Irs and Obama Administration Target Independent Contractors (3/10)

Do you use independent contractors in your workplace?  More importantly, are you sure that they are classified correctly?  If they are not, you could face significant liability, thanks to stepped-up enforcement actions by the Internal Revenue Service (IRS) and the federal government to ferret out misclassified workers.        Beginning in February 2010, the IRS launched its first Employment Tax National Research Project in 25 years, targeting 2,000 taxpayers each year for the next three years for “comprehensive” audits, according to an IRS press release.  The purpose of the audits is to determine what the “employment tax gap” is, i.e., the difference between taxes that are owed and taxes that are not paid because of underreporting, underpayment, or unfiled taxes, and how to collect these payments.  In 2005, the IRS estimated the overall tax gap to be a whopping $345 billion, and so clearly the agency is interested in increasing its collections.      In addition, the Obama Administration has signaled its support for stepped up enforcement of independent contractor misclassifications.  In his 2011 annual budget, President Obama pledged $25 million jointly to the Department of Labor (DOL) and the IRS to add 100 enforcement personnel to target misclassified contractors and to provide competitive grants to states to help them tackle the problem at the state level.  The Administration estimates that the efforts would increase Treasury receipts by $7 billion over the next 10 years for misclassified workers for whom employers do not pay federal Social Security and Medicare taxes.        You can expect the DOL and the IRS to take this mission very seriously, too, thanks in part to a critical report on employee misclassification by the Government Accountability Office (GAO) in August 2009.  In the report, the GAO pointed out that the DOL has taken only “limited steps to detect and address misclassification” of independent contractors, noting that the agency’s detection of misclassified workers is generally as an “indirect result” of its investigations into minimum wage and overtime violations under the Fair Labor Standards Act (FLSA).  The GAO report also found similar problems with the IRS, citing several enforcement “challenges” for the IRS in identifying misclassifications, including the legal complexities of determining who is an independent contractor and the limited resources devoted to this task.  In addition, the GAO reported that the IRS and the DOL did not exchange information that could help both agencies target misclassified workers more effectively.      Congress also has been kicking around legislation to define independent contractors for the last several years, most recently in the House as H.R. 3408 (introduced in July 2009) and in the Senate as S.2882 (introduced in December 2009).  Neither bill has gotten out of committee, but given the federal government’s commitment to enforcement, 2010 may be the year that these bills finally get passed.       So what should you do in light of this new enforcement agenda?  Review your independent contractor designations immediately to make sure your workers are classified properly.