The IRS Attacks  Sole Proprietors filing 1040 Schedule C as "Non-Compliant"

The Government Accountability Office said in the report that about 5.4 million, or 25 percent, of all sole proprietors reported losses in 2006. Ninety-five percent of these filers deducted some or all of their losses against other income, deducting a total of $40 billion.

According to the IRS’s most recent estimate, in 2001, 70 percent of the sole-proprietor tax returns that reported losses had losses that were either fully or partially non compliant with tax laws. About 53 percent of aggregate dollar losses reported in 2001 were non compliant. Sole proprietors underreported their net income by 57 percent, or $68 billion, for 2001. NOTE, THE TERM "NON COMPLIANT" just means the IRS questions  believes the returns are intentionally  exaggerating deductions or not reporting income.

The IRS’s compliance programs address only a small portion of sole-proprietor expense noncompliance, the GAO noted. Despite investing nearly a quarter of all revenue agents’ time in 2008, the IRS was able to audit only about 1 percent of the estimated noncompliant sole proprietors. Such exams were costly and yielded less revenue than exams of other categories of taxpayers, in part because sole proprietorships are small in terms of receipts. The IRS Small Business section is continuing to attack Schedule C filers and S corporation filers with excessive audits to attempt to scare owners into not taking all of their legitimate deductions because of the fear of audit.

"Another enforcement program that primarily uses third-party information to electronically verify compliance is not effective because little expense information is reported by third parties," said the GAO. States use third party programs to attack cash businesses such as small restaurants, pizza shops, and cash-based  eateries. This  is an attempt  to increase sales tax from the businesses.

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