Tax Audit Results in Misclassification Penalties
The IRS is calling on the city of Pine Bluff, AR, or rather auditing and assessing fines on the city’s 2007 payroll and contractor taxes. There is currently a $63,803 price tag on the initial assessment which the city hopes to minimize.
City Contractor Use Not Safe From Federal Scrutiny
This audit is one of many being done at the city level by the IRS. Recent city audits of misclassified workers include Santa Fe, NM and Atlanta, GA who has taken steps to correct the issue. It may be worth looking into the correct classification of their workers for many city governments; if not to prevent fines, to prevent bad press and potential headaches from union guilds.
As most businesses are aware, the IRS is launching a massive employment taxes audit in 2009, and much has been discussed regarding whether or not these businesses are ready to successfully survive the audit and avoid substantial penalties. Businesses are implementing proactive approaches on how to prepare for this type of audit, and are cautiously assessing what amount of risk they are willing and able to take on when working with independent contractors, especially considering that proper worker classification will be a highly scrutinized item included in the audits.
Businesses are being selected, and will be audited; this is a given. Consequently, this means businesses will more than likely be more selective and conservative with those small businesses and individuals they chose to contract out to. Furthermore, due to the current economic crisis, many businesses have placed a stop on spend when it comes to engaging vendors and independent contractors.
So what does this really mean to you, the business seeking Independent Contractor? What should your game plan include to ensure that you are able to continue to do work, and more importantly, be selected to do work with these businesses that are being targeted? It means your business structure and manner in which you engage with these businesses must be at its best so that your client feels confident in your 1099 classification.
Regardless if you consider yourself a consultant, freelancer, or self-employed, the IRS will fit you into either one of two tax filings: an employee (W2) or a 1099 (Independent Contractor).
Now is the time to put those essential business tasks into action that as a busy person you may have put on the back burner. Items such as: determining the legal structure of your business (sole proprietorship, partnership, LLC, corporation, etc), registering your business name , obtaining any necessary business license and permits, and obtaining a tax ID number among others that will strengthen your status as a legitimate independent contractor so when that feared audit comes around, you/your business will not be a red flag to the IRS, and one less worry to your client being audited. Furthermore, once the audit has passed, and businesses revamp their independent contractor/vendor selection method, chances are your business will be in good standing to be selected for further work.
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.
Employee or Independent Contractor Classification Classes for Contractors!
No money to conduct random audits? Are furloughs wreaking havoc on your ability to deploy auditors? One state finds a creative way to uncover a few employees and drum up payroll taxes simply by advertising free self-classification classes!
Iowa Workforce Development is advertising assistance with proper worker classification to contractors. Just think in one hour you too can become an expert in worker classification. You will learn how to tell the difference between an employee and independent contractor and determine if you are properly classified! The goal at the end of the class is to make you an expert and help the state reduce the number of misclassified workers in Iowa. “Getting the classification correct is critical for tax, wage, unemployment, workers’ compensation and other employment issues. Getting it wrong can cost an employer$$”.
This offering is just another example of what lengths the states will go to in order to demonstrate the renewed emphasis of enforcement by federal and state regulators. Misclassified workers step forward to be reclassified; employers are identified then fined resulting in a new flow of future payroll tax revenues. What a great way to get the cash flowing into the state and federal governments empty coffers!
The threads of this cable story twist and turn in every direction. Tangled and knotted up so badly it’s difficult to locate the epicenter.
Larry the cable guy was hired by RCN as an independent installer where he happily worked for years. Suddenly Larry loses his job, has no money and then decides to file for unemployment where he is turned down. Seems independent contractors are not eligible to collect unemployment benefits. Larry learns had he worked as a regular RCN employee he would be eligible to draw benefits and receive a weekly pay check. Larry gets an idea and a lawyer who claims Larry was misclassified as an independent contractor when he really should have been an employee. Larry’s lawyer files suit against RCN on Larry’s behalf and oh by the way several other cable guys who also were misclassified as independent contractors. What started out as a story of one individual who lost his job and needed money quickly turns into a class action law suit thrusting a cable installation company into the hot seat. The cable guy story broke in June 2009.
It’s now fall and Larry is in the news once again this time suing Comcast Corporation for the same reason he sued RCN; employee misclassification. Seems Larry had multiple clients err employers in 2009 with RCN and Comcast named as such. This suit is slightly different in that a third party has been added to a complex equation. Triwire Engineering a subcontractor for Comcast is also named accused of bank rolling the payroll for the cable giant. According to Larry he worked as a Comcast installer paid through Triwire from March until August then suddenly fired after TriWire allegedly learned of his suit against his previous employer RCN. This latest lawsuit against Comcast and Tri-Wire is much bigger than a weekly paycheck. The duo is accused of violating the federal Fair Labor Standards Act and Massachusetts’ independent contractor and overtime laws. Should Larry win it could mean a lifetime of paychecks!
With the economy still upside down employers must tread lightly when using independent contractors. Other unsuspecting employers accused of similar misdeeds by copycat contractors include cable giants Cox Communications and Charter along with a multitude of subcontracting entities.
Did Schwarzenegger receive bad advice or just a simple mistep?
Californians have no choice but to sit back and watch as the financial strangle hold on the state continues to tighten. As unemployment numbers climb to an all time high of 12.2 percent, the economic downturn forces 2.2.million workers onto the unemployment line, continued ridicule of other states over the IOU’s to cover it’s debt I ask you could it get any worse?
The state known for its financial wealth and a state of plenty must endure yet another financial hit laden with additional embarrassment. Earlier this year Schwarzenegger rolled out a cost cutting plan in an effort to save the state some money ordering reduced hours at state offices and placing workers on unpaid time off. The goal to save money may actually end up costing the state even more!
Superior Court Judge Charlotte Woolard ruled in a suit brought by the Service Employees International Union which represents the funds of more than 6,300 workers. California’s insurance code State Fund exempts its workers from furloughs and hiring freezes. The union pointed out the furloughs qualified as a “staff cutback”. Employees who were illegally furloughed are entitled to back pay plus interest for the days they missed work. The payout could cost the state a whopping $23.2 million.
The ruling couldn’t come at a worse time for California as it continues to struggle to close a $24 billion dollar deficit. Sadly enough this fiasco may not end here. Officials fear other state workers who were also furloughed may come forward seeking compensation.
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?
