“Non Audit” Audits Target Independent Contractors

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It’s hard to believe, but the Independent Contractor status has been a hot topic since 1984. And now, with our governments looking for money more than ever, the IRS is mounting a specific attack on the Independent Contractor status. Money’s tight, so we are always looking for ways to augment our income.  So are our governments.  That’s why the 1099 requirement was added. The IRS wants an easy way to find people that you’re claiming as Independent Contractors.

The government believes that there are about 10 million fake independent contractors. These are people who really should be employees.  And, 60% of Federal revenue comes from employment taxes.

Plus, the IRS estimates that 30% of those who don’t get W-2s never report their income.

Add that all together and you can see why the IRS is targeting this segment.

Couple that with the IRS estimation that 30% of those NOT issued W2’s (and probably 1099’s) who never report said income.  Now, the biggest contributors to this problem are small businesses, as opposed to illegal alien employment, which is the favorite of the larger firms.  It not only cuts employment taxes, but it also saves retirement benefits, health benefits, unemployment, etc.

The IRS has begun “non audit” audits, called National Research Project exams. Six thousand entities will be examined, two thousand  a year in 2010, 2011, and 2012, supposedly spread among large/medium employers, small/self-employed businesses, and tax-exempt entities.

At the same time, Congress is getting into the act.  At least FOUR bills, 2 Senate: 2882 and 3254, and 2 House: 3408 and 5107, have been proposed to cover this situation, upping the penalties dramatically. The first of two for each house, 2882 and 3408, will eliminate Section 530 Safe Harbor provisions, unless there has been an IRS determination.

Here are the requirements:

1.  A reasonable basis exists for not treating the subject as an employee
2.  No similar subjects exist in the enterprise that are not similarly classified
3.  Forms 1099 have been issued and Federal tax forms also complete.
Additional reasons to bolster the case:
1.  A previous determination by the IRS has proven this case.
2.  Judicial precedent or published rulings that describe the situation obtaining in this case.

Once the IRS begins its audit, it will examine the case employing the 20 tests covered in Revenue Ruling 87-41.  These tests address the matters of behavioral control, financial control, and interparty relationships.

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