IRS Cracks Down on Tax Cheats and Those Hiring Independent Contractors

As the IRS hotline to report tax cheats is ringing off the hook, the agency revs up its efforts to bust those hiring independent contractors. How does the IRS distinguish between independent contractors and employees? Is there a reward for turning in tax cheats?

The IRS vs. Those Hiring Independent Contractors

This year the IRS and state tax agencies are revving up their efforts to bring money into precariously empty budget coffers by going after presumed corporate tax cheats. CNN Money⁽¹⁾ reports that over the course of three years - starting in 2010 - more than 6,000 businesses employing independent contractors will be examined with a fine-toothed comb. The anticipated revenue generated from this scrutiny is said to be in the neighborhood of $7 billion.

How Does the IRS Distinguish Between Independent Contractors and Employees?

At issue behind this IRS crackdown on corporate tax cheats is the loss in payroll taxes. Companies that rely on independent contractors forego the need to pay payroll taxes, which helps bolster the bottom line. Not surprisingly, some businesses have begun to play it fast and loose with the rules set forth by the IRS and switched regular employees to an independent contractor designation.

At the same time, the owners or operators still a) controlled workers' daily and weekly schedules and b) required employee-like behavior with respect to work schedules, vacation requests and prohibitions against moonlighting. Companies flagged under this program may expect to receive a notification from the IRS and a pamphlet entitled "Do you Qualify for Relief under Section 530?⁽²⁾"

IRS Encourages Americans to Continue Reporting Tax Cheats

Concurrently with its crack-down on companies possibly misclassifying independent contractors, the IRS also operates a lively whistleblower program. As outlined by the Bookkeeper List⁽³⁾, as of 2008 the IRS estimated that about 17 percent of American taxpayers are falling short of obeying tax laws.

Adding insult to injury, it is the private person - not the big corporation - that usually does the cheating. Generally speaking, about 75 percent of tax cheats are households, with middle-class taxpayers making up the lion's share of this statistic. Not surprisingly, the IRS hotline to report tax cheats is getting quite a bit of attention now.

Is There a Reward for Turning in Tax Cheats?

While the recession might make cheating on taxes more palatable for the average household, a reminder that reporting tax cheats can be quite profitable as well might also make turning into an informant a lucrative deal. The IRS operates its Whistleblower Office⁽⁴⁾ with the promise of paying those reporting tax cheats up to 30 percent of the added taxes, penalties and any other funds the agency collects in response to a tip.

Sources
⁽¹⁾CNN Money. "Auditors crack down on 'independent contractors'" (accessed March 29, 2010)
⁽²⁾IRS. "Do you Qualify for Relief under Section 530?" (accessed March 29, 2010)
⁽³⁾Bookkeeper List. "Cheating on Taxes? Really?!" (accessed March 29, 2010)
⁽⁴⁾IRS. "Whistleblower Office" (accessed March 29, 2010)