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Another Reason to Fear the IRS: Misclassification Crackdowns

Daniel Werfel, acting commissioner of the IRS, waits to start a House Appropriations subcommittee hearing on June 3

Photograph by Andrew Harrer/Bloomberg

Daniel Werfel, acting commissioner of the IRS, waits to start a House Appropriations subcommittee hearing on June 3

Small business owners have reason to be wary of the Internal Revenue Service, given research that shows certain types of small companies (pdf), including sole proprietors, are more likely than their larger counterparts to be audited. Lately, it seems, there’s even more reason to fear the taxman.

Last month, acting IRS head Daniel Werfel appeared before the House Small Business Committee to explain how the agency selects small businesses for audits. (Computers do it, Werfel said.) More recently, the agency sent letters to thousands of small business owners asking them to explain possible income underreporting.

Small business owners may soon face increased scrutiny on another front, as Bloomberg BNA reported yesterday that the Treasury Inspector General for Tax Administration found in a recent study (pdf) that 19 percent of employers didn’t comply with IRS rulings on worker status: “TIGTA recommended that the agency’s small-business and self-employed division[s] increase employer compliance with determination rulings.”

Worker misclassification is a complex issue. Regardless of what your stance is on employing independent contractors who behave like full-time employees, it’s worth noting that state and federal governments see crackdowns as a means to collecting more payroll taxes. To that end, the TIGTA found that each misclassified worker can save employers $3,710 annually in Social Security, Medicare, and federal unemployment taxes.

Clark is a reporter for Bloomberg Businessweek.

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