How a Tax Law Helps Insure a Scarcity of Programmers
The Senate holds hearings this week on complaints of taxpayer abuse by the Internal Revenue Service, but the agenda does not include the role of Congress itself in creating taxpayer woes, particularly for tens of thousands of computer programmers.But just ask Midge Johnson, a would-be programming entrepreneur, about a long-standing tax law that is pointed specifically at software professionals and prevents many of them from setting up freelance businesses.
Lately, the I.R.S. has been aggressively enforcing that law -- even as computer programmers are in such short supply that the Clinton Administration is pouring millions of dollars into Federal initiatives to train more of them.
It appears to be public policy in conflict with itself and it is making work life difficult for a category of citizens crucial to the digital economy.
''Why does Congress say that I can't go out and pursue the American dream and give my kids and grandkids things I couldn't have?'' asked Mrs. Johnson, who did not find out about the law until two years ago, after quitting her job with the consulting firm of Booz Allen & Hamilton in hopes of starting her own software programming business. ''And why,'' she asked, ''is the I.R.S. so busy enforcing this law that keeps me from being an independent contractor?''
Mrs. Johnson, of Lanham, Md., knows that programmers are in such short supply that they can earn up to several hundred dollars an hour writing code for hire, and many in Congress want to let tens of thousands of foreign programmers migrate to the United States. She calculated that if she were in business for herself she could double her income.
Everywhere Mrs. Johnson went in the suburbs of the nation's capital, she said, she was offered work fixing and customizing software -- but only if she would close her business and become an employee.
''They were afraid to do business with my company,'' Mrs. Johnson said. Two months ago, her bank account empty and creditors at the door, Mrs. Johnson gave up and took a job as a programmer, paying $69,000.
Mrs. Johnson and thousands of other computer programmers who want to work for themselves instead of being employees have run afoul of a 1986 law in which Congress decreed that most individual programmers cannot be entrepreneurs.
The law generally excludes programmers from statutes giving employers some flexibility to use independent contractors. Critics say that the I.R.S. has recently stepped up its enforcement of the law in a way that effectively kills start-up programming businesses if their only employee is the founder.
The law, which was introduced by Senator Daniel Patrick Moynihan, Democrat of New York, was estimated to raise $60 million over five years, a figure based on a belief by a staff member of the Congressional Joint Committee on Taxation that employees cheat less on their taxes than independent contractors do. That was enough money to pay for a tax break, approved with Mr. Moynihan's support, that was sought by I.B.M. for its overseas operations. Under the Gramm-Rudman deficit control act of the previous year, Congress was required to pay for any tax cuts with comparable revenue increases or spending cuts.
A year after the law regarding contractors was enacted, the Senator tried to repeal it, but his bill died. In 1994, Senator William V. Roth, Republican of Delaware, the sponsor of this week's hearings, wrote Mr. Moynihan saying the programmers should get relief. More than 60 other senators have written similar letters since 1994, but they have not voted to change the law.
Ginny Flynn, a spokeswoman for Mr. Roth, said that while the Senator believed that the law was unfair, he was not currently moving to change it because ''despite the fact the programmers are treated differently from other people, this opens a Pandora's box of other independent contractor issues.''
Programmers and their lawyers say that as a result of inaction by Congress, many corporations have revised their policies to explicitly forbid the hiring of programmers who are independent contractors.
In response, some people, like Mrs. Johnson, incorporated. They reasoned that if they were employees of their own corporations they would be treated by the I.R.S. the way that many doctors and others are and could expand their enterprises.
But internal I.R.S. documents show that in Alaska, California, Ohio, Minnesota, New York and New Jersey, I.R.S. auditors as recently as last year hunted for corporations created by computer programmers. They found scores of such companies and then disallowed them for tax purposes. The papers show that they were disallowed because they were less than a year old and had only one employee, the programmer who created the corporation.
Across the country, officials of high-technology temporary-help companies said the I.R.S. audit tactic had caused many corporations to refuse to hire programmers unless they become employees, like Mrs. Johnson, or were employees of such temporary-help agencies.
