Tax Administration: Estimates of the Tax Gap for Service Providers
(Letter Report, 12/28/94, GAO/GGD-95-59).
This report provides information on the tax gap for sole
proprietors--that is, self-employed persons. The gross income tax gap
refers to the difference between the amount of income taxes owed and the
amount voluntarily paid. GAO pegs the tax gap at $21 billion for 9.2
million nonfarm sole proprietors who claimed no cost of goods sold on
their returns. GAO estimates the tax gap at $25.1 billion for 10.3
million nonfarm sole proprietors whose reported cost of goods sold, as a
percentage of gross receipts, were at or below the average reported by
all sole proprietors in the same industry. GAO estimates the tax gaps
at $30.3 billion for 11.5 million nonfarm sole proprietors who were
primarily service providers. This group includes all the sole
proprietors covered in the second group. Of this $30.3 billion tax gap,
IRS also estimated that between $2 billion and $3.5 billion was
associated with potentially misclassified workers. These estimates
included only service providers who received all their self-employment
income from one business. The $3.5 billion figure included all such
service providers. The $2 billion figure included only those receiving
$20,000 or more from one payer.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-95-59
TITLE: Tax Administration: Estimates of the Tax Gap for Service
Providers
DATE: 12/28/94
SUBJECT: Tax administration
Noncompliance
Tax nonpayment
Tax evasion
Contractors
Income taxes
Service industry
Tax law
IDENTIFIER: IRS Taxpayer Compliance Measurement Program
TCMP
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Cover
================================================================ COVER
Report to the Joint Committee on Taxation, Congress of the United
States
December 1994
TAX ADMINISTRATION - ESTIMATES OF
THE TAX GAP FOR SERVICE PROVIDERS
GAO/GGD-95-59
Estimates of the Tax Gap
(268590)
Abbreviations
=============================================================== ABBREV
COGS - Cost of Goods Sold
IRMF - Information Returns Masterfile
IRS - Internal Revenue Service
PBA - Primary Business Activity
TCMP - Taxpayer Compliance Measurement Program
Letter
=============================================================== LETTER
B-259655
December 28, 1994
The Honorable Daniel Patrick Moynihan
Chairman, Joint Committee on Taxation
The Honorable Sam M. Gibbons
Acting Vice Chairman, Joint Committee
on Taxation
Congress of the United States
This report provides information about the tax gap for sole
proprietors (that is, self-employed individuals). Specifically, it
presents estimates of the tax year 1992 gross income tax gap for
nonfarm sole proprietors who provided services. It also includes
estimates of the tax gap attributable to service providers who may
have been employees, rather than self employed. This report is part
of our response to your request that we analyze the noncompliance of
sole proprietors. It represents the combined efforts of our staff
and analysts of the Internal Revenue Service (IRS).
BACKGROUND
------------------------------------------------------------ Letter :1
The gross income tax gap is the difference between the amount of
income taxes owed and the amount voluntarily paid. Tax gap estimates
can be used to measure IRS progress in addressing particular types of
noncompliance and to help IRS allocate its compliance resources.
IRS last published a tax gap estimate in 1988.\1 IRS projected that
the tax gap for all nonfarm sole proprietors who filed a return,
regardless of whether they provided goods, services, or both, would
be over $30 billion by 1992.\2 IRS split this estimate between two
sole proprietor groups. About $20 billion was attributed to
individuals who formally organized their businesses as sole
proprietors. The remaining $10 billion was associated with
individuals organized informally--informal suppliers--who provided
goods or services primarily through cash transactions.\3 IRS has not
yet published its new tax gap estimates based on Taxpayer Compliance
Measurement Program (TCMP) results for tax years 1985 and 1988.
IRS did not segregate the portion of the sole proprietor tax gap
related to independent contractors. If done, this independent
contractor portion might also be disaggregated into an estimate for
misclassified workers. When hiring a worker to provide services, a
business may use an employee or an independent contractor. Employers
must withhold taxes on employees but not on independent contractors.
IRS has adopted 20 common-law rules for classifying workers as either
employees or independent contractors (see appendix II for a list of
these rules). The degree of control, or right to control, that a
business has over a worker generally governs the classification.
Misclassified workers are individuals who reported they were
self-employed but were actually employees of the businesses for which
they provided services. The misclassification of workers as
independent contractors has plagued IRS and employers for many years
because of difficulties in applying the 20 common-law rules.\4
--------------------
\1 The 1988 estimate relied on TCMP data for tax years 1973, 1976,
1979, and 1982. Under TCMP, IRS auditors do detailed audits of tax
returns for a random sample of taxpayers. Since 1988, IRS has also
completed analysis of its TCMP surveys for tax years 1985 and 1988.
