The IRS has announced that it intends to audit 6,000 companies for employment tax compliance during the next three years. The primary focus will be on worker classification, but other issues may be raised. As I understand it, the IRS will send letters to selected taxpayers, who will be asked for a “compliance research examination.” In its research, the IRS will conduct investigations like audits and make assessments if they deem them appropriate.

Many employers relied on a now 20 year old section of the Revenue Act of 1978, which allowed employers protected by Congress to avoid liability for Federal income tax withholding, FICA and FUTA for employees who might otherwise have been classified as independent contractors, rather than employees. It required you to meet the consistency test, which meant that you had treated similar people in somewhat similar positions in the same manner over time and had reported them consistently on Form 1099. You also, however, had to meet the reasonable basis test, which means that you have relied on some sort of judicial precedent, published ruling, technical advice, letter ruling, past IRS tax audit that resulted in no assessment, or a long standing recognized practice of a significant segment of the industry in which you are engaged. The IRS is certainly not liberally interpreting this provision, so if you receive a letter indicating that you are one of the lucky 6,000 employers, you should meet with your attorney to discuss any questionable classifications and to understand what your options may be if the IRS determines that you have employees rather than independent contractors.