More than 1 million sole proprietors understated their taxes by an average of $18,000, according to a recent report by the Government Accountability Office.

The report, which examined the average 61 percent of sole proprietors who underreport business incomes every year, found that half of these businesses understated their taxes by less than $903, while 10 percent exceeded $6,200.

While unpaid taxes by sole proprietors account for $68 billion of the $345 billion gross tax gap, IRS enforcement efforts typically reach less than 3 percent of noncompliant businesses, the report found.

The report said the agency needed to work more closely with these businesses to better explain tax-return requirements. It also concluded that a recently enacted Treasury Department initiative aimed at decreasing the tax gap failed to adequately address sole proprietorships.

Published on: Aug 15, 2007