\2 This $30 billion excludes an estimated $3.5 billion for sole
proprietors who did not file tax returns. None of the tax gap
estimates in this report includes nonfilers.
\3 A more complete discussion of the informal supplier tax gap can be
found in appendix I.
\4 Our report Tax Administration: Approaches for Improving
Independent Contractor Compliance (GAO/GGD-92-108, July 3, 1992)
summarizes the independent contractor classification issues.
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :2
Our original objectives were to estimate the income tax gap for
independent contractors and the portion of that gap associated with
potentially misclassified employees. We could do neither of these
estimates because no generally accepted definition of independent
contractor, such as from using the 20 common-law rules, could be
associated with data IRS used to calculate the tax gap.
Because of uncertainty about who was an independent contractor, we
used service providers as surrogates since many are considered by IRS
and the business community to be independent contractors. Also, IRS
data can be used in conjunction with some assumptions to make tax gap
estimates for sole proprietors who primarily provide services and for
that portion of the tax gap attributable to potentially misclassified
workers. However, because the IRS data did not clearly define
service providers, we developed three definitions for service
providers using TCMP data and information reported on tax returns.
The three definitions used the Cost of Goods Sold (COGS) information
and the IRS Primary Business Activity (PBA) codes that sole
proprietors claim on Schedule C, Profit or Loss From Business, of the
Form 1040, U.S. Individual Income Tax Return. We used the amount of
COGS claimed because sole proprietors who provide services generally
claim less COGS than those who manufacture or sell goods or mine
minerals. The PBA codes categorize sole proprietors by their type of
business activity. These codes can be used to identify service
providers.\5
Using the amount of reported COGS and PBA codes as criteria, we
analyzed the following three service provider groups:\6
-- all sole proprietors who reported no COGS on their returns;
-- all sole proprietors with no reported COGS plus those reporting
COGS at or below their industry average, as a percentage of
gross receipts--except for sole proprietors engaged in
manufacturing, mining, or sales activities; and
-- all sole proprietors in the first and second groups plus any
remaining sole proprietors with service-related PBA codes.
We analyzed the IRS 1988 TCMP data to obtain tax compliance data for
the sole proprietors who fell into each of the three groups. At our
request, IRS used these data and its tax gap model to estimate the
1988 and 1992 tax gap for each group.
To estimate the portion of tax gap related to misclassified workers,
we matched data from the TCMP file and the IRS tax year 1988
Information Returns Masterfile (IRMF) to identify service providers
who were potentially misclassified workers. For this group, IRS then
used its tax gap model to estimate the portion of tax gap associated
with potentially misclassified workers. At our request, IRS made tax
gap estimates for two categories of potentially misclassified
employees: (1) service providers who received all of their income,
regardless of the amount, from one payer and (2) service providers
who received $20,000 or more from one payer. We selected the $20,000
limit on the basis of discussions with the IRS employment tax staff.
We received oral comments on a draft of this report from
representatives of the IRS Director of Research on December 12, 1994.
These officials asked that we emphasize the weakness of the informal
supplier estimates and indicate that allocating this estimate among
business activities increases the uncertainty. We agreed and
strengthened our caution about interpreting the allocated estimates
in table 2 and appendix VI. Even though these allocations have
limitations, they provide some indication of the types of informal
suppliers who not only provide services but also add to the tax gap.
These IRS officials agreed that our method of allocation was
reasonable. We also updated the tax gap estimates to correspond to
IRS' most recent estimates.
We did our work between October 1993 and November 1994 in accordance
with generally accepted government auditing standards.
--------------------
\5 The PBA codes are defined under nine broad categories: (1)
construction; (2) manufacturing; (3) mining; (4) agricultural
services; (5) wholesale trade; (6) retail trade; (7) real estate,
insurance, finance, and related services; (8) transportation,
communication, public utilities, and related services; and (9)
personal, business, and professional services.
\6 Appendix I provides further details on our rationale and criteria
for the three definitions.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :3
Using three definitions of service providers and data available from
the IRS 1988 TCMP, we estimated that between 9.2 million and 11.5
million of the 13 million nonfarm sole proprietors might be
considered service providers. IRS estimated that the 1992 tax gap
among these likely service providers ranged from $21 billion to $30.3
billion--that is, from 56 to 81 percent of the $37.2 billion tax gap
estimated by IRS for all nonfarm sole proprietors who filed a
return.\7 Specifically, the tax gap estimates for the three
definitions of service providers were
-- $21 billion for 9.2 million nonfarm sole proprietors who claimed
no COGS on their returns.
