[Congressional Record Volume 155, Number 190 (Tuesday, December 15, 2009)]
[Senate]
[Pages S13253-S13254]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. KERRY (for himself, Mr. Durbin, Mr. Harkin, Mr. Schumer, 
        Mr. Menendez, Mr. Brown, and Mr. Kirk):
  S. 2882. A bill to amend the Internal Revenue Code of 1986 to modify 
the rules relating to the treatment of individuals as independent 
contractors or employees, and for other purposes; to the Committee on 
Finance.
  Mr. KERRY. Mr. President, today I am introducing the Taxpayer 
Responsibility, Accountability and Consistency Act of 2009 which will 
provide a level playing field to America's workers to ensure they are 
afforded protections already in the law, such as workers' compensation, 
Social Security, Medicare, payment of overtime, unemployment 
compensation, and the minimum wage. This legislation is cosponsored by 
Senators Durbin, Harkin, Schumer, Brown, Menendez, and Kirk.
  Under current law, employers are required to take certain actions on 
behalf of their employees including withholding income taxes, paying 
Social Security and Medicare taxes, paying for unemployment insurance, 
and providing a safe and nondiscriminatory workplace. Employers are not 
required to undertake these obligations for independent contractors. 
When workers are misclassified, businesses that play by the rules lose 
business to competitors that do not play by the rules and workers lose 
valuable rights and protections.
  The Internal Revenue Service, IRS, currently uses a common law test 
to determine whether a worker is an employee or independent contractor. 
Unfortunately, a loophole exists which allows a business to escape 
liability for misclassifying employees as independent contractors. 
Furthermore, there is statutory prohibition on the IRS providing 
guidance through regulation on employee classification.
  Federal and State revenue is lost when businesses misclassify their 
workers as independent contractors. A study estimated that, between 
1996 and 2004, $34.7 billion of Federal tax revenues went uncollected 
due to the misclassification of workers and the tax loopholes that 
allow it. Recent GAO and Treasury Inspector General reports have cited 
misclassification as posing significant concerns for workers, their 
employers, and government revenue.
  A study commissioned by the U.S. Department of Labor in 2000 found 
that up to 30 percent of firms misclassify their employees as 
independent contractors. State studies also show that misclassification 
is on the rise. In Massachusetts, the rate of misclassification has 
grown from 8.4 percent in 1995 through 1997 to a rate of 13.4 percent 
in 2001 through 2003.
  Misclassification is more rampant than studies indicate. Studies 
cannot adequately capture the ``underground economy,'' where workers 
are paid off the books, often in cash. Unreported cash is one aspect of 
this problem and it is difficult for the IRS to discover because 
employers have no record of pay.
  States have been leading the way in documenting and recovering taxes 
related to the misclassification of workers. In the Commonwealth of 
Massachusetts, Governor Deval Patrick has

[[Page S13254]]

tackled this issue head on and created an interagency task force on the 
underground economy and employee misclassification. The purpose of the 
task force is to gather information and assess current enforcement 
resources in an effort to improve current enforcement methods.
  The Federal Government needs to follow the lead of the States by 
addressing the current safe harbor. The determination of whether an 
employer-employee relationship exists for federal tax purposes is made 
under a common-law test that has been incorporated into specific 
provisions of the Internal Revenue Code or is required to be used 
pursuant to Treasury regulations.
  In 1987, based on an examination of cases and rulings, the Internal 
Revenue Service developed a list of 20 factors for determining whether 
an employer-employee relationship exists. The IRS recognizes that there 
may be relevant factors in addition to the 20 factors. Most recently, 
the IRS has structured its inquiry into three groupings: behavioral 
control, financial control, and the relationship of the worker and 
firm.
  Section 530 of the Revenue Act of 1978 generally allows taxpayers to 
treat a worker as not being an employee for employment tax purposes, 
regardless of the worker's actual status under the common law test, 
unless the taxpayer has no reasonable basis for such treatment or fails 
to meet certain requirements. Section 530 is commonly referred to as a 
``safe harbor.'' This provision was initially enacted for a year to 
give Congress time to resolve these complex issues. In 1982, the safe 
harbor provision was made permanent.
  The Taxpayer Responsibility, Accountability and Consistency Act of 
2009 would address the current loophole by requiring information 
reporting and making changes to the safe harbor. It would require 
businesses that pay any amount greater than $600 during the year to 
corporate providers of property and services to file an information 
report with each provider and with the IRS. A similar provision has 
been proposed by both Presidents Obama and Bush. This provision will 
ensure that contractor income is accurately reported in order to 
prevent fraudulent underpayment of taxes.
  The Taxpayer Responsibility, Accountability and Consistency Act of 
2009 revises the safe harbor and makes it part of the Internal Revenue 
Code of 1986. The safe harbor would continue to be available to 
employers for purposes of shielding them from liability, but it will be 
narrowed to reduce abuses and to ensure they had a genuinely reasonable 
basis for not treating such individual as an employee. Under the 
Taxpayer Responsibility, Accountability and Consistency Act of 2009, an 
employer shall be treated as having a reasonable basis for treating an 
individual as an independent contractor only if the decision was based 
on a written determination by the IRS to the taxpayer addressing the 
employment status of such individual or another individual holding a 
substantially similar position with the taxpayer, or a concluded 
employment tax examination by the IRS.
  The current safe harbor would continue to apply to services rendered 
up to one year after the date of enactment; after that, the new safe 
harbor would apply to services rendered more than one year after the 
date of enactment.
  I urge my colleagues to cosponsor the Taxpayer Responsibility, 
Accountability and Consistency Act of 2009 which will provide valuable 
protections to workers who are erroneously misclassified and help 
combat the underground economy.

                          ____________________