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News / Business

Effort to fight tax fraud has skeptics

Some construction firms fail to report employees

The Columbian
Published: October 4, 2011, 5:00pm

OLYMPIA — A state and federal effort to fight tax fraud in the construction industry has raised skepticism among some who wonder how effective data sharing will really be at rooting out rule-breakers.

Some businesses are cheating by treating their employees as independent contractors or simply not reporting them at all, which allows them to avoid paying unemployment taxes and workers’ compensation insurance, according to the state Department of Labor & Industries.

These companies can then offer their services at lower prices because they’re saving money on L & I taxes.

It’s a situation that frustrates those who play by the rules, such as Rob Davis, owner of Vancouver drywall company A to Z Interiors. Because his entire workforce is registered with L & I, he says he pays more than most of the competition.

Yet he’s not convinced that L&I’s new partnership with the U.S. Department of Labor will make much of a difference.

The information-sharing pact is supposed to help L & I cross-match data to find out when businesses are classifying workers wrong. L & I currently matches information with other state agencies but not the federal government.

Davis said he has seen no improvements as a result of agreements L & I has made with state agencies. “If they’re not reporting them as employees, how is it going to show up? How are they going to track that? I don’t think they can.”

An L&I official acknowledged that fraud is hard to track, though she said she hopes that a partnership with a federal agency might be more helpful because of its additional resources.

Until enforcement improves, Davis says there’s little incentive for businesses to follow the rules.

L&I officials contend that businesses should be motivated by the penalties they face if they lie about employee status—and by the risk of getting caught.

“Especially now that we’re sharing information with the feds, you can get in trouble with a number of agencies,” said Selena Davis, a spokeswoman for the state Department of Labor & Industries (and no relation to Rob Davis.)

If breaking the rules has risks, however, following them can leave a business in financial distress, Rob Davis said.

His unemployment taxes and workers’ compensation costs have increased almost 20 percent since 2008 and could rise another 3.8 percent next year, according to L&I rate data. Some years, his costs have neared $400,000, he said.

“That’s ludicrous for one company to pay that amount of money when I know dozens of companies who don’t pay anything,” Davis said.

“Rates do go up, and there’s a number of factors involved in rates,” said Selena Davis. “Certainly one of them is employer fraud. Those are huge numbers, a lot of the biggest bosses are fraudulent. Everybody pays the price.”