-- $25.1 billion for 10.3 million nonfarm sole proprietors whose
reported COGS, as a percentage of gross receipts, were at or
below the average reported by all sole proprietors in the same
industry. This group included all the sole proprietors covered
in the first group.
-- $30.3 billion for 11.5 million nonfarm sole proprietors who, on
the basis of IRS' PBA codes, were primarily service providers.
This group includes all the sole proprietors covered in the
second group.
Of this $30.3 billion tax gap, IRS also estimated that between $2
billion and $3.5 billion was associated with potentially
misclassified workers. These estimates included only service
providers who received all their self-employment income from one
business. The $3.5 billion estimate included all such service
providers. The $2 billion estimate included only those receiving
$20,000 or more from one payer.
--------------------
\7 The $37.2 billion sole proprietor tax gap estimate is from
unpublished data that we obtained from IRS. IRS relied on tax years
1985 and 1988 TCMP results to make this estimate. IRS has not
calculated a sampling error for its tax gap estimates.
INCOME TAX GAP ATTRIBUTABLE TO
SERVICE PROVIDERS
------------------------------------------------------------ Letter :4
Using the IRS TCMP data, we estimated that for tax year 1988 about 13
million individuals filed Schedules C as nonfarm sole proprietors.
We also estimated that between 68 percent (9.2 million) and 85
percent (11.5 million) of the nonfarm sole proprietors were
potentially service providers, with the estimates varying across the
three groups that we analyzed.
Using its most recent TCMP data, IRS estimated the 1992 tax gap for
all sole proprietors at $37.2 billion. Of this amount, between $21
billion and $30.3 billion was associated with sole proprietors who
provided services. Table 1 shows the estimated 1992 tax gap for
three groupings of service providers.\8 The table stratifies the
service providers into nine major sectors--seven service provider
sectors based on PBA codes used by IRS to categorize sole
proprietors, one sector for all nonservice sector businesses that
reported no COGS, and one sector for informal suppliers.\9
Table 1
Estimated Tax Gap for Potential Service
Provider Groups for 1992
(Dollars in millions)
Average or Based on
Description of sector No COGS lower COGS PBA codes
------------------------------- ----------- ----------- -----------
Construction services $ 1,209 $ 2,229 $ 3,804
Real estate, insurance, and 937 1,027 1,379
financial services
Transportation and 800 979 1,140
communication services
Business services\a 2,122 2,375 2,893
Personal services\b 61 954 1,349
Medical services\c 610 634 984
All other services\d 1,045 2,106 3,144
All other businesses with no 1,057 1,057 1,057
COGS\e
Informal suppliers 13,191 13,784 14,526
======================================================================
Total\f $21,031 $25,146 $30,276
Percent of tax gap for all sole 56.5% 67.5% 81.3%
proprietors
----------------------------------------------------------------------
Note: Appendix V shows population estimates by sector and group.
\a This sector includes services such as legal and accounting.
\b This sector includes services such as beauty shops, child day
care, and counseling.
\c This sector includes services such as doctors and dentists.
\d This sector contains services not covered in the above sectors
such as agricultural, automotive, and hotels.
\e This sector contains businesses in the manufacturing, mining, and
sales sectors, with no COGS.
\f Totals may not add due to rounding.
Source: IRS tax gap model and TCMP database.
As table 1 shows, the lowest estimate of the possible service
provider tax gap was $21 billion, or about 57 percent of the total
$37.2 billion sole proprietor tax gap estimate. This estimate
covered only those sole proprietors with no COGS, regardless of their
PBA code. We estimated that about 9.2 million sole proprietors fell
into this group. In its instructions to small businesses, IRS
indicated that COGS are used to record the expenses of any goods that
are purchased for resale. Thus, we assumed that any sole proprietor
that reported no COGS received all gross receipts from providing
services. This would be the purest form of service provider.
However, this definition excludes service providers who have COGS
because they sold some goods in the course of providing services (for
example, a mechanic who also sells automobile parts).
IRS' intermediate estimate of the possible service provider tax gap
totaled $25.1 billion among an estimated 10.3 million sole
proprietors. In addition to those sole proprietors with no COGS,
this estimate also included those who sold some goods in the course
of providing services. We defined these sole proprietors as service
providers if their reported COGS as a percent of gross receipts was
at or below the average for all sole proprietors in the same sector.
We used the average COGS amount as a measure to limit the group to
only those sole proprietors whose sales of goods were incidental to
providing services.
