Independent Contractor Compliance Blog - by Collabrus™

Continuing our series on “things tax auditors may not tell you” today’s installment covers preparing for the first meeting with the employment tax auditor.

You have agreed to an appointment for an employment tax auditor to examine your records and review your classification of IC’s. The appointment has been set for next month-thirty days from now-a reasonable time to set the appointment. Let’s not waste that time.

Talk to your accountant and/or tax attorney. They have probably dealt with the tax agency before and have some advice and insight. Since auditors work a geographical area, your accountant or tax attorney may even have worked with the auditor representing other clients. This gives you an advantage.  You may want to consider shipping the books to the accountant or attorney and asking the auditor to go there. This option has pro’s and con’s: it will cost you more, but you’ll have a professional looking out for your best interests. In general, a good professional will save you many times his fees. Auditors who work with a professional sometimes elect to not visit your business altogether-usually a good thing.

Select a secluded location for the auditor to work. If you are hosting the audit at your business, you don’t want the auditor sitting among your employees. The reasons may be obvious, but the short version is the less the auditor interacts with your staff the less information he/she will get which you don’t want him to have. Plus, your staff won’t be distracted. The auditor will also work faster if he isn’t distracted by the daily business operations. Oh, I almost forgot, make sure there is nothing in the room you don’t want the auditor to see.

Designate a single point of contact for the audit. Pick either someone in your company or your tax professional to be the primary contact to the auditor. You don’t want everybody talking to the auditor. There may come a time when others will need to be involved but in the beginning it’s best to limit the contact points. Make sure this person is qualified and has the presence of mind to not panic if questioned.

Your records should be posted up to date and balanced. The cleaner your books the better. You don’t want to be wasting time explaining or deciphering accounting errors. The biggest issue in an employment tax audit is typically the common law status of independent contractors and consultants. That subject is complicated enough without the added frustration of having to reconcile accounting records. Part of the auditor’s report normally includes an opinion about your records:  Do they follow established accounting standards; are they accurate and complete? A plus in this column contributes greatly to your credibility.

Gather and review the compliance files (or whatever you call them). I know you have created compliance files if you’ve read my other articles. Ensure they are complete and current. If you don’t have them-shame on you. Start today, before you are selected for an audit. If you don’t know what to do, call a professional. (Yes…like Collabrus!)

Visit the tax agency’s website. Most tax agencies have some valuable information about their audit process and what your rights are if you don’t think you’re getting a fair shake.

Find the number and protocol for enlisting the agency’s taxpayer rights advocate. Put that information in your back pocket and don’t bring it out until the right time, and only if needed. I’ll cover this in more detail later.

What’s next? The auditor shows up.