The Compliance Wire » IRS

Thanks, But No Thanks

Aaron Chavez — Wed, 28 Sep 2011 23:44:54 +0000

Unless you’ve been hiding under a rock for the last week, you’ve probably heard about the IRS’ new Voluntary Classification Settlement Plan (VCSP). It’s the IRS’ token of generosity that allows employers who have misclassified their workers as independent contractors to come forward and admit their guilt. The IRS will show you their appreciation by requesting a payment of 10% of the employment tax liability that would have been due on what you paid your workers for the most recent year, determined under the reduced rates of section 3509 of the Internal Revenue Code. Hmm, sounds like a deal to me.

The VCSP Criteria

I can’t help but be sarcastic when speaking of this new plan. I want to believe that the IRS had good intentions when this was being created. Asking that the employer pay a small fraction of the cost on a worker who should have been an employee rather than an independent contractor is beneficial. Unfortunately, where the plan loses its luster is within the plan’s accompanying guidelines and how the IRS is perceived. To be eligible, the IRS has established a five point criteria which includes: 1) consistently treated workers as independent contractors, 2) have filed all required 1099 forms for workers for the previous three years, 3) Not currently being audited by the IRS, 4) not currently being audited by the DOL or any state agency for worker misclassification, and 5) if you were previously audited by the IRS or DOL, you’re only eligible if you complied with the audit result. And just when you thought that was the end of the criteria, there’s an “oh by the way” as the IRS has full discretion over who it accepts into their plan.

Employers Reluctant to Come Forward

The IRS is an acronym that nobody trusts. There are few people that divulge more information than what the IRS requests. It would have been in the best interest of the IRS to roll out a plan that prohibited information sharing between the IRS and DOL or other state agencies. Unfortunately that language was not included in their plan and because of that, employers will be reluctant to come forward. Employers who keep abreast of employment news also realize that the IRS is not their primary concern when it involves misclassification. That lies with private class action lawsuits stemming from wage and hour disputes.

Can you trust the IRS?

An employer wants to make amends for the lack of good judgment used in classifying workers as IC’s instead of employees. Sacrificing themselves to the IRS with hopes of getting off easy makes sense. Unfortunately that’s the only thing that does. Without assurance from the IRS that they will not share any information with the DOL or other state agencies, this plan goes nowhere. Maybe the IRS needs to makeover their reputation before rolling out a plan like this. Until employers can start trusting the IRS, most will say thanks but no thanks to this latest plan.

Misclassification Sites Target IC’s as Their Audience

Aaron Chavez — Thu, 16 Jun 2011 19:58:11 +0000

Over the course of the last few months, more and more websites have been popping up with information regarding independent contractor misclassification. These are not your regular “Watch out, your company could be a target” websites. Instead, the sites are providing independent contractor misclassification information with the hope that a worker who is currently being engaged as an independent contractor will perform a self evaluation and report their working relationship to a third party.

Worker Classifications from a Third Party

Contacting a third party for a recommendation on your worker classification is not a foreign idea. The IRS has an SS-8 form that a worker can complete to obtain their worker status for Purposes of Federal Employment Taxes and Income Tax Withholding. While the IRS provides aid in determining status, I’d find it difficult to believe that the form is being utilized to its potential. Why? I can’t imagine that there are too many people willing to share additional tax information with Uncle Sam.

So where does that leave workers? It leads them to sites like USovertimelawyers.com and ehow.com. While these are just two examples of websites that target the worker audience, both contain different approaches. For example, USOvertimelawyers.com’s main focus is on overtime. Their site makes the transition to independent contractor misclassification on the notion that if you’re an independent contractor, you’re not collecting overtime. The potential reader begins to wonder if they’ve been improperly misclassified and before they can finish the paragraph; USOvertimelawers.com’s has conveniently placed their 800 number on their site with hope that it provides an opportunity for the worker and a potential payout for the law firm. This is the most common tactic utilized by many third party agencies looking to make a buck. ehow.com on the other hand presents their material in a different manner without being over the top. The ehow.com approach is as simple as their title “How to Sue Your Employer for Wrongful Misclassification”. In four easy steps, ehow.com advises the worker on how to initiate a lawsuit with steps that include contacting an employment law firm and gathering as much material (employee handbooks, training material, memo’s, etc.) that could potentially support a misclassification case. If you didn’t know of an employment lawyers, ehow.com conveniently offers sponsored links of which all happen to be law firms. Convenient, isn’t it?

