Independent Contractor Compliance Blog - by Collabrus™

I’m seeing an increased number of businesses being audited for worker misclassifications by both state and federal agencies.

In the past several months I’ve encountered a significant increase in the number of businesses who are currently being audited for employment taxes and misclassified workers by the IRS or a state employment tax agency. Oftentimes they are contacting me to obtain help in developing a defense. Also at my seminars people say their company has been selected for an audit. They came to the seminar to learn how to defend themselves.

Many of these companies want to get their house in order now, hoping to avoid a large tax assessment.

They ask me:

• What kind of documents they should gather?
• What arguments will work?
• What should their contractors be doing to be more independent?
• What factors will the IRS or state agency look at?

These are all good questions, except they have waited until after the auditor has knocked on their door to ask them. You can install that new lock on the barn door but if the cow is already out and running wild then it is too late!

Installing a new lock won’t bring back the cow….

In other words, it is too late to prepare for an audit challenge after you receive the letter, or a phone call from the auditor.

Audits review what was done in the past. Most statutes of limitations are three years. That means how you classified your consultants three years (or longer) ago will be scrutinized today. Can you prove what you did three years ago is right today?

If you have been selected for an audit, my recommendation for you is to find a very good employment tax attorney, or possibly a very knowledgeable CPA who specializes in this area, and hope they can keep the assessed liability to a minimum.

However, you will still pay for their fees and in addition:

• The audit will still happen.
• An assessment will still be issued.
• There could be tax liens filed against your company.
• The audit results will be shared with other enforcement agencies.
• Misclassified workers may file civil suites.
• Word may get out to your customers and investors.
• You will be placed on the tax agency’s “watch list” for future compliance and possible “follow up” audits.

It’s better if the audit never happened.

Your best defense is never to be selected for an audit but if that doesn’t work then be able to prove you are doing it right.

Enforcement agencies like to know they will make a tax assessment before they contact you.  Many have units whose sole purpose is to identify businesses that appear to be out of compliance. So it’s best not to raise any red flags that will attract their attention.

However, many factors and events can cause your company to be selected for an audit. If this occurs just knowing you are right is not enough. You will need the correct documentation to protect your company.

Don’t wait to react after you receive the letter-stay ahead of the curve. If you want assistance, Collabrus specializes in helping companies that use contingent workers to protect themselves.