Independent Contractor Compliance Blog - by Collabrus™

The GAO found that an area of particular concern is the collection of federal employment taxes. When considered in light of the government’s need for more revenue, this report will put added pressure on the tax agency to enforce tax laws and collect delinquent taxes.

The IRS acknowledges that it has powerful tools available for tax collection, but that they are not always used effectively. They also acknowledge that their delinquent tax rolls are often caused by repeated offenders who refuse to come into compliance.

The GAO found:

• The agency strives for voluntary compliance, rather than compulsory, which tends to let offenders ride for years before the tax is collected.
• Though liens can be used to enforce compliance, they often are not filed on a timely basis. Over one third of the cases that had gone to collection did not have liens filed.
• In addition, penalties are not assessed promptly on those responsible for failing to remit taxes, sometimes resulting in lost opportunities to assess penalties at all.
• Offenders are not always barred from continuing to rack up more payroll tax debt.
• The IRS doesn’t have a plan in place to improve.
• The GAO noted that in many cases, states (such as California) do a better job of enforcing compliance and preventing accumulation of unpaid payroll taxes.

GAO found payroll taxes not being collected

According to the GAO report, as of last September 30, 1.6 million businesses owe the IRS in excess of $58 billion in payroll taxes, interest, and penalties.

Independent Contractors were also noted

Past studies of the IRS by the GAO have shown that self-employment income is the largest share of delinquent taxpayer liabilities the agency has failed to collect. Studies conducted in the late 1990’s are again being reviewed. Some of them showed taxpayers with self-employment, interest, and dividend income accounted for about two-thirds of the nonwage income included in the IRS inventory of tax debts. The actual amounts are difficult to nail down, but estimates for the self-employed (IC) alone are close to $80 billion.

(In the past the IRS has reported that IC’s, who receive a 1099 without any withholding at the time they are paid, have a much higher delinquent and non-reporting rate than employees who receive a W-2 and have taxes withheld at the time they are paid).

The Senate is criticizing the IRS

After much criticism from the U.S. Senate, Deputy IRS Commissioner Linda Stiff stated that though the numbers are gloomy, IRS collection activities show improved results in recent years. For an example she cited the year ended September 30, 2007, where 5.2 million delinquent cases were settled. This is up from 2002 when 3 million were settled.

What does this mean?

As a result of this criticism, at a time when so many businesses are straining to survive, the IRS is under additional pressure to mine more money from taxpayers in financial trouble-especially independent contractors and businesses with employees.