Independent Contractor Misclassification Audience is Evolving

The audience for independent contractor misclassification is changing. In the past, a majority of the news coming from the government or third party outlets have been directed at companies who misclassify workers. The general tone of the news releases reminds me of my childhood years when the boogeyman was going to get me if I didn’t comply. Now it appears that this kind of scare tactic doesn’t work as most companies continue to go about their business without fear of penalty. The switch of targeting independent contractors as the audience is intriguing since it seems that we’re inching towards a whistleblower society. If companies cannot police themselves in their day to day business, why not engage a worker to police their own status. After all, the worker has much to gain and the potential employer, much to lose.

FedEx grounded for worker misclassification practices

Stephanie Ellis — Thu, 22 Oct 2009 00:18:32 +0000

FedEx prepares to do battle with yet another opponent in the war on worker misclassification.

On Tuesday the Attorneys general from New York, New Jersey and Montana issued a letter of warning to FedEx regarding its current independent contractor driver model. If FedEx would not abandon its current independent contractor model for home delivery drivers they would be forced to bring suit against the shipping giant.

The letter contained harsh accusations like “blatantly misclassifying its drivers”; FedEx Ground has denied these individuals the employment rights guaranteed by law. Practices which would support the allegations of worker misclassification and cited by the AG’s; the work performed is a core competency of FedEx Ground, drivers integrated into business functions of the company, determines the hours drivers work, how they load and deliver packages, and limits the drivers ability to compete other employment. The inability to work for the competition clearly creates financial dependency on Fed-Ex similar to that of an employee.

More than 1,000 drivers would be impacted by the changes should FedEx cave in under the pressure from this powerhouse. FedEx must respond with a decision by October 27, 2009 a deadline that is fast approaching. Should Fed-Ex disregard the letter the AG’s will have little choice but to file suit. The AG’s are confident they would win the suit based on its findings during the investigation of FedEx worker practices. According to the AG’s there is more than enough evidence of worker misclassification.

The suit is being called a “multistate effort” and this is not the first time this issue has come up with Fed-Ex. Earlier this year in June attorneys general from six other states wrote to FedEx Ground, demanding changes to the existing driver model. States are teaming up forming a task force in hopes of pressuring FedEx Ground to change its driver business model.

IRS Sponsored Employer Tax Audit Lottery

Stephanie Ellis — Tue, 22 Sep 2009 22:08:42 +0000

More than 6,000 employers hold a winning ticket and don’t even know it. Will you be one of the lucky ones?

Beginning in November 2009 the IRS will launch its latest National Research Program (NRP). This NRP will be focused on conducting employment tax audits.

Of the 6,000 employers unknowingly entered into the IRS lottery 2,000 of them will be declared winners in 2009. The grand prize? Fines, penalties and plenty of bad publicity. These unlucky employers up until the moment they are officially notified have no idea they have been entered into this audit sweepstakes. They were randomly selected by the IRS and with any luck will come out of the audit only slightly bruised.

Basis for these audits? The U.S. Treasury Department released a study on the U.S. “tax gap”; the difference between taxes owed and taxes not paid by tax cheats. Who are they? They are employers who underreport, underpay or simply never file. The Treasury estimates a tax gap of $345 billion and the IRS views the gap as justification for the audits.

What is your plan of action should your number be declared a winner?

Fed-Ex versus IRS $14mm

Stephanie Ellis — Tue, 22 Sep 2009 21:19:40 +0000

FedEx Corporation may face $14 million in taxes and penalties plus interest over the misuse of independent contractors in its FedEx Home Delivery division in 2002. The fines and penalties are related to uncollected employment and withholding taxes for 2002.

