When businesses don't properly report the status of their workers, they avoid paying a large amount of employment taxes.
"This problem adversely affects employees because the employer’s share of taxes is not paid and the employee’s share is not withheld,” said J. Russell George, the department’s tax administration inspector general, in a statement.
He added, “If left unchecked, the problem will continue to deprive the Federal Government, and the American people, of millions of dollars in lost revenue every year.”
An IRS program allows employers and employees to ask the agency whether or not workers should be classified as independent contractors.
The inspector general reviewed more than 5,000 IRS decisions from 2009, and found that 19 percent of employers did not comply with the IRS’s determinations and issued an independent contractor tax form instead of a W-2.
In response to the lost taxes, the inspector general recommended updating performance goals and pre-screening techniques that could reduce case processing time at the IRS.