Feb 17

Written by: David Keligian
2/17/2012 1:15 PM  RssIcon

Businesses that use independent contractors have always been in the crosshairs of federal and state taxing agencies. Taxing agencies are unusually aggressive, because they feel it is easier to collect taxes from the companies who use independent contractors rather than the independent contractors themselves.

Independent contractor audits are again becoming a hot priority for the IRS. The legal rules really haven’t changed, it’s just that the IRS is becoming increasingly aggressive in targeting companies that use independent contractors to raise revenue. The state of California is even worse, because the state rules for independent contractor treatment are even less favorable than the federal rules.

The federal rules incorporate a “safe harbor” that most taxpayers don’t know about. The “safe harbor” is contained in the provisions of the Revenue Act of 1978. There are definite strategies involved in positioning businesses to take advantage of the safe harbor. The safe harbor allows a taxpayer to successfully defend their use of independent contractors even if they fail the so-called “traditional” tests for independent contractor treatment.

For a full explanation of these rules, see my article “Winning Independent Contractor Disputes with an IRS Pre-Disposed to Find Employees,” which was published in the November issue of The Journal of Taxation. A link to a pdf of the article is below.

Winning Independent Contractor Disputes with IRS DLK Nov 2011.pdf

Click here for a printer-friendly PDF.