FedEx plans to challenge the IRS finding from the audit however final resolution any time soon highly unlikely.

“We believe that we have strong defenses to the proposed assessment and will vigorously defend our position, as we continue to believe that all of FedEx Ground’s independent contractors, including those providing the FedEx Home Delivery service, are independent contractors,” FedEx said in the filing.

The IRS is also reviewing Fed-Ex for similar issues related to tax years 2004 - 2008.

Misclassified Independent Contractor Bill Reintroduced

Stephanie Ellis — Wed, 12 Aug 2009 20:03:39 +0000

The race is on! Employers officially put on notice to clean up their act!

A bill nicknamed “the independent contractor misclassification act” officially introduced as the Taxpayer Responsibility, Accountability and Consistency Act of 2009 (H.R. 3408) is on the move again. The bill introduced in 2007 never became law stalled in Congress eventually dying on the vine. Aimed at curtailing tax cheating employer activities is top of mind and has a number of industries a bit nervous. Purpose of the bill is to shut down a perceived revenue drain in the tax system. A blatant employer tax loophole for some who have intentionally misclassified its workers as independent contractors and for years got away with it.

Why would an employer intentionally misclassify a worker and how would they benefit from this practice?

Most industry experts will tell you it’s to avoid employer responsibilities and cheating the government out of billions of dollars in tax revenue. Governmental officials position the problem as “unfair employer tactics which ultimately hurts the worker”. Reality is the money well is dry and employers who do the right thing want the loophole closed. For years many employers have side stepped their obligations looking for a cheap way out and the very tax law loophole the government is trying to close was in fact created by them!

Ah, but alas no more! The bill was reintroduced and gaining a great number of supporters on a daily basis. Looky-lou’s who have complained this loop hole has created an unfair advantage for their competitors who practice tax evasion and cite the practice as a direct contributor to the long list of social ills. Responsible employers are chomping at the bit for this bill to pass. When the bill will actually pass is anyone’s guess.

Advice for those who choose to take comfort in the wheels of justice turning slowly and think they have plenty of time. Heed the writing on the wall and get going on cleaning up your mess. The pro-labor Obama administration’s outward appearance its focus is on healthcare for America but make not mistake. A revenue drain directly responsible for the severe cash flow problems is the front runner on this administration to do list!

In Wall Street We Trust

Stephanie Ellis — Thu, 02 Oct 2008 06:03:58 +0000

On Monday after the stock market posted its worst one-day percent decline in 21 years after the house rejects $700 billion dollar bailout plan and America held its breath waiting for the other shoe to drop.

Over the last 18 months America has endured more than what it would consider its fair share of financial hits. Subprime lenders criminal business practices with slash and burn interest rates and Wall Street driving the get away car has many ready to push the panic button. This type of questionable company business practices is old hat for many seasoned Americans but how are today’s subprime loan sharks deceptive practices different from past white collar thieves? They were caught red handed.

With the economy at the brink of total collapse, employers dumping thousands of workers onto the unemployment rolls, homeowners walking away from over priced homes having learned they owe more than it’s worth we have our pick of distractions. But for some its still business as usual shifting focus back to the day to day and we’ve got a business to run. Employers may believe government watchdogs are not paying attention and no one will notice if they veer off the compliance road just a little. WRONG! Just when you think it’s okay to relax just a little state and federal auditors strike. They know unemployment benefits claims are up and there is no need to pretend it’s just a random audit.

Independent contractors although not entitled to unemployment benefits are extremely motivated in times like these. What once was clearly a client/contractor agreement can quickly shift to an employment relationship if the payout is right and the stakes are high. When it’s all said and done you picked up another headcount in addition to heavy fines and penalties while opening a 2nd audit door for yet another agency.

Words to the wise… stay the course, shore up any loose hiring practices and prepare to be audited!