SB/SE Burden Reduction Issue Committee Meeting Minutes

October 3, 2006
3:30 P.M. ET
Teleconference

Program Owner

• Bayder, Helene

Designated Federal Official

• Ramirez, Sandra -- Brooklyn, NY, Manager

Committee Members Present

• Barry, Shaun -- Franklin Square, NY, Member
• Behnkendorf, Larry -- Waterford, MI, Member
• Bland, Sandra -- Bemidji, MN, Member
• Bly, Bill -- Wayne, PA, Member
• Gursey, Gregory -- Anchorage, AK, Member
• Guthmann, Howard -- St. Paul, MN, Member
• Hafter, Donna -- Burlington, KY, Member
• Kasturi, Srinivasan -- West Orange, NJ, Member
• Landauer, Steven -- Davenport, IA, Member
• Reading, Sheri -- Alburquerque, NM, Member

Committee Members Absent

• Cordeiro, Daryll -- Mobile, AL, Member
• O’Donnell, Marie -- Riverwoods, IL, Member

TAP Staff

• Knispel, Marisa -- Brooklyn, NY, Analyst
• Odom, Meredith -- Brooklyn, NY

Other Attendees

• Tiberi, Joseph
• Schampers, Rick

Welcome

Roll Call (quorum has been met)

Review Agenda

Update on Project 94X
Analyst Judy Davis was unable to join the teleconference and provide an update on the Project.

Misclassification Subcommittee
Sheri Reading reported on the issue. She indicated that certain relevant facts dictated by the courts allow the IRS to classify whether a worker should be an independent contractor or an employee. These relevant facts fall into three categories:

• Behavioral Control – Includes type of, work place location, schedule, degree of instructions and direction, and training the business gives the workers.
• Financial Control – Includes the extent to which the workers has un-reimbursed business expenses, the extent of the workers investment, how the worker is paid and the extent to which the worker can realize a profit or a loss.
• Relationship of the Party – Includes whether there is a written contract describing the parties’ intent.

The problem appears to be businesses are classifying workers as independent contractors to avoid paying the employer’s portion of taxes, workers compensation, liability insurance and employee benefits. Many of these workers don’t understand the classification issues and are unaware of their responsibilities such as paying quarterly estimated taxes and filing Schedule C with their annual tax return. The subcommittee’s objective is to educate the taxpayer on factors that determine a worker’s status and to propose a method for the IRS to improve compliance in this area.

The subcommittee looked at the possibility of having the employer withhold taxes if the worker requests the same. However, after much consideration, the subcommittee decided that this was not a feasible solution and would do very little to change the current status on misclassification. Currently, if a worker believes he is misclassified, he can complete Form SS-8 and mail to the IRS.  After reviewing it, the IRS will contact the business, which may in fact cause a problem for that worker, leading in some cases, his/her dismissal.

The subcommittee is looking at a set of recommendations to improve education and compliance.

For education, the subcommittee is considering the following:

• IRS to mail notices to Form 1099-MISC filers with amounts in Box 7. Such notices would state the guidelines for classifying workers as independent contractors or employees; notify them of the compliance problems and the potential penalties for noncompliance.
• IRS to add a statement to Form W-9 explaining to the workers what their responsibilities as an independent contractors are.
• IRS to add a statement on Form 1099-MISC to read: “If you have income listed in box 7, you are an independent contractor. You may be required to file a Schedule C and be subject to full Social Security and Medicare taxes. For additional information refer to  Publication  XX  “

For compliance, the subcommittee is considering the following:

• IRS to require certification on transmittal Form 1096 for all attached Form 1099s that include a dollar amount in Box 7. The certification would state something to the effect that the filer under the penalties of perjury certifies that the classification workers as independent contractors comply with the applicable guidelines.

• IRS to consider matching information received from businesses in certain suspect industries wherein misclassification is believed to be rampant. The aim is to match information contained on their Form 1099-MISC as filed and the wages/salaries reported on their Form 941. The matching may provide clues that could lead to detailed audits.

• IRS to consider mailing a generic letter to all businesses in suspect industries that file Form 1099-Misc with data in box 7 stating the compliance problems encountered with the misclassification issue and suggesting that these business review how their workers are classified. The letter would also reiterate the penalty for misclassification and warn them of the potential for audits.  

• IRS to consider formalizing a plan to work with other government agencies such as the Department of Labor and the SSA to share information on investigations performed on the misclassification issue.

Kasturi asked about the regulations that empower the IRS to penalize businesses that engage in intentional misclassification. Schampers responded that these regulations are part of Section 6651 of the Code. Knispel previously sent information about penalties to the subcommittee members.

See Action Items below.

Guthmann inquired about the progress of the Subchapter S-election recommendations. Knispel reminded him that at a recent meeting, Analyst Meglan Knights reported that the SBSE organizational team is seeking advice and guidance from Counsel on the Committee’s recommendations. Guthmann suggested developing a list of issues and their statuses and providing it to the members of the committee. Sandra Ramirez noted that such a list already exists at the Joint Committee level and they monitor the status.

TAP Office Report
N/A

Public Input
N/A

Action Items
Reading will provide a draft of the Misclassification proposal to members of the subcommittee by Thursday, October 5th. Thereafter, the draft will be reviewed and shared with the rest of the Committee.

Schampers will research whether requiring certification on Form 1096 – as explained above- is a legislative issue or not.