Independent Contractor Compliance Blog - by Collabrus™

Officials from the Internal Revenue Service and more than two dozen state workforce agencies announced at the end of 2007 they have entered into agreements to share the results of employment tax examinations. Their new partnership will enable the IRS and state tax agencies nationwide to more effectively seek out and penalize businesses that misclassify workers.

The agreements, allow the IRS and state employment officials to exchange data on business they believe to be misclassifying workers, thereby leveraging resources and increasing the risks and costs of being audited by either a state tax agency or the IRS.

The information-sharing agreements with the IRS, became effective in 2008… The states that have signed partnership agreements with the IRS as of November 2007 are: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont. The IRS expects more states to sign, virtually covering the entire country.

The exchange agreements are the first result of the federal Questionable Employment Tax Practices (QETP) initiative.

Some of the more significant provisions of the agreements

The Memorandum of Understanding (MOU) allows the IRS and the state workforce agencies to exchange audit reports and audit plans, share independently conducted examination results and to participate in side-by-side examinations, when appropriate.

The IRS and the participating state workforce agencies will exchange employment tax information for civil cases…

The IRS and the states may participate in coordinated enforcement efforts.

The IRS and the states will strive to be consistent with their examination results, reducing the chances that states might classify a worker as an employee while the IRS classifies the worker as an independent contractor, or vice versa.

My opinion: This new partnership increases the risks for business who are gambling about the status of their unreported contingent work force. When a state tax agency, such as California’s EDD, knocks on your door you can now be sure the IRS will follow. You will no longer be looking at a small, bothersome liability but the potential of a chain reaction of tax liabilities and penalties, possibly leading to civil class action law suits and other problems you thought you would never see.