IRS watchdog urges action to help on-demand economy workers

The Internal Revenue Service’s in-house watchdog called on the IRS and Congress to take steps to help workers in the on-demand economy meet their tax obligations.

“Establishing the tax-compliance norms in this emerging industry in its infancy will benefit participants and the tax system as this segment grows,” National Taxpayer Advocate Nina Olson said Thursday at a House Small Business Committee hearing.

The hearing is the second that the Small Business committee held this week about tax issues relating to the on-demand economy. A hearing on Tuesday included testimony from TaskRabbit’s vice president of marketing.

Workers for on-demand economy companies such as Uber and Lyft are generally treated as independent rather than employees. Participants in the on-demand economy may not be aware that they need to set aside money for taxes or make quarterly estimated payments.

According to a survey by the National Association of the Self-Employed, 69 percent of sharing-economy participants received no tax guidance from the places with which they work.

Currently, if on-demand economy workers call the IRS or visit an agency walk-in site, they will get a message saying that the IRS isn’t answering tax-law questions over the phone or in person anymore this year and that taxpayers should look on the agency’s website.

Olson said this is “beyond unacceptable. It is absurd.”

Olson said she is not aware of the IRS engaging in outreach efforts to on-demand economy workers. The IRS is aware of the growth of the on-demand economy but moves slowly, she said.

“Hearings such as this will help move it along,” she said.

Olson recommended the IRS take actions to educate on-demand economy workers and service providers about the tax issues in this space. These actions include creating a publication and dedicated web page for on-demand economy workers and having IRS staff monitor and participate in online forums of on-demand economy workers.

Olson also recommended that Congress take actions aimed at increasing the tax compliance of workers in the on-demand economy, including changing the estimated tax payment due dates to make them easier to remember and directing the IRS to create a program in which independent contractors can enter into voluntary withholding agreements.

House Small Business Committee Chairman Steve Chabot (R-Ohio) suggested that he and the committee’s top Democrat, Nydia Velazquez of New York, could work together on legislation to change the estimated tax payment due dates.

Chabot criticized the IRS for not doing enough to help taxpayers navigate the on-demand economy.

“Too often, it seems to have been part of the problem itself,” he said.

As a result, “Congressional committees like ours have a duty to provide robust oversight of the IRS and ensure they are providing small businesses with clarity and treating them fairly,” he said.

Olson said that Congress has barred the IRS from issuing guidance on whether a worker should be classified as an employee or an independent contractor, so the IRS is stuck preparing training materials.

Velazquez said that entrepreneurs often have trouble operating their businesses in an outdated regulatory environment.

“How can we adapt existing laws and regulations to make it easier to classify a worker?” she asked Olson.

Olson said she was also struck by testimony at Tuesday’s hearing about the possibility of a “third way” other than employee or independent contractor. It would be key if companies could engage in tax withholdings and provide benefits, especially retirement benefits, for this third type of worker.