My partner, David Lawrence, recently participated in the Annual Virginia Tax Roundtable, involving a small group of Virginia tax lawyers, the Virginia Tax Commissioner and his staff, and the Virginia Attorney General’s staff, to talk about what the Tax Department’s ideas for improving tax administration in Virginia. Although the discussion is focused on non-estate tax issues, it is instructive for my Virginia readers. Below is David’s summary.
Major Worker Misclassification Inter-Agency Task Force
The big new initiative is the creation of a Virginia inter-agency task force to target misclassification of workers (independent contractors versus W-2 employees). States in general fear that they are losing millions and millions of dollars of revenue from non-reported employment taxes, income taxes and workers compensation fees. Therefore, the Virginia Employment Commission, the Virginia Department of Taxation, and the Department of Professional and Occupational Regulation are joining together to start sharing their information – something they haven’t really done in the past.
Some of the initial industries that are being targeted are construction, grounds-keeping and other outdoor activities (approximately 40% of the misclassification cases are expected to come from that area), and other service industries, such as healthcare and social services, waste management, hospitality and food services.
Basically, each of these agencies will, in effect, bird-dog for each of the other agencies. Thus, if there is an OSHA-type visit to a construction site, they will also now start checking to see if all of the subcontractors have valid contractor licenses – if they don’t, then all those employees may be deemed to be employees of the general or prime contractor. The matter is then referred to the other agencies to investigate collection of unreported taxes and fees.
The Tax Department is currently reviewing 2012 and 2013 Virginia Employment Commission data for possible audits. They indicated that they expect to add the 2014 and 2015 data shortly.
The Task Force has been talking about developing an automated program to match social security numbers among the various agencies. However, currently, the coordination between agencies is based on manual review of documents.
Remember that most states, including Virginia, generally use the IRS 20 factor test of who is an employee. There is a major focus on who has the right to instruct the worker, that worker’s integration into the overall business, a continuing relationship between that worker and the business, and the provision of personal services. States are looking for an overall ability to control behavior, the presence of financial control and an ongoing relationship with workers as indicia of the employment relationship. Once it is established that a person performs services for remuneration, the burden of proof shifts to the taxpayer to prove that that worker was not an "employee."
Expect more of a focus on these cross-agency enforcement initiatives in order to capture what Virginia and other states see as a tremendous amount of lost revenue. Feel free to give me a call if you want to talk about ideas to address this issue.
Staffing Changes at the Department of Taxation
Lots of long-time employees of the Tax Department continue to retire. The Department is trying to hire replacements as fast as it can.
Out of State Filers & Electronic Matching
There’s a continued focus on non-filers and out-of-state improper filings. With more and more returns and data being filed electronically, the Commissioner’s office looks first to its electronic file of W-2s and 1099s in order to locate non-filers.
Identity Theft – Refund Fraud
One of the biggest focuses of the Department lately has been on identity theft and refund fraud. Craig Burns, the Virginia Tax Commissioner himself, was the subject of identity theft and refund fraud when he discovered that someone else had already filed a refund claim using his name and social security number last year. He suggested to our group that people try to file their returns as early as possible before others attempt to file fraudulent claims, using information they can find out about you. He did indicate that processing refunds claims may take a little bit more time since they are hiring more people to review refunds manually before they go out and cross-checking against W-2s in searching out the fraudulent claims.
Appeals of sales tax decisions are down significantly in Virginia. Now income tax appeals make up most appeals to the Commissioner. Local tax appeals have dropped tremendously – it appears that Tax Department really does not like dealing with local tax appeals.