Technologies Reconcile State & Federal Tax Returns

Today's news feed reveals that the state of Rhode Island is getting serious about recouping its tax gap -- that difference between the taxes collected and the taxes owed. New technology and the innovation available through a public-private partnership are enabling Rhode Island to feed IRS federal tax data into a data warehouse along with state tax return records, and then mine that data to look for discrepancies.

RI expects to recover around $10 million in uncollected taxes, targeted at independent consultants, contractors, and small businesses.

This author suspects the final amount may be much more -- although Rhode Island has over 70,000 firms registered to do business, it only gets tax returns from about 65% of them.

Data sharing between the state and federal layers is among the hottest tax news of the year. There was a time when tax evaders could be busted on one level but still get away with it on the other. It's safe to say the jig is up -- or will be soon. The same is true for misclassification of employees as contractors; any offense at the state level will flow up the federal, and vice versa.

The technology is getting too good, and the amount of tax revenue at stake is too great, for the government agencies to continue to allow taxes to go uncollected.

Our ears are not deaf to stories of economic hardship that the current crackdown climate is exacerbating. A recent editorial in MI fairly notes that the state is in some deep economic trouble, and that going after small businesses for misclassification is poorly timed -- especially based on practices that have been commonplace for decades, and based on 1099 compliance rules that are as clear as mud to comply with.

Others make the point that dealing with misclassification now is good for the economy. It levels the playing field for law abiding, tax paying businesses, and stops unfair practices.

Our focus is on helping independent consultants and small business owners, as well as large firms that rely on the valuable services of consultants and contractors, work together legally, safely, and cost effectively.