Employment taxes: IRS and states join hands to stem violations

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in Compensation and Benefits,Human Resources,Small Business Tax,Small Business Tax Deduction Strategies

The IRS and the individual states figure they have a better chance at catching employment tax scofflaws by working together.

Alert: The IRS has announced it is teaming up with more than half the states to crack down on employment tax violations. (IRS News Release IR-2007-184) These information-sharing agreements, included under the IRS’ Questionable Employment Tax Practice (QETP) initiative, are intended to provide a centralized and uniform means for improving compliance nationwide.

State agencies, the U.S. Labor Department, the National Association of State Workforce Agencies, the Federation of Tax Administrators and the IRS all worked together on the agreements.

So far, 29 states have agreed to participate.They are: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin. Others may soon join the fold.

The IRS and the states hope their joint efforts will reduce fraudulent filings, uncover tax avoidance schemes and ensure proper worker classifications. In particular, distinguishing which workers should be treated as independent contractors and which should be classified as employees has long been a bone of contention.

Here’s what you can expect from the QETP initiative involving the IRS and the participating states:

  • An exchange of employment tax information for civil cases, which primarily are intended to evade or inappropriately reduce employment tax liabilities
  • An exchange of information using either actual employment tax reports or a template compatible with federal and state information that the oversight team has developed
  • Participation in coordinated enforcement efforts
  • Sharing independently conducted examination results or work side by side on an examination
  • More consistency in examination results, reducing the chances that states might classify a worker as an employee while the IRS chooses independent contractor status, or vice versa
  • Sharing employment tax training opportunities and materials
  • Sharing outreach opportunities to the business community whenever that’s practical.

The QETP initiative memorandum of understanding meets the necessary disclosure requirements for ensuring taxpayer information privacy. In addition, all participating states must demonstrate they have systems in place to ensure the safety of any IRS data they will receive as a part of the information exchange agreement.

Tip: Recommendations for legislative proposals will focus on reducing taxpayer burden and confusion, promoting fairness and confidence in the tax system and reducing noncompliance with federal and state employment tax laws.

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