Independent Contractor Compliance Blog - by Collabrus™

Continuing my series of things employment tax auditors are not likely to tell you, today I’m going to cover “hot buttons” for auditors. What are they? These are entries in your accounting records that virtually guarantee closer scrutiny of your business.

The first accounting document the employment tax auditor may look at is your Schedule of Accounts. He/she will be identifying any account with the following, or similar, titles as accounts that will get “special” attention:

• Contract Labor-every entry to this account will be scrutinized. Remember, the auditor’s basic point of view is that most individuals classified as an IC are misclassified. They begin their inquiry from this perspective, and then use data to prove or disprove it.
• Outside Labor-from the auditor’s point of view, a contractor by any other name is still a suspected misclassified employee.
• Casual Labor-this one is almost a guaranteed source of what auditors refer to as “Unreported Wages.”  Auditors know this account will include people who were really common law employees but because they only worked for a short time or earned a small amount of money you did not put them on the payroll.
• Cash Pay-any payments made to cash will be looked at closely.
• Temporary or Contingent Help-or any account with a hint that payment was for an individual’s personal service not included on the payroll.
• Any payments made to individuals, especially reoccurring payments to individuals, in the disbursements records.

Another hot button for any auditor is transferring money from account-to-account and paying regular amounts of cash credited to some vague, ill-described expense account on a repeated, chronological basis. I once audited a land developer who was moving money everyday from bank-account-to-bank-account and pulling cash form various accounts several times per week.  He also had several different legal entities (some were partnerships, some corporations, some limited partnerships; some were called “joint ventures”). Large amounts of money were being transferred between them regularly. It was like watching a money merry-go-round at the fair.  Payments were being made from each of these entities to the point where at first inspection I couldn’t tell what the heck was going on. It took me a couple weeks to figure it out.

I eventually learned much of the money ended up being credited to one of several “Purchase of Materials” Expense Accounts located in any of his numerous different legal entities. (There was also money being siphoned off to some obscure personal account that I suspected involved hiding income, but I was an employment tax auditor, not an income tax auditor, so it wasn’t my concern-another clue about how auditors think). When I started digging deeper I found the developer was paying construction workers cash, under the table, and making it appear he was using the money to buy building materials. That way he could still claim a business expense on his income tax return for the purchase of building materials, and at the same time avoid the payroll tax expenses. He was trying to have the best of both worlds. Of course, this was a clear case of fraud. Auditors love to find these situations.

What’s next?

Next time we’ll cover “Frivolous Arguments,” “Tax Protesters,” plus other ways to instantly polarize the auditor, and how you can expect the auditor to react.