Be on the watch, risk and safety managers; IRS auditing of independent contractors v. employees has started.
Editor’s comment: If your organization uses lots of independent contractors, better be forewarned. Starting right now, the IRS is to begin intensive audits of 6,000 randomly selected U.S. employers. One of the key targets will be determining whether employers are improperly misclassifying workers as independent contractors to save on taxes and legal risks.
The National Research Program audits will generate the IRS’s first statistical analysis of employment tax compliance since 1984. The audits will stretch across all industries and company sizes. We recommend you insure your employment and tax records are ready for an IRS audit. Federal officials believe the recession encouraged more employers to classify members of their workforce as independent contractors. Classifying workers as independent contractors might save money for some employers who won’t pay for contractors’ healthcare and pension benefits or for the employers’ half of the Social Security and Medicare taxes on workers’ wages.
The line in the sand is how much control the employer has over the worker’s schedule, materials, behavior, risk level and everything else. A recent U.S. Government Accountability Office (GAO) report says employee misclassification “could be a significant problem with adverse consequences” because it reduces tax revenues flowing to the government.
FedEx was the poster child for the contractor battle. The IRS originally hit the company with a $319 million tax assessment for improperly classifying 12,000 of its drivers as independent contractors. But earlier this month, the IRS backed off the assessment and allowed the workers to be classified as employees. Still, several states aren’t giving up the fight and may sue FedEx over those classifications.
The GAO report says the number of misclassified workers uncovered by state audits had increased from approximately 106,000 workers in 2001 to more than 150,000 workers in 2007. The 6,000 NRP audits will include face-to-face interviews, plus a line-by-line review of the company’s employment tax returns (IRS Form 941) and related forms and documents. Audits will mainly focus on tax returns for the calendar years 2007 and 2008.
The IRS has stated these audits will focus on five primary employment tax issues:
1. Worker classification
2. Fringe benefits
3. Reimbursed expenses
4. Officer compensation and
5. Non-filers.
Forewarned may be forearmed so don’t be surprised when and if the random audit hits your doors. Please do not hesitate to reply with your thoughts and comments.
