Independent Contractor Compliance Blog - by Collabrus™

In a report issued last year, the U.S. Treasury Department’s Inspector General bureaucratically criticized the IRS, saying that the misclassification of employees as independent contractors is a nationwide issue affecting millions of workers that continues to grow and contribute to the federal tax gap.*

The report said, “The IRS…does not have an agency-wide employment tax program to coordinate the decision-making process and efforts among its business divisions. The limited data available indicates that the worker classification issue is growing significantly…”

The report stated various reasons for employers misclassifying their workers.

1. Taxpayers might do so unintentionally because of a lack of knowledge…
2. Taxpayers might do so because of poor advice…
3. Some employers might have “Safe Harbor” protection and, as a result, can legally treat workers as independent contractors who would otherwise be employees.
4. There are employers who deliberately misclassify workers to cut costs and to gain a greater competitive edge…

The report continues…

“The IRS’ most recent estimate of the tax gap is approximately $345 billion…The employment tax portion of this figure due to underreporting is estimated to be about $54 billion…(however) the IRS does not know the size of the problem today…since the estimate is based on Tax Year 1984 data).”

The report made recommendations.

1. “…that the Deputy Commissioner for Services and Enforcement develop and implement an agency-wide employment tax program to address the issue of worker classification (with the objective of reducing the tax gap)…”
2. “The Deputy Commissioner for Services and Enforcement should also consider conducting a formal National Research Program reporting compliance study to measure the impact of worker misclassification on the employment tax gap.”

IRS management agreed with the recommendations.

As a result we have seen some significant actions this year.

• The IRS has implemented a study consisting of 6000 employment tax audits to measure the extent of misclassifications nationwide.
• Congress authorized an additional 4500 IRS Agents to close the tax gap, including worker misclassifications.
• The Department of Labor was budgeted with an additional $25 million and 100 an additional investigators to work with the IRS to enforce worker misclassifications.
• Senator John Kerry, D-Massachusetts, and Representative Jim McDermott, D-Washington, have both introduced almost identical bills that would greatly limit the current provisions of “Safe Harbor” protection and increase penalties against companies who misclassify workers.** (President Obama has indicated he supports this bill).

It is clear that we are entering a new era of greater government scrutiny of employers who utilize contingent workers. The complex world of employment law is becoming more complicated each day for employers, particularly as it impacts the contingent workforce. To help navigate through this morass employers need expert advisors (contingent workforce management experts like Collabrus) who bring proven business solutions that empower them to safely and confidently deploy the contingent talent they need, when and where they need it.

* Report Dated, February 4, 2009, the Deputy Inspector General for Audit SUBJECT: Final Audit Report - While Actions Have Been Taken to Address Worker Misclassification, an Agency-Wide Employment Tax Program and Better Data Are Needed (Audit # 20073000

** Section 530 of the Revenue Act of 1978, Pub. L. No. 95-600, 92 Stat. 2763, 2885-86 (current version at Internal Revenue Code Section 3401).