The Chief of the IRS’s Employment Tax Policy section, John Tuzynski, told lawyers on May 10, 2013 at an American Bar Association’s meeting of tax lawyers in Washington, D.C. that the IRS will soon be pursuing more cases involving independent contractor (IC) misclassification through its Questionable Employment Tax Practices (QETP) program.
The QETP program was first announced in November 2007. It is a collaborative, nationwide program seeking to identify “employment tax schemes and illegal [tax] practices.” The Program was developed by the IRS in conjunction with the National Association of State Workforce Agencies, the U.S. Department of Labor, the Federation of Tax Administrators, and the state workforce agencies of California, Michigan, New Jersey, New York, and North Carolina. As a result of their collective regulatory actions, a QTEP memorandum of understanding (MOU) was drafted and submitted to the state workforce agencies in all 50 states.
What states have agreed to participate in the IRS’s QETP program? As of today, according to John Tuzynski, 37 state workforce agencies have signed the MOU to work with the IRS. Those states include Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin.
What Will Happen under the MOU? The IRS and the participating state workforce agencies will exchange employment tax information for civil cases, which the government believes are primarily intended to evade or inappropriately reduce employment tax liabilities. The IRS and the states may also participate in coordinated enforcement efforts. The MOU will allow the IRS and the state workforce agencies to share independently conducted examination results or work side by side on an examination. In addition, under the MOU, the IRS and the states will share employment tax training opportunities and materials.
Why haven’t we heard much about the QTEP program lately? It appears that the QTEP Program was overshadowed by later information-sharing arrangements between the IRS and the U.S. Department of Labor, which has itself entered into MOUs with an increasing number of state workforce agencies. See my prior blog post in September 2011 when the DOL and IRS first announced its joint initiative.
When will the QETP program re-start? According to John Tuzynski, the IRS will begin more audits focusing on worker classification matters under the QETP program in eight to ten months, when it is expected to complete its National Employment Tax Research Project, where it has undertaken 6,000 comprehensive audits in the past three years.
How are other cases of IC misclassification coming to the attention of the IRS? According to Mr. Tuzynski, there have been many cases, particularly those related to worker classification, that are coming to the attention of the IRS through its whistleblower program.
What does this mean for businesses that use ICs? Companies that currently use ICs to supplement their workforce or that operate on an IC business model should take affirmative state-of-the-art steps to enhance their state of IC compliance. Many of those businesses are understandably concerned that their IC agreements may be outdated at best and recognize that their day-to-day practices are often inconsistent with the structure of the relationship set forth in the IC agreement. Such companies are asking questions such as, can the positions we pay on a 1099 basis be structured legitimately as an independent contractor relationship? Do such positions need to be re-structured, re-documented, or put into practice in a manner different than the way we are doing it now?
How can companies enhance their IC compliance? Businesses that wish to minimize their exposure to IC misclassification liability are benefiting from the use of proprietary tools such as IC Diagnostics™, a compliance process utilizing proprietary tools, including the 48 Factors-Plus™ analysis and IC Compliance Scale™. These tools measure compliance with applicable IC laws and guide companies through the process of re-structuring and then re-documenting and re-implementing their IC relationships. The use of these types of tools leads to enhancement of IC compliance and, in turn, minimizes the risk of misclassification liability, as more fully detailed in my White Paper .
Written by Richard Reibstein.