Independent Contractor Compliance Blog - by Collabrus™

President Obama’s Budget Director Peter Orszag announced a Tax Reform Panel has formed that will be headed by former Federal Reserve Chairman Paul Volcker. According to Orszag, they are tasked with recommending changes in the tax code including; closing loopholes, streamlining tax law and generating revenue.

The panel has been given a deadline of December 4, 2009, to make recommendations on ways to simplify the tax code that would reduce tax evasion and what he called corporate welfare, “which is another way of characterizing tax loop holes and tax shelters for corporations”.

The recommendations would potentially be included in the White House budget for the 2011 fiscal year, which must be submitted to Congress in February 2010.

“There are hundreds of billions of dollars in uncollected taxes each year,” said Orszag. The Volcker board “will be examining ways of being even more aggressive on reducing the tax gap”.

Just how big is the Tax Gap?

The Tax Gap is the difference between the amount of taxes owed by taxpayers and companies and the amount collected. 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. The IRS has estimated the Tax Gap as large as $345 billion a year.

In his statement, Director Orszag cited academic studies suggesting that the difference is $300 billion or more. “That is a lot of money,” he said, adding that the administration will be “as aggressive as possible” in reducing it.

One of the major segments of the Tax Gap is created by misclassified workers

Different studies over the years have shown different results, but it is estimated that approximately 15-25% of the Tax Gap can be attributed to IC misclassification (workers classified as IC’s who do not qualify as independent contractors under IRS common law rules).

IRS findings show that when companies (employers) properly withhold and report wages and payments to individuals there is a higher rate of 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, making it easy to see why they have increased their focus on misclassified workers.

It’s about more money

In my opinion, President Obama’s goal is pretty clear-to raise revenue. Reducing the Tax Gap is part of the puzzle to accomplish this goal. One piece of the Tax Gap puzzle is misclassified workers. You may expect some tough recommendations in this and other areas of tax enforcement coming from this panel in December. I recommend you prepare by ensuring you are properly classifying your IC’s now. Tax Audits look at last year, so fixing it now may help you later.