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"Employee Misclassification: Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention," August 2009 The General Accounting Office (GAO) has issued a report that includes several recommendations for reducing the number of workers that are incorrectly classified as independent contractors. The report notes that the IRS enforces worker classification compliance primarily through examinations of employers, but it also offers settlements through which eligible employers under examination can reduce taxes they might owe if they maintain proper classification of their workers in the future. The IRS provides general information on worker classification through its publications and fact sheets available on its website. It targets its outreach efforts to tax and payroll professionals, but generally not to workers. The IRS faces challenges with its compliance efforts because of resource constraints and limits that the tax law places on its classification enforcement and education activities. The IRS and the Department of Labor (DOL) typically do not exchange the information they collect on misclassification, in part because of certain restrictions in the tax code that limit the IRS's ability to share tax information with federal agencies. Also, DOL agencies do not share information internally on misclassification. Few States collaborate with the DOL to address misclassification, however, the IRS and 34 states share information on misclassification-related audits. The report includes the following 19 recommendations for reducing employee misclassification: - Clarify the distinction between employees and independent contractors under federal law.
- Allow workers to challenge a classification determination in U.S. Tax Court.
- Ensure that workers have adequate legal protection against retaliation after filing Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
- Define misclassification as a violation under the Fair Labor Standards Act (FLSA).
- Narrow the definition of “a long-standing recognized practice of a significant segment of the industry” so that fewer firms qualify for penalty relief under the reasonable basis standard in Section 530 of the Revenue Act of 1978.
- Lift the ban on the IRS/Treasury issuing regulations or revenue rulings clarifying the employment status of individuals for purposes of employment taxes.
- Require service recipients to provide standardized documents to workers that explain their classification rights and tax obligations.
- Expand IRS outreach to service recipient, worker, and tax advisor groups to educate them about classification rules and related tax obligations, targeting groups the IRS deems to be “at risk.”
- Create an online classification system, using factors similar to those used in the SS-8 determination process, to guide service recipients and workers on classification determinations.
- Increase the use of IRS notices to service recipients in industries with a potentially high incidence of misclassification to educate them about classification rules and ask them to review their classification practices.
- Require service recipients to withhold taxes for independent contractors whose TINs the IRS cannot verify, or who the IRS has determined are not fully tax compliant.
- Require universal tax withholding for payments made to independent contractors, using tax rates that are relatively low (e.g., 1% to 5% of payment amounts).
- Require service recipients to withhold taxes from payments made to independent contractors who request withholding in writing.
- Measure the extent of misclassification and related impacts on tax revenues at the national level.
- Require each independent contractor to apply for a separate business TIN.
- Expand the IRS's Classification Settlement Program (CSP) to include service recipients that voluntarily contact the IRS about their misclassified workers.
- Require service recipients to submit Forms SS-8 for all newly retained independent contractors.
- Enhance coordination between the IRS, DOL, and other federal agencies to share data and address misclassification.
- Enhance coordination between the IRS, States, and selected local governments to share data and address misclassification.
Recommendations (8), (16), and (19) above have received the most support from labor and employer groups. The full report is on the GAO website at http://www.gao.gov/new.items/d09717.pdf. (Source: Payroll Updates on Checkpoint Newsstand tab 9/11/09) |
