IRS fell short on worker misclassification initiative

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The Internal Revenue Service should be doing more on a joint initiative with the U.S. Department of Labor to combat misclassification of employees as independent contractors, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, evaluated the IRS’s progress in implementing a Joint Worker Misclassification Initiative with the Department of Labor, and whether the objectives in a 2011 memorandum of understanding between the IRS and the DOL were being met. However, the TIGTA report found the IRS has not effectively implemented the worker misclassification MOU. The IRS cited staff turnover, resource limitations, and other competing priorities as reasons why the memorandum has not been more of a priority. As a result, the IRS and the DOL haven’t developed the kind of robust information exchange originally envisioned under the agreement.

Not only that, but the report found that DOL referrals were less productive than worker classification examinations by the IRS that originated from other sources. In fiscal years 2015 and 2016, DOL referrals resulted in approximately $800,000 in adjustments. However, DOL referrals produced approximately $4,000 in adjustments per return. That was substantially less than other worker classification returns, which resulted in approximately $12,000 in adjustments per return.

One possible reason for the big difference in results is that the DOL’s referrals often didn’t provide key pieces of information needed by the IRS, such as the number of potentially misclassified workers or the materiality of the wages that had been potentially misclassified.

IRS officials also pointed to difficulties in developing metrics to assess the effectiveness of the memorandum of understanding with the DOL due to a lack of available data and the small scope of MOU activities.

TIGTA recommended the commissioner of the IRS’s Small Business/Self-Employed Division consider whether the provisions of the MOU require amendment, revision or termination, and ensure the duties and responsibilities of the IRS, as outlined in the agreement, are executed as required. TIGTA also suggested the IRS should work with the DOL to design a standardized referral form. Finally, the report recommended the IRS should develop performance measures to monitor the effectiveness of the MOU. The IRS agreed with TIGTA’s recommendations, but it may decide to kill off the program.

“We have evaluated and classified more than 1,300 DOL referrals,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “Approximately 39 percent were selected for examination, with an additional limited number referred to state agencies. We also conducted joint outreach events with DOL. However, declining resources and competing priorities have prevented us from fully implementing the MOU. We will review the existing MOU to determine the best path forward, whether it is amending, revising or possibly terminating the agreement.”

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Employee classifications Payroll Payroll taxes IRS DoL TIGTA