Last week Rep. Jim McDermott (D-Wash.) reintroduced the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (H.R. 3408), a bill that would entitle individuals deemed independent contractors by their employers to petition the Internal Revenue Service (IRS) for a determination of whether they are properly classified as independent contractors, significantly increase employer penalties in the event of misclassification, and make it more difficult for employers to avoid employment tax liability for such misclassification.

Specifically, the new legislation would add a new section to Chapter 25 of the Internal Revenue Code (IRC) that would enable employers to avoid employment tax liability only if they are able to demonstrate that they had no reasonable basis for classifying the independent contractor as an employee. This new Section 3511 would supplant the safe harbor provisions of Section 530 of the IRC. Under the more stringent terms of Section 3511, an employer’s decision would be deemed “reasonable” if the employer reasonably relied on a written determination addressing the employment status of the individual or another individual holding a substantially similar position with the employer, or a concluded employment tax examination that did not find that the individual (or one holding a substantially similar position) should be considered an employee. In addition, the employer or its predecessor must not have treated any other individual holding a substantially similar position as an employee for employment tax purposes for any period beginning after December 31, 1977. The assessment of whether an individual holds a substantially similar position held by another would be made using criteria established by the Fair Labor Standards Act.

Employers that misclassify employees as independent contractors would be subject to the following penalties:

• A minimum of $250 (up from the current $50) per incorrect tax return, up to $3,000,000 (currently $250,000) per year. Lower penalties would be imposed if the returns are corrected within a specified period of time, although the amounts are significantly greater than those currently imposed on employers for misclassification.
• Smaller employers (those with gross receipts not exceeding $5,000,000) would be subject to fines of up to $1,000,000 per year, up from the current $100,000 limitation.
• In the event of intentional disregard for the filing requirement, employers would be subject to a $500 fine per tax return, up from the current $100 amount. The $3,000,000 per year penalty ceiling would not apply in this instance.

If enacted, the provisions of this bill would apply to information returns required to be filed after December 31, 2009. This bill has been referred to the House Committee on Ways and Means.