The IRS audits about 1% of the Schedule C’s filed each year. That’s the tax form sole proprietors complete to calculate their taxes from self employment. 25% of these returns report losses and 95% or so of the losses are deducted against other income. The GAO estimates that 70% of of those returns understated income or overstated expenses and the resulting unreported income is estimated at $40 billion. In 2008, the IRS devoted about 25% of total revenue agent time to auditing sole proprietors. This is a very inefficient use of agent time because these audits individually yield small amounts of money. The Treasury Department is giving some consideration to recommending limits on these deductions because they are so difficult to audit.