IRS’ ‘safe harbor’ loophole frustrates those fighting labor tax cheats

safe harbor
Photo by Robert Taylor

From the Charolotte Observer

Misclassification is a widespread practice; companies can save 20 percent or more on labor costs by not paying state and federal taxes and workers’ compensation for their workers. Those that abuse the system are able to cheat competitors and exploit desperate workers, denying them unemployment benefits and often overtime and workers’ compensation.

In a five-part series earlier this year, McClatchy found that the practice costs taxpayers billions of dollars each year at a time when state and federal governments are desperate for tax revenue. The investigation into federal construction jobs found high rates of misclassification.

McClatchy estimates that more than a third of construction workers in Southern states such as North Carolina and Texas have been wrongly classified as independent contractors. The losses are huge, McClatchy estimates. In Texas alone, $1.2 billion in tax revenue is squandered annually. In North Carolina, losses reach about $467 million a year, and in Florida, about $400 million.

Several agencies have played a role in allowing the abuse to continue, McClatchy reported. The U.S. Department of Housing and Urban Development has doled out billions for public housing projects, but it didn’t pay attention to whether workers were employees or contractors. The U.S. Department of Labor hasn’t enforced labor laws and the IRS has failed to step in, McClatchy found.

IRS officials declined to answer specific questions on whether the safe harbor rule was a barrier to collecting taxes from some businesses. Spokesman Eric Smith said the IRS evaluated whether companies qualified for the safe harbor as part of regular worker-classification checks during tax audits….

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