Independent Contractor Compliance Blog - by Collabrus™

It’s tax season and recently the Internal Revenue Service announced that they have updated their estimates of the Tax Gap (the difference between what the IRS believes taxpayers should have paid on a timely basis and what was actually paid). Guess what? The Tax Gap is larger than they had originally believed (the most current year that has been conclusively verified by the IRS is 2001).

The updated estimate of the Tax Gap is $345 billion per year. The IRS estimates that $54 Billion of the gap is related to underpayment of Employment Taxes, such as FICA, Federal Unemployment Tax, and Self Employment Tax.

“…the magnitude of the Tax Gap highlights the critical role of enforcement in keeping our system of tax administration healthy…” said IRS Commissioner Mark W. Everson in a recently published newsletter. The article went on to state, “The complexity of the tax law is also a significant factor in causing the Tax Gap.”

What does this mean?

This means the IRS is becoming more and more concerned about what they perceive as a loss of revenue, and even though the tax laws are complex the IRS is convinced more tax enforcement will net more dollars to the government’s coffers.

What does this mean to you?

You may expect the number of audits, and the corresponding risk of being selected for an audit, to rise. This increased risk makes it more important than ever to make sure you are correctly classifying your contingent and contractor workforce, because the results of an audit can be very costly.

Why be concerned about misclassified workers?

One reason for the increased emphasis on misclassified workers is the IRS found where companies (employers) properly withhold and report wages and payments to individuals there is higher compliance by the individuals. On the other hand, sole proprietor income (basically 1099 Independent Contractors) reported on a Schedule C has a net misreporting percentage of 57 percent. The IRS reports this one factor alone contributes about $68 billion to the tax gap each year.

So it doesn’t take a tax rocket scientist to know one area where the IRS will increase the number of audits.