Weaknesses in the Internal Revenue Service’s employment tax compliance program could cost the U.S. Treasury $131 million in Social Security and Medicare taxes over the next five years, according to a new report.

J. Russell George

The report, from the Treasury Inspector General for Tax Administration, said the IRS should do more to protect against the improper use of employment tax forms to avoid paying Social Security and Medicare taxes. The problem stems from employers who misclassify workers as independent contractors instead of employees.

“The misclassification of employees as independent contractors is a nationwide problem affecting millions of employees,” said TIGTA Inspector General J. Russell George in a statement. “Left unchecked, it will continue to grow and contribute to the tax gap. The IRS should do more to ensure that the burden of uncollected taxes is not shifted to compliant taxpayers.”

TIGTA reviewed the effectiveness of the IRS’s procedures for ensuring taxpayer compliance with worker status determinations. TIGTA’s review focused on improper use of Form 8919, which taxpayers use when reporting only the worker’s share of Social Security and Medicare wages. Businesses and workers can request a determination letter from the IRS regarding a worker’s federal employment tax status as an employee or independent contractor. While the IRS’s rulings are binding, sometimes employers will continue to not withhold taxes even when a worker has received a determination letter from the IRS and was determined to be an employee.

TIGTA found that 74,068 taxpayers may have avoided paying $26.2 million in Social Security and Medicare taxes because they improperly used Form 8919. If not corrected, taxpayers could avoid paying about $131 million in taxes over the next five years.

TIGTA made four recommendations to the IRS, including requiring examiners to provide information to the Determination of Worker Status Program. The IRS agreed with three of TIGTA’s recommendations but disagreed with a fourth recommendation due to cost concerns.