How the IRS Going to Find You In Their Next Big Audit Sweep

This post is in: Business


The next big IRS audit sweep for small businesses is going to be Independent Contractors. You might think that you’re safe from this audit, but think again. If you have Independent Contractors, they are very likely going to find you. Here’s how.

You may be pulled into an Independent Contractor audit if:

  • You are part of an industry where others have had misclassified workers,
  • A disgruntled IC you let go complains,
  • An IC discovers they may pay less tax by turning you in,
  • You show Contractor expenses on your return,
  • You have low wages compared to the revenue you have, or
  • You have a service-industry business.

The IRS is openly soliciting small Schedule C businesses who look like they receive income from only one business to turn the payor in. They are sending out notices to basically ask them if they’re really sure that they are Independent Contractors and not employees. And, by the way, the IRS tells them, if they are employees they won’t have to pay self-employment tax and they will receive benefits.

If the current Health Care Bill does go into law as it’s currently written, then there will be an added push to turn ICs into employees so that businesses are required to pay for health insurance. Your business has to cover employees. It does not have to cover ICs.

You can count on a lot more confusion around this area as time goes on. At the very least, require that (1) your ICs operate through a business structure so you are paying a company and not the IC personally and (2) your IC sign an Independent Contractor Agreement that states that they know they are working as an IC, not an employee.


  1. Diane,

    Wow. That’s amazing about the IRS openly soliciting supposed ICs by telling them they can lower their taxes.

    Do you personally know anyone who’s been involved? How are they making the contacts? Is there an official notice being sent or are they doing something informal?

    Thanks for sharing your insights.

  2. Diane Kennedy says:


    I did have one of the letters but can not find it in my computer now. (Someone had emailed it to me) The IRS is sending out notices to Schedule Cs who have only one Form 1099-MISC for the income and few expenses. I don’t know if it’s just in one geographic area, or has expanded across the country yet. But I suspect they will soon.

    I had one client who had one of her sub-contractors solicited in his way and he rolled on her. She then had to prove that all the guys (plumber, electrician, etc..) who contracted to work on her rehab properties were actually ICs. She lost because she didn’t have an IC agreement to show them.

  3. ELoisa Alvarez says:

    Dear Dianne. I am overwhelmed with this information. I’ve been in the cleaning business for 7 years and are still a small company, my husband and I still operate part of the work: 40% and hire SC that ARE NOT business. I have tried to talk my people into becoming business for no avail and talk to new prospects and they run away. So far I am convinced this is the best form for us because we can’t afford all the expenses that come with employees and have not found the way to hire the people with a business mind. I have thought to make them employees beginning July so that I have the time to learn more about it and also hoping that I can still have SC in a legal way, but for now, what can I do with my 2010 taxes? I have $52000.00 in SC wedges. And also, if I am able to hire businesses, how much work can I give them talking about hours/week or days/week and still be OK? I appreciate your opinion very much. Eloisa Alvarez

  4. Diane,

    Thanks for bringing this to my attention; it’s definitely an area of special interest to me as a payroll service provider.

    I knew that the IRS was going to hold payroll tax return preparers responsible for proper worker classifications. I think this new tactic just underscores what you and Scott Gregory and other like-minded CPAs have been advising small biz owners for a while now…

    Don’t do your own payroll. Outsource it to a specialist.


  5. ELoisa Alvarez says:

    Yes Sheryl, you are very right. I have a professional CPA firm and have not have that advise which now sounds so logic. I don’t mean to don’t take responsability since I know the difference amongst SC and employees but in my industry, SC is common and was told that the fact that is common is taken in consideration if audited.
    Is there a form “IC Agreement”?

  6. Eloisa, we do have a template IC Agreement as part of the “Winning the Independent Contractor Argument” package now on special.

    At the very least, get an IC agreement. It won’t necessarily save you if you are audited, but without one, you don’t have much of a chance of winning.

    Take a look at the behavioral controls – do you tell when and how people to do their job or do you tell them the standard to do it by and let them determine how? Do they furnish their own tools? (If so, more proof they are ICs)

    My suggestion is to take a look at the controls and then see what you can do to make your argument stronger, if and when you get audited.

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