The highest estimate of the possible service provider tax gap was
$30.3 billion among an estimated 11.5 million sole proprietors. To
identify this group of service providers, we used the service-related
PBA codes that sole proprietors reported on their Schedule C plus
those included in the prior two groups. This group does not include
sole proprietors with PBA codes in the manufacturing, mining, and
wholesale and retail sales sectors that reported any amount of COGS.
Table 1 also shows that informal suppliers were responsible for the
largest portion of the tax gap for all three groupings. Based on the
1988 TCMP data, an estimated 2.6 million service providers were
informal suppliers. IRS officials said they have not determined why
informal suppliers accounted for such a large portion of the tax gap.
They did say that the informal supplier tax gap estimate has a high
degree of uncertainty and that IRS has not allocated this estimate
among the industrial sectors to avoid adding even more uncertainty.
Accordingly, in table 1 we did not allocate the informal supplier tax
gap to each sector. However, table 2 allocates the informal supplier
estimate across these sectors, using the informal supplier compliance
rate for each sector as the basis for the allocations. The resulting
allocation of the tax gap estimates should be viewed as rough
approximations that can provide insight as to the potential breakdown
by industry sector. Appendix VI provides more details on these
allocations.
Table 2
Estimated Allocation of Informal
Supplier Tax Gap Among Business Sectors,
1992
(Dollars in millions)
Average and Based on
Description of sector No COGS lower COGS PBA codes
------------------------------- ----------- ----------- -----------
Construction services $ 5,900 $ 6,200 $ 6,500
Real estate, insurance, and 0 0 0
financial services
Transportation and 1,100 1,100 1,200
communication services
Business services\a 1,100 1,200 1,200
Personal services\b 2,000 2,100 2,200
Medical services \c 300 300 300
All other services\d 1,200 1,300 1,300
All other businesses with no 1,600 1,600 1,700
COGS\e
======================================================================
Total\f $13,200 $13,800 $14,500
----------------------------------------------------------------------
Note: Numbers are rounded to the nearest $100 million.
\a This sector includes services such as legal and accounting.
\b This sector includes services such as beauty shops, child day
care, and counseling.
\c This sector includes services such as doctors and dentists.
\d This sector contains services not covered in the above sectors
such as agricultural, automotive, and hotels.
\e This sector contains businesses in the manufacturing, mining, and
sales sectors, with no COGS.
\f Totals may not add due to rounding.
Source: TCMP database, IRS tax gap model, and GAO analysis.
--------------------
\8 Appendix III provides a similar table for the 1988 tax gap.
\9 Appendix IV lists PBA codes for each business sector.
SERVICE PROVIDER TAX GAP
RELATED TO MISCLASSIFIED
WORKERS
------------------------------------------------------------ Letter :5
Using the broadest definition of service provider, we estimated that
between 0.2 million and 1.6 million of the 11.5 million service
providers may be misclassified employees.\10 The estimate of the 1992
income tax gap for these service providers ranged from $2 billion to
$3.5 billion. The $2 billion estimate covered only those sole
proprietors who reported $20,000 or more in income from one business.
The $3.5 billion estimate covered service providers who received all
of their income from just one business, regardless of the amount.
Table 3 shows the estimated tax gap for these two groups in total and
as a percentage of the total service provider tax gap.
Table 3
Estimated Tax Gap Amounts for
Potentially Misclassified Service
Providers in 1992
(Dollars in millions)
Percent of
service
provider
tax gap
Potentially from
misclassifi potentially
Type of potentially ed service All service misclassifi
misclassified service providers providers providers ed workers
------------------------------- ----------- ----------- -----------
Providers who reported $20,000 $2,037 $30,276 6.7
or more in gross receipts from
just one payer
Providers who reported any $3,503 $30,276 11.6
amount of gross receipts from
just one payer
----------------------------------------------------------------------
Source: The IRS tax gap model using TCMP and IRMF data.
If all of these were actually misclassified and IRS were to correct
the classification to employee, after the fact, IRS would not
necessarily collect either the $2.0 billion or the $3.5 billion.\11
However, had these workers been classified correctly as employees, a
significant amount of the taxes owed would likely have been withheld
by the employer. IRS studies have indicated that taxpayers subject
to withholding were substantially more compliant. For example, the
1988 TCMP showed that employees reported 99.8 percent of their wages,
while sole proprietors reported only 75.2 percent of their business
income.
--------------------
\10 We used the service provider tax gap estimate defined by the PBA
codes because it contained the most TCMP sample cases and, therefore,
was likely to provide the most precise estimates. Appendix I shows
the number of TCMP cases for each group.
\11 IRS data also show an estimated $2 billion employment tax gap for
1992 for misclassified workers. This would likely be reduced if
workers were properly classified.
