The greatest revenue loss is from underreported income; most from individual small and cash businesses.
Once again, off target on trying to fix a problem.
There are two ways to underreport income. The first is to tell the Internal Revenue Service (IRS) that you made less money that you did during the tax year; and the second is to claim more deductions, exemptions and tax credits than you really deserve. Underreporting of income is the single largest contributor to the tax gap, making it America’s favorite form of tax evasion. More than 83 percent of the $450 billion tax gap, or $376 billion, is attributed to underreporting of income [source: Internal Revenue Service].
Who is most likely to underreport income to the IRS? According to the non-compliance statistics from 2006, individual filers — not corporations — are the biggest tax evaders, underreporting income by $235 billion, equal to 52 percent of the total tax gap [source: Internal Revenue Service]. Interestingly, the biggest culprits among individual filers are folks who own their own businesses. Underreporting of business income accounts for $122 billion missing from individual income tax returns, while non-business income — normal wages and salary from a job — only add to $68 billion of the tax gap.