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The IRS National Employment Tax Research Project has started. On November 9, 2009 the IRS announced its first employment tax research project in 25 years. Under the program, which will last from 2010 through 2012, the IRS will audit 6,000 employers randomly selected from all employment tax filers. It is our understanding that the initial letters for the first 2000 employees selected to be part of the study have gone out and the audits will commence in May, 2010. The IRS will focus on historic areas of non-compliance including (i) the misclassification of employees as independent contractors, (ii) executive compensation, including stock options, (iii) fringe benefits (and whether taxable fringe benefits have been properly reported in employees income), and (iv) return filing compliance, including the filing of W-2s, 1099s, 940s and 941s.
Since the age-old issue of employee versus independent contractor is going to be a significant part of the study, employers selected as part of the program should conduct a review of any independent contractor issues that the company might have. If the company has a significant number of workers that are treated as independent contractors, the company should conduct a review of the status of the independent contractors under the common law "control" tests and the 20-factors listed by the IRS in Rev. Rul. 87-41. The company should marshal its evidence to support the classification of workers as independent contractors to face any potential challenge by the IRS.
Even if a company is not selected as part of the IRS's National Research Project, the company is not necessarily off the hook. The IRS is increasing is enforcement efforts in the employment tax area so employment taxes are likely to be the focus in the audit of any company with a significant number of workers, particularly in cases in which the company treats large numbers of workers as independent contractors.