Tax Administration
Information Returns Can Be Used to Identify Employers Who Misclassify Workers Gao ID: GGD-89-107 September 25, 1989Pursuant 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.
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