In this issue:

• Form 1099 audits aid searches for misclassified independent contractors
• Kentucky boasts high scores in first Aware checkup
• Arizona goes live with Aware
• Under-reporting in construction industry costs nation hundreds of millions
• Washington State cracks down on employer fraud

We recently changed the software used to distribute the BullsEye newsletter. To ensure proper delivery of the BullsEye to your inbox, please take a moment now and add us - newsletter@onpointtech.com - to your address book, trusted sender list, or company white list.

Welcome to the September 2007 issue of BullsEye, the On Point Technology newsletter. Our goal is to keep you up-to-date on the latest unemployment insurance news and developments at On Point Technology.

Form 1099 audits aid searches for misclassified independent contractors

Over the past several weeks, On Point Technology has received several requests for information about the Form 1099 "one-click" audit that is contained in our Aware for Unemployment Insurance (UI) Tax application.

The Internal Revenue Service (IRS) 1099 form is a tax document, required of businesses, to report certain transactions to the IRS. Any person, including a corporation, partnership, individual, estate, and trust, who makes reportable transactions, such as income to subcontractors, during the calendar year must file a 1099 form to report those transactions to the IRS.

There is a 1099 abstract file available from the IRS that contains a record for every 1099 form issued to workers on a state-by-state basis. A state agency wanting to initiate discussions to participate in the 1099 exchange program should contact their IRS Governmental Liaison (GL). A list of each state's GL address can be found at http://www.irs.gov/govt/liaisons/article/0,,id=133086,00.html.

Aware's one-click audit analyzes the IRS 1099 abstract file and looks for pieces of information such as:

1. How many 1099 forms the person (supposedly an independent contractor) received

2. The amount of wages (in Box #7) is at a level that suggests full-time employment

If during a one-year period, an individual receives only one 1099 form and the amount of wages being reported is at a high level, the employer may actually be misclassifying the individual as a independent contractor instead of a full-time employee. The reason an employer may do this is to avoid having to pay unemployment taxes for the individual.

With Aware, State UI agencies set the level of what constitutes a full-time wage, based on Labor Market Information (LMI). If the Form 1099 one-click audit finds an individual who meets these criteria, it identifies it for investigation as a possible misclassification case.

New York State recently announced a crack down on employers who wrongfully classify employees as independent contractors. Labor Commissioner M. Patricia Smith warned thousands of companies that they will pay the price for trying to evade taxes and employee benefits by deliberately mislabeling employees.

This fraud scheme has cost New York some $175 million in UI taxes each year, according to a recent Cornell University report. The report found that 704,000 private sector workers had been wrongfully classified as independent contractors. By misclassifying employees, the companies avoid UI taxes, as well as Workers' Compensation premiums, and their portion of Social Security and Medicare taxes.

This scheme hurts the misclassified workers also. Misclassified independent contractors have no right to collective bargaining or to receive overtime. They could also be paid below their appropriate wage classification. According to the Cornell study, a minimum of 39,500 companies misclassify their employees every year. This figure was calculated by reviewing State UI Agency audits.

For more information about this or any of Aware's one-click audits, contact Bob Yokavonus at 908-526-0426 or robert.yokavonus@onpointech.com.

Kentucky boasts high scores in first Aware checkup

On Point Technology conducted Kentucky's Department for Workforce Services' first check-up after the installation of our Aware software application. We found that Kentucky has been doing a superb job in their first few months using the product. On Point Technology, Business Team Supervisor, Norm Harelik, and Business Analyst, Tana Hensley, reviewed Kentucky's procedures and determined that many solid practices had been put into place for the initial use of Aware.

Kentucky appointed individuals who use Aware on a regular basis to detect fraud as a part of their weekly duties. One of these individuals, Rachil Malhotra, is responsible for finding a very large potential fraud situation that is currently under investigation. This situation involves the usage of a large number of invalid Social Security Numbers, multiple claims with differing SSN's, but the same names and improper claims filed by the Human Resources (HR) Manager of a large corporation. The claims were all going to addresses in one town which is located in a border state, and involve all mass electronic claims filed by this HR Manager. The case remains under investigation, but it appears that Ms. Malhotra is onto something big.

