Independent Contractor Compliance Blog - by Collabrus™

There are not many times in history when events seem to merge to insure the government will take extraordinary measures to enforce IC compliance laws and collect every possible dollar in taxes.

I believe this is one of those special times. In the next few years tax agencies will be given more powerful tools and encouragement by politicians to bring every taxpayer possible into compliance. The recent issues with key cabinet & staff appointees will roll downhill. This may be particularly true in relation to businesses and the proper classification of independent contractors.

Both state and federal governments need more money

This is no secret and I don’t need to dwell on it, but when politicians need more money they immediately think of collecting more taxes.  It’s on the table.

The IRS is ramping up its dialogue about the Tax Gap

For years the IRS has been telling law makers they could collect more money if they had more resources and stronger enforcement tools to close the Tax Gap. In the past when the IRS spoke of the Tax Gap it primarily meant domestic taxpayers-those who lived and worked inside the USA. This year the IRS has added the existence of an International Tax Gap, thus raising the stakes.

The Domestic Tax Gap is estimated at $345 billion per year. The amount of the International Tax Gap is still uncertain. The IRS estimates that $54 Billion of the Domestic Tax Gap is related to underpayment of Employment Taxes, such as FICA, Federal Unemployment Tax, and Self Employment Tax. You can be sure this will get attention.

Tougher enforcement is easier than raising taxes.

Demanding compliance with the law is fashionable, while just raising taxes is not.  Enforcing taxes against businesses is more fashionable than enforcement against the individual taxpayer.  Politicians call it “leveling the playing field” for businesses that properly classify workers. The side benefit for government to “level the playing field” for businesses is collecting more money: taxes, penalties and interest.

Proposed legislation at both state and federal levels

In the past few years there have been several new laws proposed that provide powerful tools for both state and federal enforcement agencies to bring businesses into compliance and collect all the taxes that are due.  For example:

• At the federal level there is a bill co-sponsored by our new President when he was a US Senator.  U.S. Senate Bill 2044, Independent Contractor Proper Classification Act of 2007.  This bill incorporates, and enhances, provisions of a US Congress Bill (HR 6111) that proposed some very tough enforcement measures (For details, see my article on these bills in this site).
• At the state level, for example, California’s SB 1490 by Padilla requires any employer who hires a contractor to give the contractor a notice that encourages the contractor to ask the government to audit the company for IC compliance.  It also requires the business to maintain special information about the contractor for a period of two years.

There are others: go to IC Legislation for details.

Health insurance for everyone

President Obama has promised to make health care available to everyone—including IC’s. It’s easier to have the contractor covered by an employer than require the contractor to buy his/her own health coverage, or for the government to cover them. This factor will give weight to insuring ICs are properly classified.

It all comes together

Put it all together and it creates a perfect compliance storm with a wave that will sweep over the independent contractor and contingent worker industry. Businesses that are not properly protected will be flooded with back taxes, fines, penalties and interest. It’s a good time to ensure your compliance ship is seaworthy.