Last weekend  I played golf with my wife’s former  boss.  I shot  75 and he shot  90.
Later we went to lunch with Steve Haskins, a former touring pro. I arrogantly bragged to everyone within ear shot that I was now such a good golfer that I would no longer  play with guys who suck.
Haskins said he felt exactly the same way when he played with me.  Ouch.

So today we are going to talk about IRS arrogance.

Last week I wrote that the IRS is ignoring businessmen  and undertaking a massive effort to reclassify their  independent contractors to employee status. This is a huge effort that, if successful, may put many employers out of business and certainly will financially damage many more.  So today we start the first of a four-part series describing this effort and what can be done about it.

Let’s begin with the tax law basics:

An employer is liable for many taxes imposed on an employee. For example, it must withhold their income taxes, their Social Security, certain FICA, its own Futa, etc.   The employer must deposit those taxes with the IRS electronically typically within three days of each pay day. The IRS much prefers collecting all of these taxes on many employees immediately and from one single source-the employer.

Conversely, there is no employer if the workers are independent contractors. Each of those workers are individually responsible for paying their own taxes, generally by making periodic deposits to the IRS. Many of these workers do not make these deposits and many of them spend the money before they file their federal tax returns  and thus can’t pay. The IRS oftentimes has to chase hundreds of workers for their taxes.

Instead of fixing this problem, the IRS has undertaken a significant effort to assault the employer. It is auditing the employer and telling them these independent workers should have been   treated as employees. Then the IRS attempts to collect these worker taxes  from the employer. That’s right, it retroactively reclassifies these independent workers as employees, imposes their taxes on the “employer”, and then adds penalties and interest. Even worse, the statute of limitations allows the IRS to reclassify these workers for three prior years.

While the IRS arrogantly collects hundreds of millions of dollars this way each year, it can be devastating to employers. Not only do they become liable for three years of employee taxes, but going forward they have to treat these independent workers as employees. This can often create a huge competitive disadvantage as others in the same business who weren’t audited may continue paying these same workers as independent workers and not employees.

Congress is not a big fan of this effort. It has a long history of passing relief legislation  to specifically  diminish  the IRS ability to do this. The IRS doesn’t care and narrowly interprets that legislation.
The courts are also not big fans of this IRS effort. There are a huge number of cases favoring the taxpayer, as well as the IRS. The courts are often much less stringent in interpreting the IRS  rules.

Folks, don’t play the audit lottery by  ignoring  this problem and hoping the IRS doesn’t select your business for audit. This is a real land mine and a lot of money is at risk from narrow minded IRS bureaucrats. There is a lot you can do to protect yourself, but only if you act early and prepare. Contact a good tax lawyer and protect your business.

Next week we will talk about the new overtime rules and other non-tax laws that may be affected by a successful IRS reclassification audit