IRS and states launch initiative to combat questionable employment tax practices

The IRS is collaborating with state workforce agencies to combat schemes and actions by employers to avoid the payment of employment and unemployment taxes. The association of the IRS and states has culminated in the Questionable Employment Tax Practice (QETP) Initiative, in which IRS and state employment officials will share the results of employment tax audits, exchange audit plans, plan and conduct audits jointly, and cooperate on education and outreach efforts to employers. A major focal point of the initiative is on the employer practice of classifying workers as independent contractors rather than as employees.

Information sharing

The IRS and states have entered into a “memorandum of understanding” (MOU) that allows them to share information and to implement the QETP Initiative. To date, 29 states have entered into individual information-sharing agreements with the IRS. Without the MOU, the exchange of audit reports or tax data would not be allowed and there could not be participation of the two in side-by-side examinations.

It’s anticipated that the MOU will increase compliance with employment tax filing and payment rules, increase compliance with Form 1099 and Form W-2 filing, and reduce the tax gap at both the federal and state level.

Oversight

The QETP Initiative has an oversight team that consists of the IRS, Department of Labor (DOL), Federation of Tax Administrators (FTA), National Association of State Workforce Agencies (NASWA), and five states.

Worker (mis)classification

A focus of the MOU is on how employers classify their workers for tax purposes. It has been estimated that as many as 10 to15 percent of private sector workers may be misclassified by their employers. Too often, workers are classified as independent contractors, which is to the employer’s, not the worker’s, benefit in most cases.

If a worker is classified as an employee, the employer must pay its share of federal and state unemployment taxes and Social Security (FICA) taxes, and withhold the employee’s share of federal income and FICA taxes. The employer also incurs costs pertaining to pension plans, health insurance, vacation and sick pay, and workers’ compensation insurance. On the other hand, employers are not required to withhold taxes or pay Social Security, unemployment insurance, or workers’ compensation for independent contractors.

(IR-2007-184)