Employers Do Not Always Follow Internal Revenue Service Worker Determination Rulings

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That is the literal title of a report recently issued by the Treasury Inspector General for Tax Administration (TIGTA) summarizing its  2013 audit of taxpayer compliance with Forms SS-8 processed by the IRS. Form SS-8 (titled “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding”) is typically filed by independent contractors who believe they should be treated as employees. Anyone familiar with this issue is well aware of the tax impact on the employer of this determination.

During the period covered by the TIGTA audit, only 17% of those employers who received a determination by the IRS that the subject worker should be classified as an employee actually complied with the determination by issuing the worker a Form W-2. Why is compliance so low? Quite simply because, as stated in the report, “the SS-8 Program has little ability to enforce compliance after a determination ruling is made.”   The IRS relies on audits conducted by the Small Business/Self-Employed Division, the Large Business and International Division, and the Tax Exempt and Government Entities Division to enforce worker determination rulings. The initial step in the process of enforcing the rulings involves the SS-8 Program referring the suspected noncompliant employer to the division having the proper jurisdiction. After identifying which of the three IRS business operating divisions has jurisdiction, the SS-8 Program applies criteria provided by the respective operating division to the underlying facts of the particular ruling in determining if a referral is warranted. That being said, during the period covered by the report, only 9% of cases were referred to  the Divisions for audit.

The predictable recommendation of TIGTA is that the IRS take steps to increase employer compliance with SS-8 determinations.  To this end, the Small Business/Self-Employed Division, and the Tax Exempt and Government Entities Division have committed to submit to TIGTA by March 31, 2014 a formal proposal or improving employer compliance with SS-8 determinations.

Look for an update to this post in Spring of 2014.