The safe harbor offered last week by the IRS for businesses that reclassify outside contractors as employees suggests a future tightening of the worker classification rules.
According to The Wall Street Journal, the new program gives a tremendous break to those who opt to come clean right now. The Internal Revenue Service supplies the incentive of forgiving 90% of the tax liability that would otherwise have been due and foregoes any interest or penalty as well, for those who act promptly. It is unlikely that such a generous amnesty would be offered now unless future collection efforts are planned and are expected to generate much larger sums later.
The difficulties of clearly identifying whether a worker is a regular employee or an independent contractor have been discussed here earlier. Errors in what has never been easy to determine now threaten to become very expensive, as honest mistakes and sincere misunderstandings will bring severe penalties. The Voluntary Classification Settlement Program (VCSP) is a new development that promises to foreshadow more aggressive enforcement efforts after the grace period has expired.
While the IRS prepares to activate its worker classification examiners, the Department of Labor also began a new era of cooperation with the tax agency. In addition, DOL has moved to cut deals to swap information with individual states who independently pursue employers accused of “wage theft.”
The Fall 2011 DOL calendar is supposed to involve publication in the Federal Register of a long-threatened proposal to place even greater documentation and disclosure regulatory pressures on employers, as the first step in officially proposing the new regulation. One has to wonder if it will really happen, because they have deferred that essential initial formal introductory action a number of times already; but the convergence of political and economic forces argues that it will occur sooner rather than later. November elections are on the horizon, and politicians are desperate for highly visible public initiatives to increase the income of workers, to bring in more money in taxes and penalties, to encourage employers to hire more people rather than outsource work or move it offshore, and to prove that government agencies and American elected leaders are “fighting for the middle class.” Tightening the screws on heartless employers who callously exploit their workers might just do the trick, by addressing all those needs simultaneously.
Details about the new IRS initiative have not been fully revealed. For example, how long this amnesty program will extend has not yet been announced. Many statements in the press reports call for explanations, such as the alleged statement of Commissioner Shulman that the IRS is prevented by a 1970s law from issuing guidance to clarify the independent contractor rules. Nevertheless, in the interest of supplying a heads-up notification as soon as possible, I am unwilling to delay this alert until all the information is available.
Feel free to add whatever enhancements of detail that come your way, as we all wait for the other shoe to drop.
E. James (Jim) Brennan is Senior Associate of ERI Economic Research Institute, the premier publisher of interactive pay and living-cost surveys. Semi-retired after over 40 years in HR corporate and consulting roles throughout the U.S. and Canada, he’s pretty much been there done that (articles, books, speeches, seminars, radio/TV, advisory posts, in-trial expert witness stuff, etc.) and will express his opinion on almost anything.
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