Independent Contractor Compliance Blog - by Collabrus™

In this series I last left you with the auditor humming to him/herself in your quiet room-a busy little bee, digging through a pile of your dusty old accounting books. Whenever you checked in and asked “How’s it going?” you got a little smile and a short, non-committal response like, “Fine…”

Eventually, the auditor will emerge from the quiet room and ask to speak to the contact person.  This will be your first real glimpse into how bad or good the audit is going to be for you. Your contact person must be an expert on:

• Your company
• Common law
• The tactics of an employment tax auditor.
• Negotiating

Warning:  There is a category of auditor who will slip away, without discussing the audit face-to-face. I’ll cover how to deal with this coward in a later segment.

What to expect during this “talk,” and what you should be doing…

The auditor will have a list of names and payments to individuals not on the payroll. This list is sometimes called “Questionable Items” (an auditor term for a list of individuals who appear to be misclassified). For each individual the auditor will initially ask:

• What services did the individual perform?
• Where does he perform the work?
• Does he have other clients?

Let me short cut this by saying the auditor will drill down on the common law factors (and possibly some statutory factors) that the IRS and most states use to determine who is an employee or an IC.

Don’t be caught of guard

If you need to, buy yourself some time to prepare:

• Make an excuse why you can’t talk right now,
• Ask for a copy of the list (be honest-say you want to get the information on the individuals so you can be helpful)
• Set a new appointment to discuss them within a reasonable time.

You’re buying time to research, pull files and prepare negotiating points.

When you meet.

As you go through the list the auditor should explain his point of view on each individual’s “status.”  This is basically his attempt to “educate you” and to make his initial ruling. He may tell you which individuals he believes were properly classified, and which were not (Read: tax assessment). Remember, most government auditors err towards calling an IC a misclassified employee.

A tactic almost all auditors use is to group, or batch, individuals into general categories. The auditor will attempt to get your agreement to combine (sometimes hundreds) individuals into a single group. Then he/she will discuss one or two within the group and from that discussion generalize about the other 100. So if the one or two appear to be misclassified, the auditor will assume all 100 are misclassified. It’s an easy path for the auditor-time wise and stress wise. It’s a deadly trap for you.

NEVER AGREE TO BATCHING YOUR IC’S: Unless you just want to get it over with, pay an assessment and have the auditor be on his way.

If you have a group of individuals that operated almost identically to each other you may not be able to avoid grouping. However, I recommend arguing that each individual is unique and must be discussed separately. Your strategy is to wear the auditor down…

Bargaining

At this point most auditors will attempt to gain agreement on at least some of the individuals, so the problem areas are limited. This will work for you too, because you want the auditor to agree that some people were properly classified. The auditor’s drive to get agreement on some issues will make him/her open to a give-and-take bargaining. This informal bargaining usually only happens at this level of the audit and typically is your best chance to horse trade. 

I recommend that if you know there are some issues the auditor has raised which you will lose (you never volunteer issues), offer them up here for concessions from the auditor. If he doesn’t come through you are not bound by the informal deal and you can put them back on the table.

Stay mindful of any IC’s the auditor agreed were correctly classified. You may be able to point out similarities between the remaining individuals and the properly classified IC’s to your favor.

Typically, during this informal bargaining phase the auditor is basing his/her decisions strictly on the conversation and tossing the “obvious ones” into one pile or the other. The items tossed into the “Properly Classified Pile” may never be looked at again. So the clearer cut and convincing your description is at this point, the better for you. 

WARNING: Don’t get caught warping the facts.  You’ll lose credibility and the audit will get nasty.

Your best strategy is to resolve as many of these “Questionable Items” as possible at this point by: 

• Keeping communication open
• Argue strongly, with facts and documents
• Don’t give in if you believe you’re right
• Don’t polarize yet

If you make a statement that indicates there is documentation (contracts, etc) the auditor may ask for copies. This is where your Compliance File on each individual becomes your best tool. You may be able to bring out the documentation that supports your position and make the issue go away forever.

(Please don’t tell me you don’t keep Compliance Files on your IC’s)

What’s next?

What if you just can’t agree? In the next installment I’ll talk about better options than getting angry and shouting “See you in court!” I’ll also discuss the “coward” who slipped away without talking to you.