IRS “Safe Harbor” Allowing Tax Cheating and Wage Theft

Citizen Wealth Financial Justice
Contact Workers at the Smithsonian protest in 2013
Contact Workers at the Smithsonian protest in 2013

New Orleans          It’s not news that wage theft and the problems of mis-classification of workers as independent subcontractors is rampant.  What I had not realized is how much of it was allowed directly by Congress and lax enforcement by the IRS.  You think you know the whole score, but it was not until I was reading the tail end of a story developed as part of a longer series by McClatchy news service’s Washington Bureau that I got a better handle on how easy it has been for employers to get away with this mischief.

The story’s slant was the IRS and tax cheats, rather than workers and wage theft, but it adds up to about the same thing, just double trouble.  McClatchy probably just figured the article would attract more readers if it was slanted towards tax scofflaws, rather that workers being ripped off yet again.  Just keep in mind that when workers are misclassified not only does the government not collect the state and federal withholding taxes, but the worker also doesn’t have Social Security paid on her hours or unemployment insurance and workers’ compensation paid in their behalf.   The tax cheating may be the government’s problem on the short run and worth billions, but the inability to retire with qualified hours worked, have a safety net during unemployment, or support when injured, hurts workers today, and puts them at the will and whim of the government both now and later as well, letting the corporations walk, whistling a happy tune all the way.

Interviewing Kim Bobo, executive director of Interfaith Worker Justice on Wade’s World, she had a simple definition that is easy to remember for whether or not a worker is truly an independent contractor.  You just ask, “Do you work for yourself or someone else?”  If they answer “yes,” to the first, then they are, and if “no,” then they aren’t.  That’s a bright line test.

It turns out though that during the Carter Administration and the recession then, Congress passed a law in reaction to a lot of business complaints that the IRS was hounding them to pay taxes on their workers which gave them “safe harbor” with a rule officially known as Section 530 of the Revenue Act of 1978.  Technically this was supposed to be a one-year temporary kind of deal allowing a company that had messed up and “misclassified” its workers as independent contractors to get its act straight and fly right.  Instead the loophole in the words of the McClatchy reporters has meant,

“Every year, billions of tax dollars are squandered in the United States because of a decades old loophole in federal law that allows tens of thousands of businesses to do the wrong thing – simply because they have been doing it all along…Under the safe harbor rule, the company just has to have a ‘reasonable basis’ for doing so.  Generally, companies must just show they’ve been doing it continually and that others in that industry do it the same way.”

So, the double bind is that the IRS has not enforced the section and neither has the Department of Labor.  The companies skate.  The workers are screwed.

We watched the movie, “Nightcrawler,” the other night where a fellow desperate for a job was offered an internship by the psycho and negotiated first $30 for a night’s work and then $75 for a raise, and essentially got a death sentence for then asking for even more for dangerous work.  This movie of amorality ends with three young people, now “interns” jumping into vans to work for this so-called “news” gathering service.  You might say, hey, but that’s in the movies, dude.   Unfortunately, similar scenes, perhaps less exotic and appealing, are duplicated for millions of workers in thousands of companies every day.  Come on, man!