Noncompliance in reporting sole proprietor income represents a major challenge for the Internal Revenue Service (IRS). Such noncompliance spreads over a majority of the estimated 13 million sole proprietors and creates an estimated income tax gap--the difference between the amount of income taxes owed and the amount voluntarily paid--of $34 billion a year. During the past 15 years, sole proprietors rate of noncompliance has fluctuated with little evidence that IRS' current compliance efforts will lead to significant improvements. This report (1) analyzes the extent of noncompliance by type of sole proprietor, (2) reviews steps that IRS is taking to correct such noncompliance, and (3) identifies additional steps that IRS could take to improve compliance.

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