Final Audit Report – While Actions Have Been Taken to Address Worker Misclassification, an Agency-Wide Employment Tax Program and Better Data Are Needed

This report from the U.S. Treasury Inspector General For Tax Administration presents the results of a review which evaluates the effectiveness of actions the Internal Revenue Service (IRS) had taken and planned to take to address the misclassification of employees as independent contractors. This audit was part of our risk-based audit coverage and was included in the Treasury Inspector General for Tax Administration Fiscal Year 2007 Annual Audit Plan .

The misclassification of employees as independent contractors is a nationwide issue affecting millions of workers that continues to grow and contribute to the tax gap. The IRS has taken and plans to take many positive actions to address worker misclassification. However, it does not have an agency-wide employment tax program to coordinate the decision-making process and efforts among its business divisions. The limited data available indicates that the worker classification issue is growing significantly. When an employee is misclassified, tax revenues are not reported or paid and the burden of uncollected taxes shifts to other taxpayers.

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