Caroline Bruckner, managing director, Tax Policy Center at the American University Kogod School of Business, and Bárbara J. Robles, retired principal economist at the Federal Reserve Board, have released the survey findings of their recent small business tax literacy project. The survey is a result of an innovative research collaboration with Public Private Strategies Institute, an independent small business education and outreach organization. The survey findings point to a significant tax knowledge gap as small businesses confront their tax obligations. The survey results have been shared with the U.S. House of Representatives Committee on Small Business in advance of the committee hearing scheduled for April 18.

The survey’s top-line results illustrate a $496 billion tax problem: despite IRS efforts to measure the tax gap, which is the difference between taxes owed and ultimately paid, the agency has not measured the small businesses tax literacy gap. The new research shows that 37 percent of the small businesses and the gig workers surveyed struggle with feelings of anxiety and confusion about how to file taxes. Even though the majority of respondents (76 percent) reported having at least a college degree, only a small percentage were taught how to prepare their taxes while in school. One-third of respondents didn’t know whether they had to pay estimated taxes, and a quarter (25 percent) of respondents did not know how to file their taxes. 

“Our survey results show that many small businesses and gig workers don’t have baseline tax knowledge to be able to do their taxes efficiently and on time,” said Bruckner. “Instead, these business owners spend potential tax savings hiring professionals to do the work.”

Last fall, PPSI shared the survey with approximately 90,000 small businesses, self-employed individuals, independent contractors, freelancers and gig workers. The responses provided top-line data to Bruckner and Robles as they work to address the research gap that exists when it comes to taxpayers’ own understanding of their tax obligations.

“This exploratory survey provides evidence-based findings that indicate a need for a more comprehensive and tax inclusive financial literacy education across federal small business financing programs and in high schools, trade schools community colleges and universities across America,” said Robles.

In their recommendations that are based on the survey findings, Bruckner and Robles go beyond the Strategic Operating Plan IRS released to Congress earlier this month. The researchers recommend that IRS collaborate on education and outreach strategies with the Small Business Administration, Department of Commerce, USDA, and other agencies that have small business financing networks to fill tax education and outreach gaps.

“The IRS can’t audit or digitize its way out of a $496 billion tax gap,” Bruckner stated. “Too many small business owners don’t have the tax education needed to comply with tax rules and generate access to capital through tax savings. Aggressive, cross-agency education and outreach strategies on the basics of tax filing, quarterly-estimated payments and self-employment tax are not directly addressed in the IRS April 2023 SOP and are the starting point for small business and gig worker tax compliance.”  

As part of its commitment to advance tax literacy, the Kogod School of Business is addressing the gaps uncovered by the survey through a wide range of initiatives including a Volunteer Income Tax Assistance Volunteer Corps project that is scheduled to be launched later this year, and a new class in business ownership fundamentals that prioritizes tax education. 

Learn more about the Kogod Tax Policy Center at American University and its solutions to tax issues faced by small businesses and the growing gig workforce here.