IRS Crackdown on Contractor Classification

January 16th, 2012
in Background

Econintersect:   The following story is from Econintersect Newspaper Americas page

PHILADELPHIA, Jan. 14, 2012 /PRNewswire/ -- Using independent contractors reduces the paperwork, tax burden and hassles associated with hiring employees. AuditSMALLTax specialist Christopher Ezold warns that employers can expect changes in 2012.

The IRS and the U.S. Department of Labor have agreed to an information sharing memorandum with 11 states to ensure that employers are not misclassifying employees as contractors. Regardless of these agreements, employers in all states will be subject to random audits throughout 2012.  The IRS says it intends "to end the business practice of misclassifying employees in order to avoid providing employment protections."

Follow up:

According to a GAO report, for example, officials from one region said, "Workers were misclassified as independent contractors at over 80 percent of the construction sites they inspected."

At stake is $7 billion in taxes and penalties for misclassified workers that the IRS believes it can add to federal coffers during the next 10 years.

"Regardless of current practices, employers need to carefully examine IRS guidelines on what constitutes an employee versus a contractor, and they must ensure that they meet the federal standard or face penalties and interest for failing to do so," says Ezold, a business attorney and tax partner with The Ezold Law Firm, P.C., a Philadelphia-based employment and business boutique.

The cudgel in the new enforcement policy are the 100 investigators the IRS expects to hire.

"For employers who have misclassified workers, there may be relief for companies that act promptly," says Ezold. "The IRS has instituted the Voluntary Classification Settlement Program, offering partial amnesty to offenders."

The IRS will waive fines and penalties for employers who erroneously classified employees as independent contractors. Those participating in the settlement program will pay slightly more than 1 percent for the wages paid to misclassified workers during the previous year. The IRS will also refrain from conducting audits on employers from previous years.

"The clock is ticking for every employer who has misclassified contractors," says Ezold. "Make sure you're in compliance; if not, it's worth examining the benefits of the partial amnesty program. The program has downsides that aren't published, so a thorough review is necessary. Delaying could cost you significantly more money down the road and added IRS scrutiny."

For more information, contact Chris Ezold at 610-660-5585, or visit

Source:  Christopher Ezold

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