Independent Contractor Compliance Blog - by Collabrus™

That’s right!  For example, California’s EDD doesn’t publish this fact (government agencies don’t like to publicize these statistics) but at least 70% of all companies audited by them receive a tax assessment for misclassified workers, including back payroll taxes with penalties and interest. 

There are some reports that the IRS’ finds misclassified workers in 90% of tax audits when the auditor begins looking at worker classification issues during a business income tax audit.*

*Under pressure from Congress to close the “Tax Gap,” the IRS has announced it will perform 6000 employment tax audits in the next year as a test to see if there is justification to expand the worker misclassification audit program. 

Why do so many audits result in finding misclassified workers?

Tax agencies rarely select a company for any type of tax audit unless they already suspect there are errors.  This means the auditor shows up the first day with the pre-conceived idea your business has done something wrong.  Of course, no government agency will officially tell you this, but it’s the way tax auditors think…

Auditors think this way because tax agencies follow a detailed filtering process to identify companies that appear to have made errors.  Therefore, an auditor who has been on the job for several years forms the attitude that most audits will result in finding errors.  It becomes the auditor’s reality-his expectation.

Especially for worker misclassifications.

This expectation becomes a self-fulfilling prophecy, especially in the world of worker classification.  The IRS has publically stated it believes approximately 48% of all 1099’s filed represent a misclassified worker.  In my experience, EDD auditors believe over 70% of IC’s represent misclassified employees.  It’s their base attitude.  Because of this belief, auditors will keep looking until they find The Error. 

Although this is not an official policy or procedure, EDD supervisors also share this reality.  They will begin to suspect the auditor isn’t properly doing his/her job if they don’t maintain a +70% statistic.  This combination of case pre-selection and auditor attitude almost guarantees finding misclassifications.

It’s best never to get audited.

How do you accomplish that?  There are no guarantees, but if you:

1. Properly verify and document the status of your projects and consultants, and
2. Properly report and provide full benefits to workers who are actually employees…

…then you have made a good start.  If an auditor should knock on your door you have a much better chance of being one of the 10-30% who are not assessed.

One of our services at Collabrus is to help you do it right in the beginning, before the auditor knocks on your door.