Tax Administration:

Information Returns Can Be Used to Identify Employers Who Misclassify Workers

GGD-89-107: Published: Sep 25, 1989. Publicly Released: Oct 27, 1989.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) enforcement efforts and procedures for detecting misclassifications, focusing on whether matching independent contractors' information returns with their tax returns would provide IRS with a systematic method for identifying employers that misclassify employees as independent contractors.

GAO found that: (1) 157 of the 408 employers IRS reviewed misclassified their employees as independent contractors; (2) revenue officers' examinations confirmed that 92 of the 157 employers had misclassified 17,347 employees as independent contractors and recommended taxes and penalties of $16.7 million, which accounted for employer liabilities for social security, income withholding, and unemployment taxes, but not for tax losses due to misclassified deductions for business expenses; (3) IRS would not have to create a new matching process to identify misclassifications, since it already matched information returns and income tax returns to identify unreported income; (4) regulations restricted IRS authority to require certain employers to reclassify workers and to assess back taxes that employers should have withheld and paid; and (5) as long as employers filed the required information returns for payments made to their workers and consistently classified all similar workers as independent contractors, IRS could not correct their misclassifications or assess back taxes.

Matter for Congressional Consideration

  1. Status: Open

    Comments: Call 202/512-6100 for additional information.

    Matter: Section 630 of the Revenue Act of 1978 restricts IRS' authority to ensure that current and future classifications will be correct. In view of the equity issues and tax revenues involved, Congress may wish to consider repealing this restriction against requiring employers to prospectively reclassify employees who have been misclassified as independent contractors.

Recommendation for Executive Action

  1. Status: Open

    Comments: Call 202/512-6100 for additional information.

    Recommendation: The Commissioner of Internal Revenue should match independent contractors' information returns with their tax returns to more systematically identify employers who are misclassifying employees as independent contractors and to better target audit resources for doing employment tax examinations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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