Tax ownership.  enhanced assessment can improve access for small business owners

Tax ownership. enhanced assessment can improve access for small business owners

What did the GAO find?

The Internal Revenue Service (IRS) does not collect data on taxpayers, including small business owners, based on 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 these data, GAO used data from other Federal agencies, other taxpayer information, and special analytical techniques to help identify or estimate relevant demographic characteristics of taxpayers.

GAO analyzed the use of the COVID-19 tax provisions, specifically the paid sick and family leave credits and the payroll tax deferral for employers and the self-employed, as well as the Employee Withholding Credit, among the population studied in sole proprietorships. Year 2020. GAO matches data from various agencies to reveal the registered gender of business owners and the estimated race and ethnicity of selected taxpayers using the imputation method. This method calculates the probability that a person with a given surname and place of residence identifies with selected racial and ethnic groups.

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-employed vacation credits or payroll tax deferrals. GAO also found some estimated differential use by business ownership demographics among the study population. For example:

  • Vacation loans for the self-employed. The GAO estimated that eligible black or African-American and Hispanic-owned businesses were more likely to use these loans compared to Asian and white-owned businesses.
  • Employee retention loan. The GAO found that a slightly higher percentage of women-owned and Asian-owned businesses used this credit than other businesses that file employment tax returns.

Almost all small business organizations that GAO spoke with cited poor understanding of tax provisions as a possible reason for limited use, particularly among very small businesses. GAO’s analysis also identified information and recordkeeping requirements as a potential barrier to limited use. The IRS has provided information to small businesses about the provisions and has used some measures to assess its reach, such as informal feedback and compliance data. However, the GAO determined that these measures did not provide adequate and complete information.

The January 2021 Executive Order on Advancing Racial Equity directed agencies to evaluate their programs and policies to determine whether they perpetuate systemic disparities between groups. Furthermore, Treasury’s strategic plan includes equity goals that include outreach and education to underserved communities. Enhanced evaluation of ongoing outreach efforts can help the IRS develop information that is useful to groups with diverse needs, including very small businesses and owners from diverse demographic backgrounds. Although the statute of limitations for these COVID-19 provisions has passed, an awareness assessment can also strengthen the IRS’s preparedness to communicate tax benefit information in future emergencies.

Why did the GAO conduct this study?

The COVID-19 pandemic has caused significant upheaval in the US economy. Congress has enacted tax provisions in pandemic relief efforts to support businesses. However, little is known about the effects of this tax policy on the demographic background of entrepreneurs.

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

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

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

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