---------------------------------------------------------- Letter :5.1
As agreed with the Committee, we will send copies of this report to
the Secretary of the Treasury, the Commissioner of Internal Revenue,
and other interested parties. We also will make copies available to
others upon request. This report was prepared under the supervision
of Natwar M. Gandhi, Associate Director.
Major contributors to this report are listed in appendix VII. If you
have any questions, please contact me at (202) 512-5407.
Jennie S. Stathis
Director, Tax Policy
and Administration Issues
METHODOLOGY FOR IDENTIFYING
INDUSTRIES AS SERVICE PROVIDERS
=========================================================== Appendix I
Neither income tax return nor TCMP data are specific enough for
developing a tax gap estimate on independent contractors. Our
discussions with IRS officials and representatives of various
business community interest groups revealed that independent
contractors are generally considered service providers, rather than
manufacturers or sellers of goods. Even so, we could not use service
providers as an exact surrogate for independent contractors. Neither
the IRS sole proprietor tax gap nor TCMP data specifically identify
sole proprietors whose incomes are primarily derived from providing
services as opposed to those who primarily receive income from
manufacturing or selling goods.
We tried to use depreciation and the presence of an information
return for nonemployee compensation as ways to distinguish income
derived from providing services as opposed to other types of income.
However, these options did not work. We found no pattern in our
analysis of depreciation that clearly differentiated between income
earned by providing services and income derived from manufacturing
and selling goods. Likewise, using information returns would have
excluded service income that is not required to be reported on
information returns (for example, income from providing services to
individuals not engaged in a trade or business) and income that was
not reported on information returns as required.
Lacking a specific definition of service providers, we made
assumptions about sole proprietors, resulting in three service
provider definitions. We then gave IRS information about sole
proprietors in the 1988 TCMP database that met these three
definitions. IRS used its tax gap model to prepare an estimate for
each definition.
Our first service provider definition consisted of all sole
proprietors from the TCMP database with no COGS. IRS instructions
indicate that a business must complete the COGS section when the
production, purchase, or sale of merchandise produced income. We
reasoned that if sole proprietors had no COGS, then all their gross
receipts must come from providing services. Accordingly, this group
should represent the most stringent test for service providers.
The second definition of service providers consisted of all sole
proprietors whose PBA code was not in the manufacturing, mining, and
sales categories and whose COGS, as a percent of gross receipts, was
at or below the industry average. For these sole proprietors, we
reasoned that their gross receipts included some mix of payments for
services provided and for materials used in providing those services.
For example, gross receipts for repairing plumbing fixtures in a
building included charges for the repair service and the new
fixtures. The cost of the fixtures can be shown as a part of COGS.
We considered the sole proprietors at or below the industry average
as primarily service providers. We used the IRS Statistics of Income
data to develop industry averages for COGS as a percent of gross
receipts.
The final group represents the broadest definition of service
providers. On tax returns, IRS asks that sole proprietors categorize
their businesses by using PBA codes. IRS has over 170 PBA codes that
can be used to determine whether sole proprietors' primary business
is service related. Relying on IRS' defined PBA codes, our third
group includes all sole proprietors whose PBA codes fall into one of
these service-related sectors.
In each of the three definitions of service providers, we included
sole proprietors in the manufacturing, mining, and sales categories
(i.e., nonservice sector) that paid no COGS. In the nonservice
group, sole proprietors operating businesses such as food markets,
dry goods stores, restaurants, or metal shops should have substantial
COGS. For example, Statistics of Income data show that in the
nonservice group COGS averaged almost 65 percent of gross
receipts.\12 We reasoned that sole proprietors with PBA codes in this
group and with no COGS were probably either providing services to the
industries or were misclassified employees. Accordingly, we included
them in each of our definitions. Table I.1 provides specific
information about the number of service providers in each group plus
the estimated population of those who were potentially misclassified
workers.
Table I.1
Data on the Observations and Population
Estimates Used to Make Tax Gap Analysis
for 1988
Number of
observation Sampling
s in TCMP Estimated error (plus
Service provider groups data population or minus)
------------------------------- ----------- ----------- -----------
No COGS 9,939 9,152,583 332,440
At or below average COGS 11,614 10,269,196 317,278
As defined by IRS' PBA code 14,423 11,473,195 347,065
Potentially misclassified 393 187,418 21,816
workers with over $20,000 of
income
Potentially misclassified 1,306 1,618,550 160,061
workers with any amount of
income
----------------------------------------------------------------------
Source: The IRS 1988 TCMP.
