Office of Audit
EXPANSION OF THE GIG ECONOMY WARRANTS
FOCUS ON IMPROVING
SELF-EMPLOYMENT TAX COMPLIANCE
Final Report issued on February 14, 2019
Highlights of Reference Number:† 2019-30-016 to the Commissioner of Internal Revenue.
IMPACT ON TAXPAYERS
With economic trends increasing the number of self-employed taxpayers, it is important that the IRS provide accurate guidance and notices about self‑employment tax obligations.
The IRS last estimated the self-employment portion of the annual Tax Gap at $69 billion.† The gig economy has since emerged and grown considerably, with thousands of new taxpayers each year being responsible for self‑employment taxes.† This audit was initiated to evaluate the self-employment tax compliance of taxpayers who earn income in the gig economy and assess the IRSís processes and controls that identify and address noncompliance with self‑employment tax requirements.
WHAT TIGTA FOUND
TIGTA reviewed cases in the IRSís Automated Underreporter (AUR) program for taxpayers who work in the gig economy and who have discrepancies between what is reported on their income tax returns and payments reported to the IRS on Tax Years 2012 through 2015 Forms 1099-K, Payment Card and Third Party Network Transactions, by payers.† The review was limited to nine commonly recognized gig economy payer companies and identified 264,346 cases with potentially underreported payments included on Form 1099-K.† The number of discrepancies involving Forms 1099-K from these gig economy payers increased 237 percent from 2012 to 2015.
Like other types of AUR inventory, many cases were not selected to be worked by the AUR program due to the large volume of discrepancies that were identified.† Specifically, 59 percent of taxpayers were not selected to be worked by the AUR.† This includes 2,817 taxpayers with potential underreporting of their Form 1099-K income in all four tax years, involving $2.7 billion in potentially underreported payments included on Form 1099-K.
AUR employees removed thousands of cases from inventory without justification or with justification that was inaccurate.† Many of the cases that were worked included errors by IRS examiners.† Also, AUR employees rarely refer questionable deductions claimed by taxpayers on amended returns filed in response to receiving a notice from the AUR program to the Examination function.
Treasury Regulations do not require certain gig economy businesses to issue Form 1099-K unless workers earn at least $20,000 and engage in at least 200 transactions annually.† Consequently, many taxpayers who earn income in the gig economy do not receive a Form 1099-K; therefore, their income is not reported to the IRS.† When income is not reported to the IRS, taxpayers are more likely to be noncompliant.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS take several corrective actions to improve how the AUR program addresses self-employment tax noncompliance, selects cases, and conducts quality reviews.† Additionally, TIGTA recommended that the IRS Office of Chief Counsel develop and issue guidance to help clarify current third-party reporting regulations and work with the Department of the Treasury Office of Tax Policy to pursue regulatory or legislative change to reduce the information reporting gap.
The IRS agreed or partially agreed with nine of our 11 recommendations.† Managementís disagreement with two recommendations was mainly due to other work priorities and the cost and difficulties associated with making changes to IRS systems.† TIGTA contends that the implementation of these recommendations would be in the best interest of improving taxpayer compliance.
READ THE FULL REPORT
To view the report, including the scope, methodology, and full IRS response, go to:
Phone Number ††/† 202-622-6500
E-mail Address †/†