Independent Contractor Compliance Blog

Law firms and local newspapers around the country are beginning to report that the IRS’ promised 6000 employment tax audits to determine the extent of non compliance and misclassifications of workers is hurting businesses just as they are struggling to save money and stay in business in this tough economy.

For example, the Dallas Business Journal, reports “…that 20 Texas companies are part of the first wave of companies being studied…

Read more: IRS ‘contractor’ study raising big concerns – Dallas Business Journal

Texas may think it is first, but there are other reports of businesses all around the country being selected for employment tax audits by the IRS. For example, California has been identified as one of the prime states to focus on for this IRS study.

Independent Contractors are Increasing Across the Nation

It’s about collecting more revenue.

The current IRS estimate is that the tax gap is around $350 billion per year and that misclassified workers account for nearly 25% of that amount.

However, that estimate is based primarily on studies done over two decades ago, so no one is sure what the actual numbers are today. Everyone agrees that there has been a significant increase in the use of contingent workers and independent contractors in the past two decades. The question is how many are misclassified?

Last year, the IRS Commissioner, Douglas Shulman, told congress he was instituting a two year pilot study where he would conduct 6000 employment tax audits nationwide to determine the extent of misclassified workers.

Of course, when the IRS conducts a study they mean conduct tax audits…

For more information about the IRS’ study, and IC compliance crack downs, read:

This is a Bad Time to Cut Costs by Improperly Classifying Your Workers

It’s not just employers that will be scrutinized. Consultants also need to be concerned.

The study, which officially began this year, will involve “audits of businesses and of the workers (tax returns who claim to be IC’s),” says Clay Sanford, an IRS spokesman.  “The study will…be used to look for tax cheats on both sides of work arrangements.”

My advice is to be sure you are in compliance before the IRS knocks on your door.