Bloomberg, Push to ‘Correct’ IRS Small Business Rule Ignores Tax-Gap Data, by Ryan J. Donmoyer:

A year ago, Congress had instructed the Internal Revenue Service to improve small businesses’ compliance with tax laws and created rules to make it more difficult for entrepreneurs to hide their income.

Now, rules requiring businesses to report to the IRS transactions with vendors may become collateral damage in a political fight over the health-care law. President Barack Obama in his State of the Union address on Jan. 25, backed an effort to “correct” the “unnecessary bookkeeping burden” before the rules take effect in 2012, forgoing an estimated $1.9 billion annually to pay for the overhaul of the health-care system.

The about-face is designed to appease congressional Republicans and business groups such as the U.S. Chamber of Commerce that have criticized the rules along with the broader health-care law. It also shows how difficult it is to take steps to close the tax gap among small businesses, which data show have lower tax payment rates than corporations and salaried workers. …

The IRS estimates that about $345 billion in taxes owed are unpaid every year. Auditors recover about $55 billion of that, leaving $290 billion that goes uncollected, a figure known as the tax gap. The agency attributes $109 billion of the gap to underreported business income earned by individuals. The IRS estimates that this group also fails to pay about $39 billion in self-employment taxes. The figures are drawn from a study of 2001 tax returns and are likely higher today, according to the Congressional Research Service.

The IRS says small businesses are able to underreport their taxes because many business-to-business transactions aren’t reported independently to the government as wages and investment income are. By contrast, about 98% of salaried workers pay what they owe because their employers report their wages to the IRS. The Bush administration, in response to demands from Senate Finance Committee Chairman Max Baucus, a Montana Democrat, in 2008 proposed requiring businesses to report to the IRS when they pay vendors more than $600 for goods. Similar requirements exist for purchases of services.