Information Return Requirements for Independent Contractors

Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) efforts to: (1) ensure that employers report payments made to independent contractors; and (2) detect employers who misclassify employees as independent contractors. GAO found that: (1) federal, state, and local governments, and businesses were not complying with tax reporting requirements; (2) IRS failed to identify unreported income when examining tax returns; (3) IRS did not have a systematic approach for identifying employers who misclassified workers; (4) tax revenue losses stemmed from employers not paying employment taxes and misclassified workers taking additional tax deductions that they were not entitled to; and (5) IRS did not provide revenue agents with specific procedures for assessing compliance, since such other issues as overstated deductions had higher priority during tax return examination. GAO believes that: (1) IRS needs to systematically improve its enforcement of employer income filing and use tax returns to identify employers who misclassify employees; and (2) statutory provisions should be modified to allow IRS to reclassify workers in future tax years.