Seasonal employees could find themselves in the IRS’s cross-hairs as the agency steps up its enforcement of 1099-MISC information reporting.
The IRS is expected to become more aggressive in ensuring that employers of seasonal workers in industries such as retail and agriculture properly report on their wages and income. It’s all part of the IRS’s effort to close the so-called tax gap, and it could leave a large hole in the stockings hung by the fireplace by department store Santas.
“The IRS feels there is a big gap between what is reported to the government and what they feel should be,” said Kyle Janssens, brand manager at Greatland Corporation, which provides W-2 and 1099 software for businesses. “They’ve been working with people to try to get them into compliance, and in order to try to move more toward enforcing compliance, they’re increasing penalties, and there are some new requirements. We are pointing out where businesses potentially fail in meeting those requirements. One of the key areas we saw was seasonal and contract employees. Whether it’s willful noncompliance or ignorance, we wanted to paint a picture of what noncompliance looked like, and what was the result of that. This is going to be a bigger issue than it has been in the past.”
A recent report by the Government Accountability Office noted that for 2006, 1099-MISC forms reported approximately $2.3 trillion in seasonal and contract labor wages. Recipients of these forms must then report this information on their individual tax returns.
However, the GAO report admitted the IRS has no idea how much tax revenue is lost due to noncompliance on the part of contract employers and employees alike. As a result, Greatland noted, the GAO expressed its concern regarding this “window of opportunity for payees to underreport their income and go undetected by IRS … representing a significant problem.”
The IRS estimates an overall 16.3 percent noncompliance rate (including seasonal and contract workers), meaning a significant amount of wages and income is not being reported accurately, or at all, by businesses or organizations. This noncompliance hurts the ability of the IRS to detect underreporting of income by individuals, and as a result, contributes to the estimated $345 billion tax gap.
Greatland cites Santa Claus impersonators as an example. There are approximately 8,000 professional Santas across the U.S., many of whom make an average of $8,000 during the holiday season. If each of the nation’s 8,000 Santas made $8,000 in annual income, the total contract labor reported to the IRS would be $64 million. But, according to the above statistics from the IRS, a 16.3 percent noncompliance rate would create a potential $10,432,000 in Santa income that might not be reported.
By IRS standards, the Santa example doesn’t illustrate a huge sum of missed or underreported income (and hopefully the sidewalk Santas are not skimming off any money dropped in their kettles by charitable passersby). However, when you look at the total number of seasonal and contract workers that account for the $2.3 trillion amount of taxable payments annually, the total noncompliance figures could be staggering. The GAO report states that even a 1 percent increase in all reported 1099-MISC payments could result in an additional $60 billion in taxable income reported to the IRS.
In 2012, it will take even more work to avoid ending up with a stocking full of coal from the IRS. A new provision in the health care reform legislation is aimed at improving reporting and closing this particular gap, Greatland noted. It will require all businesses to not only issue a 1099 to document wages paid to contract workers, but also issue a 1099 form to any business from which they purchase at least $600 in goods or services. For example, if Santa dry cleans his fur-lined red suit 20 times during the year at a cost of $30 each time, he will have to issue a 1099 form to his drycleaner. And maybe to his reindeer trainer too.
By expanding 1099-MISC reporting to include service and goods payments of $600 or more to corporations by third-party payers, it is estimated that an additional $8.17 billion over a 10-year period would be generated because this increased reporting would enable the IRS to detect underreported payments.
The burden, however, will fall on the many small businesses around the country that will need to have the processes and systems in place to handle the nearly tenfold increase in reporting and tax forms, Greatland noted. While there have been efforts to repeal this provision of the health care legislation, none have passed so far.
For Santa, this may mean a number of new elves devoted entirely to tracking payments and issuing these forms, Greatland pointed out. Mrs. Claus also could find herself a lot busier next Christmas season electronically filing the forms from the North Pole, unless Congress finally repeals the new 1099 requirements.