US eyeing the self-employed who skimp with the IRS
Encyclopedia salesmen, free-lance cartoonists, contract welders, and truckers who own their rigs are examples of the independent contractor, a genre of worker typically free of the whiplash eye of a boss and the regimen of the time clock.
They are also free from withholding taxes on their income, and are thus not on the best of terms with the Internal Revenue Service. A controversial IRS report, issued in 1979, said independent contractors paid only 85 percent of the income tax they owed, cheating the government of an estimated $1 billion.
A new bill, introduced by Sen. Robert Dole (R) of Kansas, aims at making it harder for such self-employed workers to hide their income from the taxman. It would also set a basic definition of ''independent contractor,'' in an effort to end IRS-business battles over who gets the benefits of such stature.
''Anytime you get an apple and an orange, and it's more advantageous to be an orange, then everybody's going to try to be an orange''--in this case, an independent contractor, says Edward Maggio, a tax accountant for Seidman & Seidman.
Independent contractors account for only a small slice of the estimated $85 billion annual tax gap. But with Congress facing staggering deficits, any move to close the gap will likely draw strong support--and the IRS considers law in this area to be somewhat weak.
''The employee-independent contractor area is particularly in need of congressional attention,'' IRS Commissioner Roscoe Egger recently told Congress.
The compliance section of the bill would attempt to unearth illegally hidden income by attaching stiff new penalties to rules already on the books. Currently , companies must tell the IRS about payments of more than $600 made to independent contractors. Senator Dole's legislation would replace now-modest fines with percentage penalties. Incorrigible repeat offenders would be fined up to 30 percent of the payments they didn't tell the IRS about.
In addition, the bill would require that wholesale purchases of certain salesmen, such as Amway soap peddlers, be reported to the IRS.
The administration--through Assistant Treasury Secretary John Chapoton--has come out in favor of the legislation, though it considers the penalties somewhat complex. Even independent contractors themselves say it's not such a bad idea, though they claim they've been unfairly slurred.
''The allegations our people are less in compliance than the general population are false,'' says Mario Borssi, an attorney for the Direct Selling Association.
Mr. Borssi points out that the IRS study alleging a $1 billion shortfall was based only on taxpayers whose status as independent contractors was being legally challenged.
A far more controversial section of the bill would set criteria defining ''independent contractor.'' Even if they didn't meet the tests, workers could still claim contractor status, but those within the congressionally defined ''safe harbor'' would be sheltered from IRS lawsuits about someone's status.
Through much of the '60s and '70s, the IRS doggedly chased the independent contractors they thought were really employees. In 1979, Congress leashed the IRS with a moratorium on such prosecutions. That moratorium expires in June, and the self-employed quake at the thought of the government's again snapping at their heels.
''To remove the uncertainties caused by those attacks, we support the legislative effort to establish statutory 'safe harbor' rules,'' Duncan McRae of the American Trucking Association recently told the Senate Finance Committee.
Specifically, the bill says independent contractors must, among other things, control their own hours, risk income fluctuations, and pay for their own principal place of business.
The point of view on these rules depends on whether one intends to be moored in the safe harbor, or chasing people into it.
The Treasury reacted with a ringingly circumspect endorsement. ''Renewed consideration of this pressing issue is imperative,'' the Treasury's Mr. Chapoton said, though he expressed interest in tightening certain of the provisions.
''Basically, (the IRS) would like to see a tighter safe harbor,'' a Senate Finance Committee aide says.
The private sector has a different point of view.
''It seems so restrictive a number of individuals will fall outside the definition that have historically been treated as independent contractors,'' says Mr. Maggio of Seidman & Seidman.
It's easy for companies to handle independent contractors, Mr. Maggio points out: They don't have to withhold income tax, pay unemployment insurance, or contribute a portion of social security tax.
''If you really want to resolve the matter,'' he said, the government would have to end the advantages of hiring an independent contractor by eliminating the tax distinctions between independent contractors and employees.