Independent Contractor Compliance Blog - by Collabrus™

WASHINGTON DC-The IRS’ National Taxpayer Advocate, Nina E. Olson, wants to improve “state information sharing tracking metrics” on misclassified workers.

The Taxpayer Advocate’s report released to Congress, dated December 31, 2009, lists the type of information that is shared between the IRS and local state enforcement agencies.

The IRS receives:

• The state income information
• Sales information (e.g., from local sales tax returns),
• Personal income tax withholding information from state agencies.
• State and local tax audit reports.

In addition, to uncover misclassified workers, the IRS exchanges employment tax audit reports, audit plans, participates in side-by-side examinations with state and local government agencies, and collaborates on outreach and educational opportunities as part of its Questionable Employment Tax Practices (QETP) Program.

In California, for example, the Employment Development Department (EDD) and the IRS work closely together on all of these areas of compliance and education.

However, does all this cooperation and information sharing make a difference?

The report stated the IRS acknowledges that traditional metrics are not good measures for these programs because they do not capture the impact of the program on future compliance. The IRS wants to develop practical measures so it can tell if the program is “encouraging future compliance” after an audit or examination for misclassified workers.

(In my experience “measuring” and “encouraging” future compliance really means the IRS wants to closely monitor audited businesses in subsequent years and quickly punish any that have not complied with the IRS audit findings).

The IRS wants more money from Congress to fix their problems.

(If you recall, the American Recovery and Reinvestment Act of 2009 just increased IRS funding to hire 4,500 new revenue agents for the purpose of closing the tax gap).

Reading through the report, the reoccurring theme is to ask Congress for more money so the immense agency will be able to do a better job at using the information it currently receives from the states. Some of the money will be used to monitor audited businesses to insure they continue to comply in the future. 

For justification, the report cited that voluntary compliance in the future is sometimes diminished after the IRS conducts an examination.

The report cited examples of taxpayer businesses actually becoming less compliant after they had been audited or examined by the IRS. The Taxpayer Advocate speculates one reason may be the taxpayer realizes after such an experience the IRS does not identify all misclassifications, or other errors.

The report is telling Congress that more money will bring more compliance (and more tax revenues), because the IRS will have more resources to find errors and to follow up on these delinquent taxpayers.

Have you prepared for the knock on the door?