned through the gig Economy should be reported by the taxpayer on Schedule C, Profit or Loss from Business (Sole Proprietorship).
The IRS’s Tax Gap analyses indicates that there is higher compliance when amounts are subject to information reporting. When there is no information reporting, the compliance rate is only 37 percent. In response, the IRS developed Form 1099-K for submission by payment settlement entities starting in Calendar Year 2012. This information reporting was intended to assist the IRS in matching income from sales to income reported on tax returns in an effort to reduce the Tax Gap.
The growing gig economy and the challenges it presents to tax compliance have been the subject of Congress’s attention for a number of years. To help alleviate some of the confusion for taxpayers earning income in the gig economy who want to be compliant, the IRS has created the “Sharing Economy Tax Center” web page. The National Taxpayer Advocate believes that “much of the compliance burden can be alleviated if tax is collected by third parties and reported to the IRS and service providers”.
This review was performed in the SB/SE Division Examination function at the Automated Underreporter (AUR) program campuses in Philadelphia, Pennsylvania, and Ogden, Utah, during the period August 2017 through July 2018. An electronic payment facilitator is a third party that makes payments in settlement of reportable payment transactions on behalf of the payment settlement entity. We conducted this performance audit in accordance with generally accepted government auditing standards.
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