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?

IRS Summertime Tax Tip 2009-20 has the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employeesThe warning came in the form of a “tax tip” from the IRS. Its target is the small business owner. ”Whether you hire people as independent contractors or as employees will impact how much taxes you pay and the amount of taxes you withhold from their paychecks. Additionally, it will affect how much additional cost your business must bear, what documents and information they must provide to you, and what tax documents you must give to them”.

Before you run out and hire a contractor stop at the IRS web page and pick up your free “get out of hot water” card.  Stop by and download 10 tips for keeping you on the right track and the IRS at bay. Other must see items like the tax videos  and employer guides are available for the taking.

 Worker classification is complicated and can be very costly when you get it wrong.  All too often employers try to go it alone and navigate the rules. The end often results in a sizeable payout and bad publicity.

Cintas Corporation blames the union citing the suit was merely its way of pressuring it to allow worker unionization. The union’s opinion “After six long years of delay tactics and needles posturing by Cintas, drivers will finally receive just compensation for overtime work,” said Workers United’s president, Bruce Raynor.

Looks like Larry the Cable Guy has company. Communications companies are being bombarded with worker claims of unpaid overtime , worker misclassification and unlicensed workers. Joseph Valdez, cable installer filed a lawsuit against several cable giants claiming he was cheated out of unpaid wages. Attorneys for the plaintiff have accused the cable companies of worker misclassification and unpaid overtime. The overtime claim is not warranted in a case where the workers were hired as independent contractors. Is this a clear cut case of employer intentional misclassification paying the workers as independent contractors to avoid employer obligations? Perhaps it’s a simple case of misinformed cable companies duped by its sub-contractors providing the installers. Often a company finds itself in the middle of a legal dispute due to ignorance of the subcontractor’s actual relationship with its workers. These companies enter into an arrangement with the subcontractors under the impression the workers are paid as employees after all the contract prohibits them from supplying 1099 contractors. The unsuspecting company is totally unaware of any misconduct. Typically an organization will engage a subcontractor and assume they operate a legitimate business.  Only when a worker files a complaint against the subcontractor do they become painfully aware of a bad employment arrangement and stuck in the middle of a hellish nightmare!

In June a former cable installer filed suit against RCN Corp. claiming he was an employee and not an independent contractor. Fritz and more than 1,000 other U.S. installers are paid as “independent contractors and recognize this arrangement has ripped them off for years.  They claimed they have been deprived of overtime and other employee benefits enjoyed by RCN employees.

An unsuspecting business can sidestep these types of legal problems by taking time to run a thorough check on its subcontractors. A couple of phone calls and a few hard hitting questions about its hiring practices may turn out to be time well spent! 

After two long years of investigating tax cheats the state of Connecticut put the hammer down on companies scamming the payroll taxes and workers’ comp system by misclassifying employees as independent contractors. A closer look at the construction industry revealed worker misclassification and tax fraud are just the tip of the iceberg. Other criminal offenses include worker exploitation, hiring undocumented workers and identity theft to name a few all in the name of greed.  How wide spread is the problem in Connecticut? A team of state labor department employees issued 220 stop work orders during the past 22 months, a rate that far exceeds New York and Massachusetts.

Worker misclassification has plagued our nation for years and the tax cheats appear to be winning. Not so fast.  States like California, New York, New Jersey and Massachusetts state authorities have been winning the war for quite some time. Joining the ranks is Delaware who became the latest state to impose stiff penalties on construction industry employers who improperly classify employees as independent contractors. Enforcement programs or “feet on the street”, a  task force comprised of state and federal agents are how these states are shutting down illegal operators.

The payoff? In New York, authorities recovered more than $4.8 million in unemployment taxes since September 2007, issued more than $1 million in unemployment insurance fraud penalties, and more than $1.1 million in workers’ compensation fines and penalties. In Massachusetts, authorities recovered $1.4 million between fines, unpaid wages and tax assessments.

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

Wal-mart has agreed to pay $35 million to 88,000 employees in its Washington state stores settling a lawsuit stemming from 2001. But the retail giant is not going quietly in fact they are crying foul. “This lawsuit was filed years ago, and the allegations are not representative of the company we are today,” Wal-Mart spokesman Daphne Moore said. “We have worked hard to have the right communication, processes and systems in place to help ensure we live up to this commitment.”

For years Wal-Mart has been plagued by similar suits  with higher payouts and accused of everything from wage and hour violations, short changing the workers on overtime and lest not forget about forcing employees to work through meal and rest breaks. Wal-Mart accomplished compliance with its alleged anti-employee practices by threatening demotion even discharge for failure to get on-board.  Rumor has it Wal-Mart has gone as far as physically locking employees in the store overnight after they had already clocked out for the day. Managers claimed pressure from upper management to slash employee costs forced them to under hire and overwork employees even if it meant working them off-the-clock.

Claiming to be a changed employer while continuing to rack up worker instigated suits makes it difficult for one to muster up any sympathy.   Seriously…oh please forgive me for I have changed my wicked ways!