IRS Reclassification Program Needs More Data, TIGTA Says

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By Michael Trimarchi

The Internal Revenue Service fails to ask for information to ensure that employers are eligible to participate in a program to voluntarily reclassify workers from independent contractors to employees, the Treasury Inspector General for Tax Administration said Sept. 24 in a report.

The Voluntary Classification Settlement Program was created in 2011 to allow employers to make employment reclassifications for tax purposes, TIGTA said, noting that millions of employers misclassify workers as independent contractors instead of employees.

The report found, however, that the IRS does not require employers to provide information on the VCSP application identifying the workers being reclassified, such as workers' names and Social Security numbers.

“Without the specific worker identification information, the IRS cannot determine if the applicant met VCSP eligibility requirements,” the report said. The IRS was unable to verify the accuracy of wages reported on applications and was unable to accurately calculate the VCSP amount owed in taxes, the report said.

“Without identifying information for the workers being reclassified, the IRS is also unable to establish an effective process to monitor VCSP agreements to ensure employer compliance,” the report said. “Processes to track and monitor program applications are ineffective and not always accurate, and the follow-up review control logs do not always reflect accepted agreements.”

Determining employee or independent contractor status has tax implications for the worker, the employer and the IRS, the report said.

TIGTA recommended that the IRS require employers to provide the names and Social Security numbers of employees they reclassify as part of the program, revise internal procedures for processing VCSP applications and ensure that data on the applications and VCSP payments are accurate.

Tax obligations for the worker  and the employer are affected  by the type of classification.

The IRS agreed with the recommendations and said it plans to revise the VCSP application to include employee names and Social Security numbers.

The IRS also agreed to improve reporting and processing procedures for VCSP applications, TIGTA said.

The VCSP was last expanded and revamped in February 2013 with an updated version of Form 8952, Application for Voluntary Classification Settlement Program, to reflect an increased payment rate. Applications for the program totaled 1,550 in March, the IRS said.

$10.2 Million in Grants Awarded

The Labor Department awarded $10.2 million to 19 states to implement or improve worker misclassification detection and enforcement programs in unemployment insurance programs.

The funds are to increase the ability of unemployment insurance tax programs to identify instances where employers improperly classify employees as independent contractors or fail to report the wages paid to workers at all, the department said in a news release.

“This is one of many actions the department is taking to help level the playing field for employers while ensuring workers receive appropriate rights and protections,” Labor Secretary Thomas E. Perez said Sept. 15. “Today's federal grant awards will enhance states' ability to detect incidents of worker misclassification and protect the integrity of state unemployment insurance trust funds.”

The states receiving the grants are to use the funds for a variety of improvements and initiatives, including enhancing employer audit programs and conducting employer education initiatives.

Although several states have established programs to reduce worker misclassification, this is the first year that the Labor Department has awarded grants dedicated to this effort. The Consolidated Appropriations Act of 2014 authorized the awarding of grants to fund “activities to address the misclassification of workers.”

Maryland, New Jersey, Texas and Utah shared in additional funding of $2 million as part of a bonus program because of strong performance results in detecting incidents of worker misclassification, the department said.

The remaining $8.2 million was distributed to 19 states in competitive grants of up to $500,000.

Texas received the largest amount, $1.3 million, including a bonus of $775,529. Delaware received the smallest grant, $27,672.