WASHINGTON -- The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its review of whether Internal Revenue Service correspondence audits effectively address the compliance risks of sole proprietors.

Estimates by the IRS show that $68 billion of the $345 billion tax gap in 2001 was due to the underreporting of income by sole proprietors. The IRS conducted more than 5.1 million correspondence examinations between Fiscal Year 2004 and FY 2008 that recommended the IRS collect approximately $35 billion in additional taxes, TIGTA found. For each tax return examined, a correspondence examination generated about $6,800 in recommended additional taxes.

TIGTA also identified instances where sole proprietors may have avoided tax and interest assessments because the IRS failed to address significant potential income misstatements during compliance audits.

TIGTA recommended that the IRS require correspondence examiners to check for unfiled returns, such as employment tax and information returns, and to probe for unreported income. These checks are required of IRS examiners who conduct in-person audits, but not of correspondence examiners.

"Sole proprietors who underreport their income can create an unfair burden on honest taxpayers and diminish the public's respect for the tax system," said J. Russell George, the Treasury Inspector General for Tax Administration. "It is imperative that the IRS institutes policies to address this problem."

In its response to TIGTA's draft report, the IRS agreed to develop inventory selection filters to identity and refer to field examiners: (1) those sole proprietors who did not file required employment tax or information returns; and (2) those with indicators of unreported income.