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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Highlights
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.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| Section 530 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. |
Closed – Implemented
|
In 1996, Congress modified Section 530 of the Revenue Act of 1978 to limit the prior audit safe harbor so that taxpayers could not rely on prior audits commencing after December 31, 1996, unless such audit included an examination for employment tax purposes of whether the worker involved (or worker holding a substantially similar position) should be treated as an employee of the taxpayer. |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | 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. |
Closed – Implemented
IRS supported and planned to implement the development and testing of a matching process that provides IRS with a more systematic way to identify employers who misclassify employees as independent contractors, which incorrectly lowers employers' tax liability. IRS use of this matching process resulted in $9.9 million in additional tax and penalty being assessed against 67 employers found to have misclassified workers.
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Topics
CorporationsFines (penalties)Income taxesJob classificationLiability (legal)Tax administrationTax lawTax return auditsTax returnsIndependent contractors