It’s widely recognized—including by IRS and USED—that the beauty and wellness industry suffers from substantial undercounting of income.
IRS refers to this as the “tax gap” or “income gap”. IRS has been aware of this for many years and has many publications describing the challenge. And, USED recognized this phenomenon in its responses to the proposed gainful employment rule. USED did not dispute the existence of this issue. But, it refused to account for it in the final GE rule and instead chose to rely on this admittedly bad data in the final rule.
Several things account for this “tax gap” phenomenon. The SSA data is known to undercount income from: (1) self-employed individuals, (2) individuals paid in cash, and (3) individuals paid in tips. Large numbers of persons employed in the beauty industry fall into one of these three categories.
Persons in these groups have an incentive to underreport income to reduce their tax burden. Also, because they are required to self-report income, the extra record-keeping burden increases the likelihood of under-reporting. This underreporting has persisted despite the fact that the law already requires accurate reporting of income. The fact that many of the transactions in this sector are done in cash further compounds the problem.
Duane Morris llp