6000 Audit Disasters 05/19/2011
To hear an audio recording of the blog, click on the Play button (>) below. Transcript follows.
Faced with a recession that won’t seem to go away, small companies are employing a strategy that reaps huge benefits, clearing $50,000 to $100,000 of net profit without having to develop a new product or win new customers. To a small business owner, that can mean the difference between more years of sweat equity or the start of a profitable business.
These small companies have embraced the aggressive strategy of laying-off workers and then hiring them back as independent contractors. Engaging an independent contractor instead of an employee brings huge savings. Companies save on FICA and FUTA taxes, Maryland unemployment taxes, Maryland worker’s compensation insurance, benefits, and overtime pay. In addition, companies have more protection from negligence or damages caused by independent contractors.
The risks, however, are huge.
Over the next two years, the Internal Revenue Service will steam roll over 6,000 randomly selected businesses, auditing them to determine whether they have misclassified employees as independent contractors. As Maryland tax attorneys, we solve tax problems for companies throughout the Baltimore and metropolitan DC area. We’ve learned there’s nothing more shocking for a client than being hit with a bill for taxes, interest, and penalties that result from misclassifying employees. Because the audits often include several years, it’s not unusual to see a tax bill for hundreds of thousands of dollars – often the death toll for a small business.
Before rolling the dice and taking the risk, small business owners should consult with a tax lawyer to provide guidance through the morass of applicable law. In Maryland, companies are subject to federal tax law – the 20-Factor classification test and the section 530 Safe Harbor rules – the Maryland Code and COMAR, and federal and state common law.
For those unlucky enough to be among the 6,000 businesses selected by the IRS, solid legal representation during and after the audit can lead to a victory. Even if the IRS finds that misclassification occurred, the IRS Classification Settlement Program offers a cost-efficient resolution, often for 10-cents on the dollar and a pledge to be bound by the proper classification moving forward.