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Underground economy update: scrutiny for cash-based businesses

This is a follow-up to a post we did last fall on the taxation of California's underground economy.

As we noted in our October 9 post in 2013, the legislature passed a bill calling for the formation of a collaborative task force that is supposed to crack down on below-the-radar economic activities. The concern is that these activities tend to escape state government's attempts to impose taxes.

In this post, we will discuss related efforts within state government to frame an agenda for confronting the underground economy.

The Labor Enforcement Task Force (LETF) within the California Department of Industrial Relations is tasked with several responsibilities. One of them is making sure that the state collects employment taxes from businesses that might try to evade taxes through illegitimate means.

The LETF is therefore concerned about issues that include:
• Employee misclassification
• Wage theft
• Under-the-table payments

Making sure that employers do not engage in such activities must of course be handled with care. Worker classification issues, for example, are often very complicated.

After all, there are many factors involved in trying to distinguish contractors from employees. Some employers may classify certain workers as contractors, only to have government agents disagree. There should not be a rush to judgment in trying to accuse such employers of misclassification.

In other cases, such as with off-the-books payments, there may very well be tax evasion, tax fraud or even wage theft involved in some cases. But in certain industries, such as construction, cash-based payments may be common for legitimate business reasons.

In short, confronting the underground economy is a tricky business. And any California task force that takes it on should proceed with care.

Source: California Department of Industrial Relations, "Labor Enforcement Task Force (LETF)," Accessed March 7, 2014

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