Conventional wisdom holds that North American Industry Classification System (NAICS) codes chosen by people not experienced with the system are often mis-specified, but there has been little formal research into the scope of the problem. In this paper we explore prevalence of and patterns in misspecification in NAICS codes self-reported on two kinds of business tax forms. Errors are identified by comparing as-filed codes with codes validated by Statistics of Income. We find that over a third of codes are wrong, but that the errors are not random and often (though not always) seem to have logical reasons behind them.
Office of Management and Budget. 2017 North American Industry Classification System (NAICS) Manual. 2017; pp. 1, 435-436, 485. Available at: https://www.census.gov/eos/www/naics/2017NAICS/2017_NAICS_Manual.pdf.
2.
MillerMAEllisJM. The NAICS Code Selection Process and Small Business Participation. Naval Postgraduate School. 2016; Available at: https://apps.dtic.mil/sti/pdfs/AD1027495.pdf.
3.
Barry Johnson. Director SOI. Personal communication. 22 November 2021.
4.
Internal Revenue Service. Instructions for Schedule C (Form 1040 or Form 1040-SR), Profit or Loss From Business (Sole Proprietorship). 2020; Available at: https://www.irs.gov/pub/irs-prior/i1040sc–2020.pdf.
5.
Internal Revenue Service. Instructions for Form 1120, U.S. Corporation Income Tax Return. 2020; Available at: https://www.irs.gov/pub/irs-prior/i1120–2020.pdf.
6.
OehlertCSchulzEParkerA. NAICS Code Prediction Using Supervised Methods. Statistics and Public Policy. 2022; 9(1): 58-66. doi: 10.1080/2330443X.2022.2033654.
7.
Internal Revenue Service. SOI Tax Stats – Statistical Methodology. 2022; Available at: https://www.irs.gov/statistics/soi-tax-stats-statistical-methodology.
8.
Internal Revenue Service. Statistics of Income – 2016: Sole Proprietorship Returns. 2018; Available at: https://www.irs.gov/pub/irs-soi/16sp01br.xls.
9.
Internal Revenue Service. Statistics of Income – 2015: Corporation Income Tax Returns. .3. 2019; Available at: https://www.irs.gov/pub/irs-soi/15co53ccr.xlsx.
10.
Office of Management and Budget. 2022 North American Industry Classification System (NAICS) Manual. 2022; Available at https://www.census.gov/naics/reference_files_tools/2022_NAICS_Manual.pdf.
