The Internal Revenue Service is being urged to focus more on improving self-employment tax compliance as the so-called “gig economy” continues to expand.

A new report from the Treasury Inspector General for Tax Administration pointed to the importance of the IRS providing accurate guidance and notices about self‑employment tax obligations. The gig economy has been expanding as services such as Uber, Lyft, Airbnb and Handy sign up people to provide services such as driving cars and renting out rooms. But with many of the workers treated as self-employed, it’s up to them to handle tax withholding and compliance.

For the report, TIGTA reviewed cases in the IRS’s Automated Underreporter, or AUR, program for taxpayers who work in the gig economy and who have discrepancies between what’s reported on their income tax returns and the payments reported on their 1099-K forms, payment card and third-party network transactions, by payers for tax years 2012 through 2015. TIGTA limited the review to nine commonly recognized gig economy payer companies and identified 264,346 cases with potentially underreported payments included on Form 1099-K. It found the number of discrepancies involving Forms 1099-K from these gig economy payers increased 237 percent from 2012 to 2015.

Many cases were not selected to be worked on by the AUR program due to the large volume of discrepancies that were identified. Indeed, 59 percent of taxpayers weren’t selected for the program, including 2,817 taxpayers with potential underreporting of their Form 1099-K income in all four tax years, involving $2.7 billion in potentially underreported payments included on Form 1099-K.

TIGTA contended that IRS employees in the AUR program removed thousands of cases from inventory without justification or with inaccurate justification. Many of the cases that were worked on included errors by IRS examiners. On top of that, AUR employees only rarely referred dubious deductions claimed by taxpayers on amended returns that they filed in response to receiving a notice from the AUR program to the IRS’s Examination function for further scrutiny.

Treasury regulations don’t require certain gig economy businesses to issue a Form 1099-K unless workers earn at least $20,000 and engage in at least 200 transactions annually, TIGTA noted. That means many taxpayers who earn income in the gig economy don’t receive a Form 1099-K, so their income isn’t reported to the IRS. “When income is not reported to the IRS, taxpayers are more likely to be noncompliant,” said the report.

TIGTA recommended that the IRS take several actions to fix how the AUR program addresses self-employment tax noncompliance, selects cases, and conducts quality reviews. TIGTA also suggested that the IRS Office of Chief Counsel develop and issue guidance to help clarify the current third-party reporting regulations and work with the Treasury Department’s Office of Tax Policy to develop regulatory or legislative changes to reduce the gap.

The IRS agreed or partially agreed with nine of TIGTA’s 11 recommendations. However, it disagreed with two others, mainly due to other work priorities and the cost and difficulties associated with making changes to IRS systems. For its part, TIGTA contended that implementation of the recommendations would be in the best interest of improving taxpayer compliance.

“Your report suggests that we could benefit from the development of a comprehensive strategic plan to address the gig economy as well as any potential noncompliance resulting from it.” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “In November 2018, the Small Business/Self-Employed Division initiated an effort to develop and implement such a compliance strategy. As part of this endeavor, we plan to establish a single definition for the gig economy, perform demographic research on the population, and use internal and external data to identify significant compliance risk associated with this expanding economic sector.”

She noted that the strategy will address many of the issues described in the TIGTA report, including information return reporting, non-filing of income tax returns, self-employment taxes and worker classification issues.