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Carter County Judge-Executive Mike Malone (foreground) and Grayson Mayor George Steele listen to presenters during an IKORCC forum on stopping tax fraud in the construction industry. (Photo by Jeremy D. Wells)

Tax fraud in the construction industry inhibits competition, hurts workers, raises costs for law abiding contractors, and costs state and local governments millions each year – up to $80 million or more – according to construction industry panelists who spoke at an event in Carter County last Friday that drew government representatives from across the region.

'At the end of the day, it steals money from taxpayers and is illegal,' explained Jerry Yates, with the Indiana Kentucky Ohio Regional Council of Carpenters (IKORCC).

Yates was one of several to speak on the impacts of fraud in the construction industry during the event.

He explained that one of the ways that contractors get out of paying their share of state and local payroll taxes is by hiring subcontractors who hire workers as independent contractors. In those cases the independent contractors, who receive a 1099 form instead of a W-2 from their employer, are required to hold out their own taxes, but this rarely happens. In some cases it's because the workers don't know they have to, or how much they have to hold out. In other cases it's because the employers purposefully don't file or pay taxes, particularly if the construction workers are illegally working in the United States without proper identification and work visas. In some instances these workers are paid directly in cash, instead of with a paycheck.

'There's a 30 percent unfair cost advantage when employees are paid under the table,' Yates explained.

'It's huge. It's more than just winning the project,' he said. It doesn't just hurt the legitimate contractors, he explained. It also costs taxpayers who end up 'footing the bill' for medical expenses if the employee is hurt and workers compensation taxes aren't being paid, welfare when the contractor is out of work, and other costs.

'It robs Kentucky taxpayers,' Yates said. These numbers, according to Yates, add up to $80 million annually by costing the state $18 million in state taxes, $30.2 million in workers compensation, and $32.4 million in unpaid unemployment.

It also contributes to human trafficking, Yates said, as unscrupulous contractors pay foreign workers 'under the table.'

Waylon Isaacs, also with the IKORCC, explained how he has seen workers on job sites using the same name and social security number with fake identification cards. Isaacs related how he once hung a sign in a laundromat advertising identification for undocumented workers and received several inquiries within days of putting up the sign.

Isaacs also noted how he had gone onto a work site and spoken with a Serbian worker who was serving as translator for the other Serbian and Russian workers on the project. While he admitted that some of the workers didn't have proper permits to work, when jobsite managers came on site, he said, the translator gave non-verbal cues, such as nods, to employees not to come near as identification was being checked.

'Within ten minutes of being on site, the developer was there and shut down conversation with the workers,' Isaac said.

In one of the other cases that Isaacs investigated in Louisville, on an apartment building project, they were able to determine the city and state lost over $5 million in payroll tax revenue.

'Nobody checks (Social Security) numbers,' Isaacs said.

In some cases, he said, the illegal employees have approached the union because they end up not getting paid at all. What happens, he said, is that the employees are paid in cash. At first they are paid regularly. Then they get partial payment, with a promise that the contractor or subcontractor will catch up with wages during the next pay period. This continues, he said, until they are not paid at all. In one case, he said, after the employees complained and contacted subcontractors further up the line for payment, they were told to come and collect 'what they had due.' When they showed up, Isaacs said, the contractors had Immigration and Naturalization Services waiting to take them into custody.

Isaacs said that this isn't just something he's seen as a union member and investigator. He said he was cheated on under-the-table pay himself, as a young man just entering the workforce.

Yates said it wasn't just cities like Louisville and Lexington where such high scale fraud took place. He said he could think of several local incidents as well.

This, he said, is why the lowest bid isn't always the best bid and can actually end up costing the city more when employees come from outside the state or country and aren't paying local and state payroll taxes. When a city takes the lowest bid, he said, 'they look at the money they're saving,' but they aren't really looking at the entire picture, which includes what they are losing when taxes are not paid.

He told the crowd that his group would help verify workers at no cost to the community.

'It doesn't cost you anything (to have us report),' he said. 'We're already doing it.'

He added that while he is a union member, this isn't just a union issue. Many contractors that don't use union labor are also law abiding and tax paying employers. The main focus for Yates, he said, is the use of local labor and payment of state and local taxes.

'When you follow (the guidelines) 9 times out of 10, you're funding a job for a local,' said Terri Branham Clark, business woman and General Assembly Representative for Kentucky's 100th district. That impacts more than just tax revenue, she explained. That money, she said, then circulates in the community instead of going out of the community.

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