IRS calculated the tax gap estimates using its tax gap model, which
was developed to estimate federal income tax revenue lost from
underreporting income and overstating deductions. For these
estimates, IRS used data from its TCMP for tax year 1988 returns
filed by individuals. The model also uses methodology developed by
IRS to estimate unreported income that was not identified in the TCMP
audits.\13 We did not verify tax gap data provided by IRS because we
had no access to the IRS model. IRS has not calculated a sampling
error for its tax gap estimates.
As part of its tax gap calculation, IRS makes an estimate for
informal suppliers. IRS defines informal suppliers as individuals
who provide products or services through informal arrangements, which
frequently involve cash transactions. This special class of
individuals is believed to include persons who are at the core of the
so-called "underground economy." IRS calculates the tax gap for
informal suppliers differently than for other nonfarm sole
proprietors. Rather than relying solely on TCMP data, IRS also uses
estimates of income received by informal suppliers. These estimates
are made by an outside consultant. In this report, we categorize the
informal supplier tax gap separately from that of other sole
proprietors.
--------------------
\12 In contrast, COGS for all industries not in the manufacturing,
mining, or sales industries was less than 24 percent of gross
receipts.
\13 For more details on the IRS tax gap estimates, see The Tax Gap:
Definition, Studies, Assumptions, and Components,(GAO/GGD-88-66BR
Mar. 25, 1988, and GAO/T-GGD-88-22, Mar. 31, 1988).
SUMMARY OF THE 20 COMMON-LAW
FACTORS THAT DISTINGUISH EMPLOYEES
FROM INDEPENDENT CONTRACTORS
========================================================== Appendix II
Workers are generally employees if they
-- must comply with employer's instructions about the work;
-- receive training from or at the direction of the employer;
-- provide services that are integrated into the business;
-- provide services that must be rendered personally;
-- hire, supervise, and pay assistants for the employer;
-- have a continuing working relationship with the employer;
-- must follow set hours of work;
-- work full-time for an employer;
-- must do their work on the employer's premises;
-- must do their work in a sequence set by the employer;
-- must submit regular reports to the employer;
-- receive payments of regular amounts at set intervals;
-- receive payments for business and/or traveling expenses;
-- rely on the employer to furnish tools and material;
-- lack a major investment in resources for providing services;
-- cannot make a profit or suffer a loss from the services;
-- work for one employer at a time;
-- do not offer their services to the general public;
-- can be fired by the employer; or
-- may quit work anytime without incurring liability.
Source: Exhibit 4640-1, Internal Revenue Manual 4600 (Employment Tax
Procedures).
1988 TAX GAP FOR SERVICE PROVIDERS
========================================================= Appendix III
Table III.1
Estimated Tax Gap for Service Providers
for 1988
(Dollars in millions)
Average Based on
Description of sector No COGS COGS PBA codes
------------------------------- ----------- ----------- -----------
Construction services $698 $1,287 $2,196
Real estate, insurance, and 541 593 796
financial services
Transportation and 462 565 658
communication services
Business services 1,225 1,371 1,670
Personal services 35 551 779
Medical services 352 366 568
All other services 603 1,216 1,815
All other businesses with no 610 610 610
COGS
Informal suppliers 9,385 9,807 10,335
======================================================================
Total $13,911 $16,366 $19,433
----------------------------------------------------------------------
Source: The IRS tax gap model and TCMP database.
TYPES OF SERVICE PROVIDERS BY
SECTOR
========================================================== Appendix IV
Table IV.1
Types of Service Providers In the
Construction Sector
PBA code Description of service provider
-------- ------------------------------------------------------------
0018 Operative builders (building for own account)
0034 Residential building
0059 Nonresidential building
0075 Highway and street construction
0232 Plumbing, heating, and air conditioning
0257 Painting and paperhanging
0273 Electrical work
0299 Masonry, drywall, stone, and tile
0414 Carpeting and flooring
0430 Roofing, siding, and sheet metal
0455 Concrete work
0471 Water well drilling
0885 Other building trade contractors
3889 Other heavy construction
----------------------------------------------------------------------
Source: 1988 TCMP database.
Table IV.2
Types of Service Providers in the Real
Estate, Insurance, and Financial
Services Sector
PBA code Description of service provider
-------- ------------------------------------------------------------
5512 Real estate agents and managers
5538 Operators and lessors of buildings
5553 Operators and lessors of other real property
5710 Subdividers and developers
5736 Insurance agents and services
5751 Security and commodity brokers, dealers, and investment
services
5777 Other real estate, insurance, and financial activities
----------------------------------------------------------------------
Source: 1988 TCMP database.
