IRS, DOL, several states to share data on worker classification.

• Author: Dell, Michael

On September 19, 2011, the secretary of Labor and the IRS commissioner signed a memorandum of understanding (MOU) agreeing to enable the Department of Labor (DOL) to share information and coordinate law enforcement with the IRS "to end the business practice of misclassifying employees in order to avoid providing employment protections." In addition, state labor commissioners and other agency leaders representing seven states signed MOUs to share data with the DOL (Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington), and four more agreed to enter into an MOU (Hawaii, Illinois, Montana, and New York).

Two days later, the IRS announced its Voluntary Classification Settlement Program (VCSP), allowing employers to voluntarily reclassify their workers from independent contractors to employees under certain circumstances, with terms more favorable than if the issue is resolved after an audit.

Labor Secretary Hilda Solis said in a news release that the purpose of the MOUs is to "send a coordinated message: We're standing united to end the practice of misclassifying employees, [and w]e are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike" (Labor Dep't Wage and Hour Division news release 11-1373-NAT (9/19/11)).

Under its MOU with the IRS, DOL will refer for investigation "information and other data that DOL believes may raise Internal Revenue employment tax compliance issues related to misclassification." The IRS will evaluate the referrals and "conduct examinations to determine compliance with employment tax laws." The IRS also will share the referrals with state and municipal taxing authorities.

Implications

The IRS and 37 states have existing data-sharing MOUs as part of the Questionable Employment Tax Practices (QETP) program. States participating in the QETP send information to the IRS when they reclassify workers; the QETP states also receive...