Tax fairness: Enhanced assessment could improve contact with small business owners

Tax fairness: Enhanced assessment could improve contact with small business owners

What GAO found

The Internal Revenue Service (IRS) does not collect data on taxpayers, including small business owners, regarding their race, ethnicity or gender. This makes it difficult to determine whether the use of tax provisions varies by demographic group. In the absence of this data, GAO used data from other federal agencies, other taxpayer information, and specific analytical methods to help identify or estimate the respective demographics of taxpayers.

The GAO analyzed the use of tax provisions related to COVID-19, notably paid credits for sickness and family leave and payroll tax deferral for employers and self-employed workers, as well as employee retention credit, including a study population of single-owner firms in the fiscal year 2020 setting. GAO compared data from different agencies to identify the registered sex of the entrepreneurs and the estimated race and ethnicity of selected taxpayers using an imputation method. This method calculates the probability that a person with a given surname and residential location identifies with selected racial and ethnic groups.

GAO found limited use of tax provisions by small businesses. Less than 7% of eligible small businesses within the study population used employer and self-employed leave credits or payroll tax deferral. GAO also found an estimated differential utilization by demographics of corporate ownership within the study population. For instance

  • Credits for autonomous leave. GAO estimated that eligible businesses owned by blacks or African Americans and Hispanics were more likely to use these credits than businesses owned by Asians and whites.
  • Employee loyalty credit. GAO found that a slightly higher percentage of female-owned and Asian-owned businesses used this credit than other companies filing workplace tax returns.

Almost all small business organizations surveyed by the GAO identified a poor understanding of tax provisions as a potential cause of limited use, particularly among very small businesses. GAO’s analysis also identified information and record retention requirements as a potential barrier contributing to limited use. The IRS provided information to small businesses about the provisions and used some measures to assess their scope, such as informal feedback and compliance data. However, GAO determined that these measures did not provide relevant and complete information.

A January 2021 executive order on the advancement of racial equity directed agencies to evaluate their programs and policies to determine whether they perpetuate systemic inequalities between groups. Additionally, the Treasury Department’s strategic plan includes equity goals that involve raising awareness and education for disadvantaged communities. Better evaluation of ongoing awareness efforts could help the IRS develop information that is useful for groups with different needs, including small businesses and owners of various demographic backgrounds. Although the eligibility period for these COVID-19 provisions has expired, the awareness assessment could also improve the IRS’s preparedness for reporting information on tax relief in future emergencies.

Why GAO did this study

The COVID-19 pandemic has caused significant turmoil in the United States economy. Congress has enacted tax provisions in pandemic relief efforts to support businesses. However, little is known about the effects of these tax policies based on the demographic background of business owners.

The CARES Act includes a provision for GAO to report on its ongoing COVID-19 monitoring and oversight efforts. GAO was also asked to review the effects of selected tax policies on small businesses by race, ethnicity and gender as part of this oversight.

This report, among other things, estimates the use of COVID-19 tax provisions selected by race, ethnicity and gender of small business owners. It also assesses potential barriers to accessing COVID-19-related tax provisions among small businesses.

GAO analyzed data from the IRS, the US Census Bureau, and the Social Security Administration; revised literature on analytical methods; and interviewed representatives of small business organizations and agency officials.

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