Another employee, Kevin Parker, has been developing leads for the Tax branch to use in the investigation of SUTA dumping schemes. Mr. Parker is also using Aware to look for claims with people born after 1952 and a lower level of education than would be expected. Kentucky has joined the ranks of states that have begun to have a problem with illegal aliens drawing benefits. Mr. Parker also uses Aware to determine better ways to visually catch claims using stolen identities or drawing benefits illegally. This type of innovation shows just how versatile the Kentucky Aware application is for identifying fraud schemes within the UI system.

Along with the individuals who use Aware as a part of their regular duties, the program is available to all the fraud investigators around the state. They are able to use Aware to help with a current investigation or simply scrutinize claims filed within their jurisdiction.

It was suggested during the course of the check-up that one individual have the responsibility to run the one-click audits each month to ensure they are not overlooked. Using Aware's ad hoc query tool, Workforce Reporter, is an interesting part of any person's day and the State wants to ensure that the pre-written queries are not forgotten or neglected.

Kentucky is aggressively pursuing the detection of fraud and has found success in their first few months of using Aware and finding ways to best use the tool.

Arizona goes live with Aware

The Arizona Department of Economic Security recently completed a successful installation and implementation of On Point Technology's Aware software application. During the course of the training, several suspicious-looking leads were found. The fraud investigators who were present jokingly remarked that Aware was great for job security. The staff was amazed at the versatility of the Aware product, especially its ability to interrogate against literally any data within the Arizona system.

A Labor Market Information (LMI) staff person was shown how Aware may be used to glean statistics from the system without expensive programming costs. Using real-life fraud tips during the training enabled the staff to see how easily Aware can be used to detect patterns within the mainframe data.

Overall the "go-live" of Aware in Arizona was a success, with the Arizona staff being able to quickly use the product to their fullest advantage.

Under-reporting employment in the construction industry costs nation hundreds of millions

The Fiscal Policy Institute (FPI), a nonpartisan research and education organization that focuses on the broad range of tax, budget, and economic issues that affect the quality of life and the economic well-being of New York State residents, has issued a stinging report detailing under-reporting in New York City's construction industry.

According to the study, construction firms routinely avoid responsibility for payroll taxes and social insurance programs, thereby shifting the costs to other employers and taxpayers. While this may not be news to those in the unemployment insurance (UI) community, the magnitude of the problem may come as a surprise. The study suggests that in New York City alone, the socialized cost of this under-reporting is between $85 million and $126 million. If this cost can be logically extrapolated to the nation as a whole, the cost shift is enormous.

FPI reports that the most evident example is in the affordable housing segment of the construction industry. Here it suggests that two-thirds of construction takes place in the "underground economy." The underground economy refers to cash-based transactions that are considered "off-the-books" and therefore untraceable and difficult to audit.

Part of this evidence is based on FPI's examination of building permits between the years 2000 and 2005, when construction permits doubled while employment, as reported by the Labor Department, rose only 16 percent.

Did you know that On Point Technology's Aware for UI Tax package software application detects UI tax non-filers and under-payers? For more information contact Bob Yokavonus at 908-526-0426 or robert.yokavonus@onpointech.com.

Washington State cracks down on employer fraud

Washington State employers trying to manipulate the unemployment insurance system are learning that fraud does not pay.

In July 2006, the Washington Employment Security Department added a new unit dedicated to finding employers that defraud the system. In its first year, the unit discovered almost $5 million in unpaid taxes. Of that, $4.4 million was from employers that merged or restructured their businesses to gain a better unemployment tax rate. The other $582,000 was from employers that had not registered with the Department or had not paid taxes for all of their employees. Those employers have to pay back the tax they owe, plus penalties and interest.

Over the year, the Department also enforced unemployment coverage for 1,166 workers. Those workers had been misclassified as independent contractors, jeopardizing their livelihoods if they were laid-off or lost their jobs.

Employers do not pay unemployment taxes on contractors, and the contractors generally are not eligible for unemployment benefits. The employers also gain an unfair business advantage because their costs are lower than businesses that pay taxes for all their employees.

Historically, the Department has focused on fraud committed by people who collect unemployment benefits, but was able to expand its focus to include employers with funding from the 2006 legislature.