Tax cheats running small businesses continue to gouge billions of dollars from the economy by putting in dodgy expense claims while demanding cash-in-the hand transactions.

Key points: ATO estimates about $11 billion in tax that should be paid by small business is lost to errors or outright fraud

ATO estimates about $11 billion in tax that should be paid by small business is lost to errors or outright fraud The black economy accounts for about $7 billion a year in uncollected tax

The black economy accounts for about $7 billion a year in uncollected tax The ATO is stepping up its use of analytical tools to spot deliberate and systematic cheating on invoices

The Australian Taxation Office (ATO) says while almost 90 per cent of small businesses pay income tax voluntarily, figures from 2015-2016 show $7.1 billion went into the "black economy" through straight-out tax evasion and the use of software that can hide transactions.

ATO deputy commissioner Deborah Jenkins told The World Today that businesses and consumers exploiting the cash economy for a cheaper deal meant less revenue for critical infrastructure spending like roads, bridges and schools.

"There are those who are trying really hard to do the right thing, honest businesses who just make simple errors, but you're right. There's a bunch of people who think it's OK to take cash jobs and not report it," Ms Jenkins said.

"If you are saying to the tradie, 'Hey, do this a for a bit cheaper for cash', you are actually participating in the black economy."

The latest ATO analysis shows a small business tax gap of 12.5 per cent gap or $11.1 billion from small businesses either avoiding or accidentally misstating their tax liabilities, with $7.1 billion lost to the black economy.

The tax gap is a theoretical estimate of what the ATO expects to collect and what was actually collected in a given year.

Sorry, this audio has expired Black economy fuelled by small business tax cheats: ATO

As part of its fightback, the ATO is expanding its cross-referencing tools to detect "red flags" and will deploy "strike teams" to identify the tax cheats.

Receipt scams

Ms Jenkins said the ATO was also cracking down on the use of sales suppression software that disguised the transactions within a company's records.

"If you're in a cafe, the software might turn a very expensive steak into a bowl of fries," she said.

"There is some really sophisticated software out there that is helping people avoid paying the right amount of tax.

"But whether it is cashless payments or whether it is the use of platforms or apps, it means there is really a trace of your transactions.

"We use merchant data and other sources of information to identify where things just don't look right. Then we go and have a chat to them and say, 'Hey, can you explain?'"

Ms Jenkins said the ATO was expanding its use of sophisticated analytical tools to detect omitted income and black economy behaviour.

The ATO will also step up its enforcement with "highly visible" mobile strike teams after almost 10,000 businesses were visited last year.

Ms Jenkins says small businesses need to understand their tax obligations or face significant penalties.

But she rejects claims from small business that the tax office is a bully.

"Come and talk to us. We're not really scary, I promise," she said.

Follow Peter Ryan on Twitter @peter_f_ryan