Tax fairness: Improved assessment can improve communication for small business owners.

What did the GAO find?

The Internal Revenue Service (IRS) does not collect information about taxpayers, including small business owners, about their race, ethnicity, or gender. This makes it difficult to determine whether the use of tax provision varies by demographic group. In the absence of these data, GAO used data from other federal agencies, other taxpayer data, and special analytical methods to identify or estimate individual demographic characteristics of taxpayers.

GAO analyzed the use of Covid-19 tax provisions—specifically, paid sick and family leave credits and payroll tax deferrals for employers and the self-employed, as well as employee retention credits—among a number of studies of sole proprietorship businesses in the tax. year 2020. GAO used a method to match data from various agencies to identify the gender of registered business owners and the race and ethnicity of estimated taxpayers. This method calculates the probability of identifying a person with the same name and place of residence with the selected racial and ethnic groups.

The GAO found limited use of tax provisions by small businesses. Less than 7 percent of eligible small businesses in the study population used employer and self-employment leave credits or payroll tax deferrals. GAO found some estimated differential use by business owner demographics in the study population. for example

  • Self Employed Vacation Credits. The GAO estimated that eligible black or African American and Hispanic-owned businesses were more likely to use these credits than Asian and white-owned businesses.
  • Employee retention credit. The GAO found that a higher percentage of women-owned and Asian-owned businesses used this credit than other businesses that filed employment tax returns.

Almost all of the small businesses that GAO spoke with identified poor understanding of the limited use of tax provisions, particularly among very small businesses. GAO’s analysis also identified data and recordkeeping requirements as barriers that contribute to limited use. The IRS has provided information on the provisions to small businesses and has used some measures to assess its reach, such as informal feedback and compliance data. However, GAO determined that these measures did not provide appropriate and complete information.

A January 2021 directive for agencies to review their programs and policies to promote racial equity was found to perpetuate systemic inequality among groups. Additionally, the Treasury Department’s strategic plan includes equity goals that include outreach and education to underserved communities. Improved evaluation of ongoing outreach efforts helps the IRS develop useful information for groups with diverse needs, including very small businesses and owners from diverse demographic backgrounds. After the eligibility period for these Covid-19 provisions has passed, a utility review may enhance the IRS’s readiness to transfer tax relief information for future emergencies.

Why did the GAO do this study?

The Covid-19 pandemic has caused significant disruption to the US economy. Congress has passed tax provisions in pandemic relief efforts to support businesses. However, little is known about the effects of these tax policies on the demographic background of business owners.

The CARES Act includes a provision for GAO to report on ongoing surveillance and monitoring efforts for COVID-19. GAO was also asked, as part of this oversight, to assess the racial, ethnic, and gender impacts of selected tax policies on small businesses.

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

The GAO analyzed data from the IRS, the U.S. Census Bureau, and the Social Security Administration. Literature reviewed on analytical methods; And spoke to representatives of small businesses and agency officials.

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