Table IV.3
Types of Service Providers in the
Transportation and Communication Sectors
PBA code Description of service provider
-------- ------------------------------------------------------------
6114 Taxicabs
6312 Bus and limousine transportation
6338 Trucking (except trash collection)
6510 Trash collection
6536 Public warehousing
6551 Water transportation
6619 Air transportation
6635 Travel agents and tour operators
6650 Other transportation and related services
6676 Communications services
6692 Utilities, including dumps, snowplowing, and road clearing
----------------------------------------------------------------------
Source: 1988 TCMP database.
Table IV.4
Types of Service Providers in the
Business Services Sector
PBA code Description of service provider
-------- ------------------------------------------------------------
7617 Legal services (or lawyer)
7633 Income tax preparation
7658 Accounting and bookkeeping
7674 Engineering, surveying, and architectural
7690 Management, consulting, and public relations
7716 Advertising, except direct mail
7732 Employment agencies and personnel supply
7757 Computer and data processing, including repair and leasing
7773 Equipment rental and leasing
7914 Investigative and protective services
7880 Other business services
----------------------------------------------------------------------
Source: 1988 TCMP database.
Table IV.5
Types of Service Providers in the
Personal Services Sector
PBA code Description of service provider
-------- ------------------------------------------------------------
8110 Beauty shops or beauticians
8318 Barber shops or barbers
8334 Photographic portrait studios
8516 Shoe repair and shine services
8532 Funeral services and crematories
8714 Child day care
8730 Teaching or tutoring
8755 Counseling (except health practitioners)
8771 Ministers and chaplains
6882 Other personal services
----------------------------------------------------------------------
Source: 1988 TCMP database.
Table IV.6
Types of Service Providers in the
Medical Services Sector
PBA code Description of service provider
-------- ------------------------------------------------------------
9217 Offices and clinics of medical doctors
9233 Offices and clinics of dentists
9258 Osteopathic physicians and surgeons
9274 Chiropractors
9290 Optometrists
9415 Registered and practical nurses
9431 Other licensed health practitioners
9456 Dental laboratories
9472 Nursing and personal care facilities
9886 Other health services
----------------------------------------------------------------------
Source: 1988 TCMP database.
Table IV.7
Types of Service Providers in All Other
Service-Related Businesses
PBA code Description of service provider
-------- ------------------------------------------------------------
1917 Soil preparation services
1933 Crop services
1958 Veterinary services, including pet
1974 Livestock breeding
1990 Other animal services
2113 Farm labor and management services
2212 Horticulture and landscaping services
2238 Forestry, except logging
2279 Fishing, hunting, and trapping
7096 Hotels, motels, and tourist homes
7211 Rooming and boarding houses
7237 Camps and camping parks
7419 Coin operated laundries and dry cleaning
7435 Other laundry, dry cleaning, and garment services
7450 Carpet and upholstery cleaning
7476 Janitorial and related services
8813 Automotive rental and leasing without driver
8839 Parking, except valet
8854 General automotive repair service
8870 Specialized automotive repair service
8896 Other automotive services (wash, towing, etc.)
9019 TV and audio equipment repair services
9035 Other electrical equipment repair service
9050 Reupholstery and furniture repair
2881 Other equipment repair services
8557 Physical fitness facilities
9613 Videotape rental stores
9639 Motion picture theaters
9654 Other motion picture and TV film and tape activity
9670 Bowling alleys
9696 Professional sports and racing
9811 Theatrical performers, musicians, agents, producers, and
related services
9837 Other amusement and recreational services
----------------------------------------------------------------------
Source: 1988 TCMP database.
POPULATION ESTIMATES BY SERVICE
PROVIDER DEFINITION AND SECTOR
=========================================================== Appendix V
Table V.1
Population Estimates for Service
Providers With No COGS
Sampling
Estimated error (plus
Description of sector number or minus)
---------------------------------------- ------------- -------------
Construction services 899,098 123,848
Real estate, insurance, and financial 1,105,244 101,930
services
Transportation and communication 512,366 67,728
services
Business services 2,054,035 155,543
Personal services 1,550,542 152,537
Medical services 501,777 55,267
All other services 1,286,405 147,154
All other businesses with no COGS 1,243,115 137,544
======================================================================
Total service providers with no COGS 9,152,583 332,440
Percent of all sole proprietors 68.1% 3.6%
----------------------------------------------------------------------
Source: The IRS tax gap model and TCMP database.
