Independent Contractor Compliance Blog - by Collabrus™

Continuing my series on “things the employment tax auditor might not tell you” we now arrive at a critical juncture. The auditor has examined your records and found a whole list of “exceptions” or alleged “misclassified workers. You’ve argued with him and brought out your best documents to prove you did it right but he’s got his mind made up and you’re expecting him to assess you for the past three years. At this point, you have polarized with the auditor.

However, it may not yet be time to polarize with the tax agency itself. There may still be a couple options at this point.

Most agencies recommend you ask for a meeting with the Auditor’s Supervisor

In my career the only time I’ve known the supervisor to side with the taxpayer, against his own auditor, is when the auditor did not discuss the findings of the audit and never gave the taxpayer an opportunity to provide documents or proof. In my experience, the supervisor will review the audit file and then meet with you to “do the dance.” What I mean is the supervisor knows he/she has to play the part of being objective and hearing you out and attempt to explain and justify the auditor’s findings. In the end, generally the supervisor simply gives you the same results the auditor did. 

The only exception to this is if you really have some powerful evidence that proves you are right. This is usually evidence the auditor did not see. (Have you created your Compliance Files yet?)  If the supervisor clearly believes they will lose at a hearing or trial, then there may be some give-and-take at this meeting.

The Taxpayer Rights Advocate (TRA)

At this point ask yourself the following questions:

• Did the auditor slip away without explaining the results of the audit to you?
• Did you suddenly get a bill in the mail without explanation?
• Was the auditor prejudiced concerning you or your business?
• Did it appear the auditor already had his/her mind made up from the beginning and wasn’t objective? 
• Did the auditor refuse to consider your point of view or to give your documentation the weight you feel it deserved?
• Did you call the supervisor and he just blindly backs up the auditor’s determination without giving you a fair chance? 
• Was the auditor rude or in some way unprofessional?
• Is the auditor contacting your clients and service providers, informing them you are being audited thereby hurting your reputation in the business world?
• Has an issue gone on for in excess of 30 days after the auditor promised to get it resolved?
• Is this causing your company financial hardship or burden?

If any of these things occurred, you can call the TRA then call your attorney anyway (see below).  Why call the Taxpayer Rights Advocate first? Usually the TRA will issue a “stop order” on the agency while the case is being reviewed. This is to protect you from any further harm (like further contacts with your customers and clients, collection of liabilities, etc.) The TRA does not cost you anything and often will put a hold on the forward movement of the case the same day you call or file your Form 911 (IRS form to ask for help). 

Of course, the Advocate ultimately works for the agency you’re asking protection from, so don’t expect miracles. Generally, the TRA will fix any auditor abuses or other errors and put you back the way you were just before the error. It’s called “making you whole again.” However, the case continues and this time the tax agency is more careful…

The advantage to calling TRA is the madness will stop.

Calling your attorney

Most attorneys would probably argue you should call them first. I won’t argue with that if you have a true legal expert in the employment tax area. Not someone who took his mandatory classes in law school and promptly forgot most of it after the Bar. Most attorneys really are not experts in common law and employment tax law. For most cases, many tax agencies don’t even send an attorney to the tax hearing to present their case, because the auditor or auditor’s supervisor has more experience and skill in presenting these cases than the employer’s attorneys. For example, California’s EDD wins over 80% of its cases at hearing and that’s without using attorneys. When they call in the attorneys the win rate approaches 95%. I believe the IRS has similar stats. So be sure you have a qualified labor law and employment tax law expert to represent you-someone who has successfully faced this agency before. Also note, it takes a significant amount of billing hours to represent one of these cases.

Calling the local, or federal, politician

This is almost always a dead end. The elected representative will probably never personally see your letter or receive your telephone call. Each elected official has a staff whose primary responsibility is to handle these complaints. The tax agencies have people who are experts in dealing with the elected official’s staff members. Many times they even know each other. All parties have a careful procedure they follow to “resolve” the issue you have raised. Most likely you will receive a carefully crafted letter supporting the tax agency’s position and the audit will go forward. 

You’re going to hate reading this, but it’s true. In most cases the elected official’s staff member asks the agency you are complaining about to draft letter for the politician’s signature. The letter will read as if the politician wrote it and explain his findings on the agency’s actions: A true case of the fox investigating the raid on the henhouse. So unless you really have a powerful connection this approach probably isn’t going to work for you.

Ultimately, your best defense is to be sure you have properly classified your workers and you have the needed documentation to prove your case for each individual.