GAO Offers 10-Point List Independent Contractor Misclassification
Government Administrative Office released a List to serve as a guidline for businesses as it relates to Independent Contractors.
By: Jesse Case
Source: http://ezinearticles.com/
The misclassification of employees as Form 1099 independent contractors in the United States could be a significant problem with adverse consequences, the Government Accountability Office told Congress in a recent report.
The practice itself is not illegal but is often associated with labor and tax law violations, the watchdog agency said in the report Employee Misclassification: Improved Coordination, Outreach, and Targeting Could Better Ensure Detection and Prevention. The GAO noted that in fiscal year 2007, states uncovered at least 150,000 workers who were misclassified as independent contractors.
In a recent article in BNA’s Daily Tax Report, Robert W. Wood, an attorney with Wood & Porter in San Francisco (woodporter.com) and the author of Legal Guide to Independent Contractor Status (4th Ed. 2007), discussed 10 things that the GAO had to say about contractor misclassification.
1. Watch out for legislation.
The GAO report refers to a handful of bills on worker misclassification that were introduced in the 110th Congress (H.R. 5804, H.R. 6111, S. 2044 and S. 3648). If passed, the bills would require employers to keep full records on independent contractors, add misclassification penalties, modify misclassification rules, and require the Internal Revenue Service and the Labor Department to exchange information, Wood said.
2. Big bucks are involved.
In 2000, the Labor Department found that 10 percent to 30 percent of employers audited in nine states had misclassified workers, treating some employees as independent contractors. The study, Wood said, suggested that if 1 percent of all employees nationally were misclassified, the annual loss in revenue from employers’ unemployment insurance payments would be nearly $200 million.
3. Construction industry targeted.
The GAO reports that a New York Labor Department task force has especially targeted misclassification in the construction industry. The GAO report mentions violations in nearly half of the construction businesses surveyed. Regardless of who uncovers a misclassified worker, there tends to be a domino effect in such cases, with other workers also found likely to be misclassified, Wood said.
4. The IRS leans to employee status.
The Employment Tax Examination Program is used by the IRS to examine employers that are considered to have a high likelihood of misclassifying workers. The agency also has a Questionable Employment Tax Practices program through which the agency and states share information related to the examinations. The GAO study reports that the IRS made tax and penalty assessments in 71 percent of such examinations in 2008.
5. Consider filing Form SS-8.
An IRS Form SS-8 is a streamlined ruling form that either the worker or company can fill out to obtain an IRS determination on worker status. The GAO report indicates that the IRS SS-8 program is helpful. A significant number of taxpayers misses out, however, by not taking advantage of the opportunity. But be aware, Wood said, because there are risks involved.
6. Under the radar.
The IRS says it has the resources to detect and pursue only a tiny fraction of misclassification situations. The Small Business and Self Employed Division completed examinations of fewer than 1,200 employers in 2008. This is one more reason to worry about the domino effect, Wood said. If you have an unemployment insurance “employee” determination, it may lead to one on workers’ compensation, state disability, and IRS issues, he said.
7. Some IRS notices are voluntary.
Not all IRS notices are of the “pay up or else” variety, Wood said. For example, if the IRS receives a Form SS-8 from a worker, the agency investigates and then may rule the worker to be an employee. The agency often does not always try to enforce the ruling and instead might send a “soft notice” to encourage the employer to change its classification practices. Enforcement is spotty, he said.
8. Remember Section 530 relief.
A problem that few wish to discuss concerns Section 530 relief, Wood said. An employer that faces an IRS assessment based on past failures might be entitled to a reprieve. Section 530 of the 1978 Revenue Act, as amended, provides relief from employment tax liability for employers that misclassified workers as independent contractors using standards under common law facts and circumstances. The GAO report suggests that the IRS is constrained by Section 530. IRS employment tax officials have told the GAO that employers regularly request IRS guidance.
9. Frustration.
The study says that the GAO has been analyzing options about worker misclassification issues since 1977, Wood said. It has offered suggestions for addressing noncompliance issues related to employee misclassifications. The GAO made recommendations in 1977, 1979, and 1992. It offered 19 options in 1992, all included in the study.
10. New recommendations.
The GAO suggests that the secretary of labor and commissioner of the Internal Revenue Service instruct staff members to increase detection of misclassification errors. In doing so, the GAO is suggesting more exchanges of information and joint projects, Wood said. It also suggests that the IRS extend its classification settlement program to include employers that volunteer to prospectively reclassify misclassified employees. The IRS especially wants to get workers classified as employees, he said.
Conclusion
As any employer that has been involved in a worker status dispute knows, disputes can be messy and time consuming, Wood said. Such disputes can also be difficult to control, particularly because one dispute can lead to others, making the stakes in such cases difficult to assess.
In the furor of current activity, the GAO study may not get a huge amount of attention, Wood said. If it does, count on the fact-intensive worker classification field to become even more volatile, he said.
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