Mary E. Oppenheimer, an I.R.S. assistant chief counsel, said there was no national directive for auditors to hunt for incorporated programmers. However, she noted, Congress has directed the I.R.S. to look at the economic substance of tax matters, not just their legal form.
In an earlier interview, Tom Burger, the director of employment taxes for the I.R.S., said one of the agency's difficulties ''is that, and I need to pick my words carefully, Congress passes laws, often without asking us about them, and then tells us to enforce them.''
The immediate effect of these audits is to force individual programmers like Mrs. Johnson to abandon their dreams of getting rich off their high-technology skills. But the broader impact is that small businesses started by one entrepreneur do not have a chance to grow into mighty enterprises that can create jobs and generate more taxes. ''Who do you know who would hire someone who will bring with them trouble from the I.R.S.?'' asked Harvey J. Shulman, the Washington lawyer for the National Association of Computer Consultant Businesses, who made the audit documents available.
Mr. Shulman has challenged 52 such audits. ''I prevailed in 50 cases and partially in another, but at a cost to clients of $50,000 or more, and that is just ridiculous,'' he said.
The association's 400 members, who had more than $5 billion of revenues last year, are mostly high-technology temporary-help agencies that hire programmers as employees and send them to companies on short-term assignments. They want the same flexibility to use contractors and individuals who have incorporated as other businesses do.
Don McLaurin, president of the Computer Consulting Group in Columbia, S.C., which hires programmers as employees and farms them out to companies for short-term projects, said the law and its enforcement ''are having a devastating impact on the computer industry.''
He said his business and his clients would benefit if he could use some independent contractors and some incorporated programmers.
''This is Catch-22,'' he said. ''If you are not legitimate because you start out as a one-person corporation and you haven't been in business for a year, then how do you ever start your business? It is nonsensical.''
Ed Myers, president of a company in El Segundo, Calif., that provides programmers to corporations, said that when his company was audited he and Mr. Shulman were able to defend the status of all but 3 of 50 workers as independent contractors.
''The auditor then said I had to give him two more people and I said, 'what do you mean?' and he said he had to have five people he could reclassify as employees because that was what his boss demanded and that if I would give him two more names he would close the audit.
''My first reaction was 'hell no,' because they are not truly employees,'' Mr. Myers said. ''But my second reaction was that it makes no economic sense for me to fight this because it would cost another $50,000 or more, so I gave him two names.''
The two programmers, he said, no longer speak to him.
Mr. Shulman said the association ''is not asking for a special privilege in repealing this law; we are just asking that programmers and other technical-services workers be treated the same as every other worker in America instead of being singled out for discriminatory treatment.''
Donna Steele Flynn, a former member of the House Ways and Means Committee staff who is now a tax specialist with Ernst & Young, said, ''The only reason this hasn't gotten fixed is because the official Joint Tax Committee estimate in the past was that repeal of Section 1706 would cost a billion dollars in tax revenue over five years.
''There is a political will on both sides of the aisle, but in terms of importance and number of people, a billion dollars is a lot of money for a relatively small number of people.''
However, Ms. Flynn added, the official estimate seems wildly inflated. She noted that when legislation was considered last year that would allow employers broad discretion over whether to treat workers in any industry as employees or independent contractors, the tax revenue loss for the entire economy was estimated at the same $1 billion over five years.
The I.R.S. estimates that it collects 99.5 percent of taxes due from employees, but far less from those who work as independent contractors.
''Whether people cheat is a separate issue,'' Mr. Shulman said. He pointed to a Treasury Department study that found that programmers were more compliant taxpayers than other independent contractors.
''The I.R.S. wants people to be employees because it is easier to collect revenue, but the revenue they are collecting from employees is less than the revenue they would collect from independent contractors -- even if they cheat a little -- because they can make so much more,'' he said. ''Basically the I.R.S. is saying it would rather collect less revenue with less cheating than collect more revenue with more cheating. Does that make economic sense?''
No comments:
Post a Comment