2010 IRS Employment Tax Crackdown

The stated purpose of the IRS audit is to collect data that will help the agency better understand the areas in which businesses most frequently fail to comply with employment tax laws and related reporting requirements. The IRS plans to use these audits to secure statistically valid information for computing the “Employment Tax Gap” (the difference between the amount of tax owed by taxpayers and the amount actually paid voluntarily and on time by taxpayers ' last estimated to be approximately $350 billion), and to determine compliance characteristics so that it can address the most noncompliant employment tax areas going forward.

The IRS has acknowledged that the focus of its audit will rest in four areas where it believes businesses frequently fail to comply with employment tax laws: 1) employee vs. independent contractor status; 2) fringe benefits; 3) expense reimbursements; and 4) executive compensation. Because it continues to be one of the most significant problem areas for employers, this article examines the first of these four areas ' the classification of workers as either employees or independent contractors. Specifically, this article: 1) reviews the approach the IRS will use to determine whether companies have properly classified workers; and 2) discusses the consequences from both a tax and potential civil liability perspective of misclassifying employees as independent contractors.