The Treasury Inspector General for Tax Administration has released While Actions Have Been Taken to Address Worker Misclassification, an Agency-Wide Employment Tax Program and Better Data are Needed:

Misclassified workers are a significant portion of the employment tax gap. However, because studies of the impact of worker misclassification on the tax gap are over 20 years old, the IRS does not know the size of the problem today and is unable to determine the overall effectiveness of its actions to address this issue. The IRS’ most recent estimate of the tax gap is approximately $345 billion. The employment tax portion of this figure due to underreporting is estimated to be about $54 billion with an estimated $1.6 billion being attributable to worker misclassification. However, the $1.6 billion estimate is based on Tax Year 1984 data. The IRS conducted a preliminary analysis of Fiscal Year 2006 operational and program data and found that underreporting attributable to misclassified workers is likely to be markedly higher than the $1.6 billion.

We recommended that the Deputy Commissioner for Services and Enforcement develop and implement an agency-wide employment tax program to address the issue of worker classification to improve coordination among the business divisions, improve compliance, and reduce the tax gap. The Deputy Commissioner for Services and Enforcement should also consider conducting a formal National Research Program reporting compliance study to measure the impact of worker misclassification on the employment tax gap.