Does credit-card information reporting improve small-business tax compliance?

Abstract

We investigate the response of small businesses operating as sole proprietorships to Form 1099-K, an information report introduced in 2011 which provides the Internal Revenue Service with information about electronic sales (e.g., credit card sales). The overall impact of the policy appears to be relatively small. However, theory and distributional analysis isolates a subset of taxpayers expected to be especially sensitive to reporting, who report receipts equal to or slightly exceeding the receipts reported on 1099-K. Among this set of taxpayers, information reporting induced more tax filing-30 percent of sensitive taxpayers filed a return declaring business income for the first time, and among those that were already filing, we estimate an increase in reported receipts by up to 24 percent. These taxpayers largely offset increased reported receipts with increased reported expenses, which do not face information reporting, diminishing the impact on reported net taxable income.

Effective tax rates and firm size in Ethiopia

“…Similarly, medium‐sized firms report more expenses, but this may not necessarily reflect the reality of their economic activity. Indeed, the compliance literature has shown that firms may adjust their tax returns along less visible margins, like business expenditure, to minimize their taxes (Carrillo et al, ; Slemrod et al, ). Expenditure is particularly hard to verify by the tax authority, making it a plausible mechanism for reducing taxable income.…”

“…Despite the availability of these records, however, the ERCA faces great challenges in verifying deductions and expenses. This is partly because of the low quality of data on expenses in Ethiopia and partly because expenses are generally harder to verify than total sales (Carrillo, Pomeranz, & Singhal, ; Slemrod, Collins, Hoopes, Reck, & Sebastiani, ).…”

Reducing evasion through self-reporting: Evidence from charitable contributions

“…See, also, studies of accounting regulations(Asatryan and Peichl (2016)), monitoring rules(Almunia and Lopez-Rodriguez (2018)), electronic payments(Slemrod et al (2017)), and receipt incentives(Naritomi (2013)). 2 Previous studies typically rely on survey evidence: e.g Slemrod and Sorum (1984)…”

IRS Attention

“…For example, the IRS has access to third party information reports filed by (i) the firm itself reporting information for taxpayers (e.g., W‐2 and 1099‐MISCs, which could be used to verify compensation expense) and (ii) others reporting information about the firm (e.g., Form 1099‐K) (Slemrod et al. []).…”