Table V.2
Population Estimates for Service
Providers With Average or Lower COGS
Sampling
Estimated error (plus
Description of sector number or minus)
---------------------------------------- ------------- -------------
Construction services 1,343,180 135,945
Real estate, insurance, and financial 1,129,957 102,256
services
Transportation and communication 546,740 68,340
services
Business services 2,231,821 163,622
Personal services 1,698,522 157,157
Medical services 521,696 55,627
All other services 1,554,165 151,367
All other businesses with no COGS 1,243,115 137,544
======================================================================
Total service providers with average 10,269,196 317,278
COGS
Percent of all sole proprietors 76.4% 3.3%
----------------------------------------------------------------------
Source: The IRS tax gap model and TCMP database.
Table V.3
Population Estimates for Service
Providers Defined by the PBA Code
Sampling
Estimated error (plus
Description of sector number or minus)
---------------------------------------- ------------- -------------
Construction services 1,707,309 141,375
Real estate, insurance, and financial 1,178,942 103,819
services
Transportation and communication 597,864 71,842
services
Business services 2,408,087 167,606
Personal services 1,889,072 161,994
Medical services 593,901 56,818
All other services 1,854,906 157,816
All other businesses with no COGS 1,243,115 137,544
======================================================================
Total service providers as defined by 11,473,195 347,065
the PBA code
Percent of all sole proprietors 85.3% 3.0%
----------------------------------------------------------------------
Source: The IRS tax gap model and TCMP database.
ALLOCATION OF INFORMAL SUPPLIER
TAX GAP
========================================================== Appendix VI
The tax gap for informal suppliers accounted for a large part of the
overall service provider tax gap. IRS does not routinely allocate
this estimate among the various business sectors because no generally
accepted methodology existed for making such an allocation. Also,
allocating the informal supplier tax gap estimate among the various
sectors adds an additional degree of uncertainty to the estimate. To
provide additional information, we developed tables VI.1 to VI.3 in
which we allocated the informal supplier tax gap among the business
sectors. Based on discussions with IRS officials, we allocated the
informal supplier tax gap by the proportion of noncompliance found in
TCMP for the sector.
Table VI.1
Allocation of Informal Supplier Tax Gap
by Proportion of Noncompliance (No COGS)
(Dollars in millions)
All other Total
Informal service service
Description of sector suppliers providers providers
---------------------------- ------------ ------------ ============
Construction services $ 5,923 $ 1,209 $ 7,132
Real estate, insurance, and 0 937 937
financial services
Transportation and 1,068 800 1,868
communication services
Business services 1,121 2,122 3,243
Personal services 2,005 61 2,066
Medical services 317 610 927
All other services 1,200 1,045 2,245
All other services with no 1,557 1,057 2,614
COGS
======================================================================
Total $13,191 $ 7,841 $21,032
----------------------------------------------------------------------
Source: TCMP database and the IRS tax gap model.
Table VI.2
Allocation of Informal Supplier Tax Gap
by Proportion of Noncompliance (Average
or Lower COGS)
(Dollars in millions)
All other Total
Informal service service
Description of sector suppliers providers providers
---------------------------- ------------ ------------ ============
Construction services $ 6,189 $ 2,229 $ 8,418
Real estate, insurance, and 0 1,027 1,027
financial services
Transportation and 1,117 979 2,096
communication services
Business services 1,172 2,375 3,547
Personal services 2,095 954 3,049
Medical services 331 634 965
All other services 1,254 2,106 3,360
All other services with no 1,627 1,057 2,684
COGS
======================================================================
Total $13,784 $11,361 $25,145
----------------------------------------------------------------------
Source: TCMP database and the IRS tax gap model.
Table VI.3
Allocation of Informal Supplier Tax Gap
by Proportion of Noncompliance (PBA
Code)
(Dollars in millions)
All other Total
Informal service service
Description of sector suppliers providers providers
---------------------------- ------------ ------------ ============
Construction services $ 6,522 $ 3,804 $10,326
Real estate, insurance, and 0 1,379 1,379
financial services
Transportation and 1,177 1,140 2,317
communication services
Business services 1,235 2,893 4,128
Personal services 2,208 1,349 3,557
Medical services 349 984 1,333
All other services 1,322 3,144 4,466
All other services with no 1,714 1,057 2,771
COGS
======================================================================
Total $14,526 $15,750 $30,276
----------------------------------------------------------------------
Source: TCMP database and the IRS tax gap model.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII
GENERAL GOVERNMENT DIVISION,
WASHINGTON D.C.
Tom Short, Assistant Director, Tax Policy and Administration Issues
Ralph Block, Assistant Director, Tax Policy and Administration Issues
SAN FRANCISCO REGIONAL OFFICE
Lou Roberts, Evaluator-in-Charge
Sam Scrutchins, Technical Consultant
*** End of document. ***