Tax Administration: Issues Involving Worker Classification

GAO discussed the classification of workers either as employees or independent contractors for federal tax purposes. GAO noted that: (1) the Internal Revenue Service (IRS) has maintained an active audit presence despite the high levels of income tax noncompliance involving independent contractors; (2) from 1988 through 1994, IRS completed 11,380 Employment Tax Examination Program audits, resulting in $751 million in tax assessments and the reclassification of 483,000 workers; (3) IRS classification rules need to be clarified to improve independent contractor compliance; (4) although independent contractors represent only a small proportion of taxpayers, they have accounted for between $21 billion and $30 billion of unpaid income taxes for tax year 1992; and (5) changes to the classification rules need to be cognizant of the body of laws that create a safety net for American workers, as many laws do not protect workers classified as independent contractors.