Worker Reclassification Audits

 Businesses often face devastating financial consequences when the IRS reclassifies their independent contractors as employees.  Affected businesses may have to pay past-due payroll taxes and interest, as well as penalties for failure to file payroll tax returns, failure to pay tax and for failure to deposit payroll taxes.  In all, these costs may range between 30 to 50 percent of a company’s total payroll costs.

 Both the IRS’s worker reclassification examinations and those of the various states have become increasingly aggressive.  Recently, the IRS announced that it would randomly audit approximately 6,000 companies for employment taxes over a three-year period beginning February 2010 as part of a new National Research Program.

Many states, including Texas, share employee classification information with the IRS.  According to a Government Accountability Office report released September 9th, states uncovered about 150,000 workers who were misclassified as independent contractors.  The report also said that the IRS and 34 states, including Texas, share information among themselves from employee classification-related audits.

To enhance the likelihood that independent contractors will agree with the IRS’s reclassification, the IRS publicly tells them that they may be eligible for tax refunds, may owe additional tax, or may have an existing tax liability reduced.

We have substantial experience in dealing with worker reclassification cases. If you have any questions, please e-mail Jimmy Martens at jmartens@textaxlaw.com, Mike Seay at mseay@textaxlaw.com, or Kelli Todd at ktodd@textaxlaw.com or call any of them at (512) 542-9898.