Rhode Island plans to use information from the Internal Revenue Service to track down employers who are failing to properly pay state unemployment insurance taxes.
The Rhode Island Department of Labor and Training has signed an agreement with the IRS to share information that will allow the state agency to identify businesses that should be paying into the state’s unemployment insurance trust fund but are not, said Raymond A. Filippone, who heads the state’s unemployment insurance program.
“It is very important for us. I think it’s a step in the right direction,” Filippone said in a telephone interview yesterday from Nashua, N.H., where he is attending a conference for state unemployment insurance directors.
Based on a statement issued by the state agency yesterday, and on comments by Filippone, the new agreement’s focus would include the following situations in which state unemployment insurance taxes are not being properly paid:
•A business may be registered with the federal government, but not with the state government.
•A company may be registered at the federal level as a business with employees, but at the state level as a sole proprietorship without employees.
•An employer may misclassify employees as independent contractors.
The agreement will help the state agency identify such employers and notify them about the requirement to pay the tax, Filippone said.
Under the current system, businesses that fail to properly report their situations and pay the required unemployment insurance taxes are not caught until after employees file for unemployment insurance benefits.
With the IRS agreement, “Now we can catch them before an employee contacts us with a claim,” Filippone said in a statement.
Adelita Orefice, director of the state Department of Labor and Training, said in a statement that, “Prevention, detection and elimination of abuse in the unemployment insurance program are top priorities for our department. We want to ensure that employers are paying only their fair share of employment taxes and are not subsidizing any dishonest employers.”
The state does not have an estimate of how much in additional unemployment tax revenue it might collect as a result of the agreement, Filippone said in the phone interview.
Nevertheless, he said it is bound to result in some additional collections. This, in turn, could benefit existing employers who currently pay unemployment taxes — they might wind up paying less in tax, or pay less of an increase that would otherwise be due, he said.
If a business has employees, “It has to pay . . . unemployment insurance tax,” said Patricia A. Thompson, former president of the Rhode Island Society of Certified Public Accountants.
The unemployment insurance program is run through a federal-state partnership and is designed to partially replace lost earnings of individuals who become unemployed through no fault of their own. It is also intended to stabilize the economy during downturns.
The program has been a key component in ensuring the financial security of America’s work force for more than 70 years, according to a report issued last month by the U.S. Government Accountability Office (GAO), the investigative arm of Congress.
For the year ended Sept. 30, 2006, the unemployment insurance program covered about 130 million workers and paid about $30 billion in benefits to about 7 million workers nationwide who lost their jobs, the GAO report said.
The program is paid for through state and federal employment taxes. In general, the taxes that employers pay are deposited into an unemployment insurance trust fund.
From that fund, the state pays benefits to workers who lose their jobs and qualify for benefits. The fund has a balance of about $192 million, Filippone said.
Broadly speaking, the tax that an employer pays is based, in part, on how many people have collected unemployment benefits in the past based on that employer’s account, said Thompson, tax partner with Piccerelli Gilstein & Co. LLP, a CPA firm in Providence.
Rhode Island is one of 29 states that will sign a memorandum of understanding with the IRS on Nov. 6. Besides Rhode Island, other New England states in the agreement include Massachusetts and Maine, Filippone said.
A spokesman for the IRS was not immediately available to comment about the agreement. Thompson said that the IRS could benefit from the information-sharing agreement in a number of ways.
For example, if an employer misclassifies a worker as an independent contractor, the employer does not pay federal payroll taxes that would otherwise be due, such as unemployment tax, Social Security tax and Medicare tax.
If the agreement uncovers such situations, the IRS could seek payment from the employers.