Tax Administration: Improving Independent Contractor Compliance

GAO discussed its report on improving independent contractor tax compliance, focusing on the Internal Revenue Service's (IRS) Employment Tax Examination Program (ETEP). GAO noted that: (1) the classification rules for determining if a worker is an employee or an independent contractor need to be clarified; (2) since fiscal year 1989, IRS has found that 90 percent of the businesses audited under ETEP misclassified one or more workers; (3) IRS studies have shown a lower tax compliance level for independent contractors than for employees; (4) requiring businesses to withhold taxes from contractor payments and improving business compliance with the requirement to file information returns on contractor payments would improve compliance; (5) requiring withholding on contractor payments would present some administrative problems; and (6) information returns significantly improved voluntary compliance.