U.S. Tax Gap: No Third-Party Reporting? Big Problem for the IRS.
The amount of unpaid taxes owed to the U.S. government has grown drastically over five short years, according to data released by the IRS on Friday. The tax gap for 2006 alone reached $450B, up from $345B for 2001 and far higher than many previous estimates.
The bigger problem is the cause of that gap. When income is reported or withheld by a third-party, such as with wage and salary payments on a W-2, the rate of misreporting (i.e. underreporting and failure to report) is a mere one percent (1%). However, when there is no such reporting or withholding, the rate of misreporting jumps to fifty-six percent (56%).
What isn’t reported? Payments between corporations. This is the reason that many organizations believe they can achieve “compliance” by only working with incorporated independent contractors. However, over the past couple of years, the IRS has increased its focus on these relationships. In fact, many incorporated independent contractors have been found to be employees in both federal and state audits. These contractors’ corporations were completely disregarded.
With this new report out from the IRS, employers need to prepare for an even higher level of scrutiny. The IRS has its sights set on reducing the tax gap and the way is clear – focusing on payments that aren’t reported and ensuring that those payments are properly classified.
Did you know that working with incorporated independent contractors doesn’t eliminate your misclassification risk?
You can read more about the tax gap here.
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