New study finds tax compliance challenges put on-demand economy taxpayers at risk for audits and penalties for misreporting their income
The Kogod School of Business Tax Policy Center at American University today released the results of a new study “Shortchanged: The Tax Compliance Challenges of Small Business Operators Driving the On-Demand Platform Economy,” a research project initiated to understand the existing tax compliance challenges for taxpayers who work for on-demand platforms like Airbnb, Uber, Lyft and Etsy.
According to the study, 2.5 million Americans are earning income in the on-demand or sharing economy by renting rooms, giving rides, running errands, and selling goods. For tax purposes, on-demand economy service providers and sellers are small businesses owners; however, the study finds the economic activity and growth of these small businesses has largely gone unacknowledged by most government measures for tracking small business activity.
“As the on-demand platform economy continues to experience extraordinary growth since its inception, little has been done to understand the tax compliance challenges this new frontier presents, or how the on-demand platform economy impacts the IRS’ ability to fairly and efficiently administer the U.S. tax code,” said
Caroline Bruckner, Managing Director, Kogod Tax Policy Center.
As part of its research and in partnership with the National Association for the Self-Employed (NASE), the Kogod Tax Policy Center conducted a survey of more than 40,000 self-employed small businesses to assess their participation in the on-demand economy and whether concrete tax compliance challenges exist. The survey revealed that among self-employed respondents who earned income working with an on-demand platform company in 2015 by either by selling goods or providing services:
• 69% did not received any tax guidance from their shared economy platform;
• 61% did not receive a Form 1099-MISC or Form 1099-K for their platform-related earnings;
• 47% did not know about any tax deductions, expenses or credits that could be claimed related to their on-demand platform income;
• 43% were unaware how much they would owe in taxes and did not set aside money for taxes on that income;
• 36% did not understand what kind of records were needed for tax purposes for business income and expenses generated from working with a sharing economy partner;
• 34% did not know whether they were required to file quarterly-estimated payments with the IRS on their on-demand platform income.
As a result of the current tax code and administration system, many sharing economy taxpayers face the unnecessary burden of potential audit and penalty exposure for failure to comply with filing rules that are triggered by relatively low amounts of earned income and inconsistent reporting rule adoption.
“Our assessment of the lack of information and understanding by taxpayers when it comes to filing taxes on income earned from on-demand platform work was consistently reinforced by interviews with tax preparers, industry experts and our survey,” said Bruckner. “At a minimum, the IRS should explore strategies in which it could revise the information reporting regime to eliminate the guesswork that serves as the basis for many of the tax returns filed for income earned participating in the sharing economy.”
About Kogod School of Business
The Kogod School of Business is the leading destination for the study of business in the Washington, D.C. metro area. The School has been a part of the D.C. business community for 60 years and is accredited by the Association to Advance Collegiate Schools of Business. AACSB accreditation represents the highest standard of achievement for a business school worldwide.
American University is a leader in global education, enrolling a diverse student body from throughout the United States and nearly 140 countries. Located in Washington, D.C., the university provides opportunities for academic excellence, public service, and internships in the nation’s capital and around the world.