Independent Contractor Compliance Blog - by Collabrus™

In my seminars I tell participants that, “Over 70% of all employment tax audits find misclassified workers, resulting in a tax assessment.”

The reason the number is so high is because tax agencies rarely select a company for an employment tax audit unless they suspect there are misclassification errors. This means the auditor shows up the first day with the pre-conceived idea that 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 believe most, if not all, companies misclassify their workers. Why?

Just out of the gate: The IRS estimates 48% of all 1099’s represent misclassified workers. That’s just 1099’s! This statement shows that auditors, and their bureaucrat bosses, believe most companies are misclassifying workers. Where did this belief come from?

All tax agencies follow a detailed filtering process to identify and select companies for audit that appear to have misclassification issues. This process includes such factors as:

• Correlating reporting practices,
• Internet searches,
• Government data bases,
• Complaints from former employees,
• Complaints from competitors,
• Type of industry,
• News articles and various other sources. 

It’s a miracle the government only finds + 70% misclassified, because by the time an audit case is assigned to an auditor for investigation, there’s almost a 100% probability the company is “out of compliance.” This is why an auditor who has been on the job for several years forms the attitude that most cases will result in finding misclassified workers.

It becomes the auditor’s reality-the expectation…

These beliefs, experiences and resulting expectations become a self-fulfilling prophecy.

Auditors will keep looking until they find misclassification errors. Their supervisors, who also share this reality, will begin to suspect the auditor isn’t properly doing his/her job if they don’t maintain that +70% misclassification statistic. This combination of case pre-selection and auditor-attitude almost guarantees finding misclassifications.

Actually, the list above is not complete.

If you want to know the complete list of factors, events and actions that will get your company selected for both a state and/or federal employment tax audit, you should attend one of my seminars.

For details on the next seminar, March 17^th in San Francisco, click here.

(If you want to attend a seminar, I recommend you register early. They fill up quickly, and we purposely keep them small so I can spend time talking to each of you privately-but only if you wish).

Possibly a primary reason such a high rate of misclassified workers are found during an audit is the Burden of Proof is on the business.

That’s right. A major reason companies end up with misclassification findings is they can not prove they did it right. The government puts the responsibility to prove the consultant was properly classified on the business, not the IC and not on the government. It is assumed you are wrong and you must prove you are right. Most companies are not prepared and are taken completely by surprise at the level of detail required.

The deck is marked and the other guy gets to deal. Your odds are not good unless you hire a professional to help you play.

To properly protect yourself, you can’t make the contingent worker and IC engagement process a side job. The government auditors are specialists. They typically spend their entire career doing one thing-employment tax audits and ferreting out misclassified workers. To ensure you are protected you should employ an industry expert, like Collabrus, who also specializes in this area and works full-time protecting employers.