Independent Contractor Compliance Blog

WASHINGTON, DC – President Obama signed a presidential memorandum to stop companies who are delinquent in their taxes from collecting on government contracts. While signing the memorandum he stated, “(they are) gaming the system…We need to make sure every tax dollar we spend is going to address our nation’s urgent needs and to make a difference in the lives of our people. ”

It’s about Closing the Tax Gap.

Obama’s memo stated, “The Federal Government pays more than half a trillion dollars a year to contractors and has an important obligation to protect American taxpayer money and the integrity of the Federal acquisition process. Yet reports by the Government Accountability Office (GAO) state that Federal contracts are awarded to tens of thousands of companies with serious tax delinquencies. The total amount in unpaid taxes owed by these contracting companies is estimated to be more than $5 billion.”

In his oral statement the president added, “This is not simply a matter of signing a piece of paper or taking a bureaucratic act….All across this country, there are people who meet their obligations each and every day. You do your jobs. You support your families. You pay the taxes you owe — because it’s a fundamental responsibility of citizenship. And yet, somehow, it’s become standard practice in Washington to give contracts to companies that don’t pay their taxes. ”

More importantly, the President then indicated stronger actions are coming.

Possibly most significant he then said, “Beyond these steps, I’m also calling on Congress to build on the kind of legislation that Senator McCaskill, Congressman Ellsworth, and Chairman Towns have introduced  — and that I introduced when I was senator — legislation that will crack down on tax cheats by allowing the IRS to share information about tax delinquency with contracting officials. And by the way, when I introduced that Senate bill, Claire stood by me, and Brad led the way in the House…”

The President is referring to Senate Bill 2044, that he co-sponsored.  It was introduced during the 110th Congress and was titled, `Independent Contractor Proper Classification Act of 2007′.

Some of the major provisions of that bill are:

1. Grants the IRS the authority to force employers to reclassify IC’s to employees.
2. Authorizes the IRS to issue regulations and revenue rulings establishing standards for properly classifying workers as IC’s.
3. Eliminates a major protection provision of the IRS’ Safe Harbor
4. Requires DOL to create a poster that must be posted by businesses that informs workers of their right to challenge their classification as independent contractors.
5. Sets up a procedure by which workers can challenge their classification as independent contractors.
6. Provides protections against retaliation for workers who take advantage of the challenge procedure.

For items 4, 5 & 6 read; encourages workers to ask for an IRS audit of the company.

1. Requires the IRS to report employers to the Department of Labor (DOL) if an audit found misclassified workers.
2. Requires DOL to investigate industries that are revealed by IRS data to have high rates of misclassifications.
3. Requires businesses to notify independent contractors of their federal tax obligations and of their right to obtain a determination of their independent contractor status from the IRS.  The notice must also inform IC’s of the labor and employment law protections that apply only to employees-not to IC’s.
4. Requires employers to keep detail records relating to independent contractors (hours, days worked, rate of pay, etc) for three years.

The time to prepare is now-before laws like this are passed and the government knocks on your door.