Tax Justice: An improved rating could improve the reach of small business owners

Tax Justice: An improved rating could improve the reach of small business owners

What GAO found

The Internal Revenue Service (IRS) does not collect data about 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 this data, GAO used data from other federal agencies, other taxpayer information, and specific analytical methods to identify or estimate specific taxpayer demographics.

GAO analyzed the use of COVID-19 tax provisions — specifically, paid sick leave and family vacation credits and payroll tax deferrals for employers and self-employed, as well as employee retention credit — among a study population of single-owner tax-related businesses in 2020. GAO cross-checked data from various agencies to identify the recorded gender of business owners and the estimated race and ethnicity of selected taxpayers using an imputation method. This method calculates the likelihood that a person with a given surname and place of residence will identify with selected racial and ethnic groups.

GAO found that small businesses make limited use of tax regulations. Less than 7 percent of eligible small businesses within the study population took advantage of employer and self-employed vacation credits or payroll tax deferrals. GAO also found estimated differential usage by business ownership demographics within the study population. For example

  • Holiday credits for the self-employed. GAO estimated that eligible Black or African American and Hispanic-owned businesses are more likely to use these loans than Asian- and White-owned businesses.
  • employee loyalty loan. GAO found that a slightly higher percentage of female-owned and Asian-owned companies used this credit compared to other companies that filed payroll taxes.

Almost all small business organizations surveyed by GAO cited a poor understanding of tax regulations as a possible cause of limited usage, particularly among very small businesses. GAO’s analysis also identified information and record-keeping requirements as a potential barrier contributing to restricted use. The IRS provided small businesses with information about the regulations and used some measures to assess its reach, such as: B. informal feedback and compliance data. However, GAO found that these actions did not provide relevant and complete information.

A January 2021 executive order to promote racial justice directed agencies to evaluate their programs and policies to determine whether they perpetuate systemic inequalities between groups. In addition, the Treasury Department’s strategic plan includes equity goals that include outreach and education for underserved communities. Improved evaluation of ongoing outreach efforts could help the IRS develop information useful to groups with diverse needs, including very small businesses and owners from diverse demographic backgrounds. While the eligibility period for these COVID-19 regulations has expired, the public relations assessment could also improve the IRS’s preparation for reporting tax relief information in future emergencies.

Why GAO did this study

The COVID-19 pandemic has caused significant turbulence in the US economy. Congress enacted tax rules as part of the pandemic relief effort to support businesses. However, little is known about the impact of these tax policies on entrepreneur demographics.

The CARES Act includes a provision for GAO to report on its ongoing COVID-19 surveillance and oversight 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 estimates the use of selected COVID-19 tax provisions by race, ethnicity, and gender by small business owners, among others. It also assesses potential barriers to small business access to COVID-19 tax regulations.

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

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