Employee or Independent Contractor?

All Employers Face Independent Contractor, Employment Tax Scrutiny

IRS Compliance and Enforcement

From Forbes, Janet Novack discusses the perils of misclassifying workers as independent contractors from the IRS’s enforcement perspective.  She warns that while class action lawsuits may receive a lot of publicity, you should also be concerned about IRS enforcement actions.  Janet writes:

“But beware–failing to comply with tax laws to gain or keep an edge against competitors can result in large penalties, personal liability for corporate officers, and even criminal prosecution.  The cost of being tax compliant is well worth it, when viewed in light of the potential consequences of failure.

In recent years, the Internal Revenue Service has made employment tax compliance an enforcement priority.  In 2014 alone, it assessed close to $5 billion dollars in civil penalties. IRS reports show that it initiated about 120 criminal investigations related to employment tax evasion in 2014 and recommended prosecution in 92% of such investigations.

If that doesn’t worry you, consider this:  in the last three calendar years, a significant majority of prosecutions involving employment taxes have resulted in sentences including incarceration.  In just the first three months of this year, the Department of Justice issued press releases in four cases involving employment tax violations, announcing sentences that ranged from 12  to 30 months, imposed on business owners and corporate executives.   This is in addition to sentences ranging up to 80 months in prosecutions of those involved in fraudulent payroll services.

Despite its recent budget problems, the IRS shows no signs of slowing down in the employment area.   At the American Bar Association’s Section of Taxation meeting in Washington in May, Rebecca Sparkman, director of the IRS Criminal Investigations division, explained why it’s a priority. “These employment tax cases are not small cases,’’ Sparkman said. “These are important because not only is the government a victim, but you have individuals who are being victimized because they are having withholdings being taken out and they’re not getting paid for it.”

The IRS focuses its enforcement on a range of conduct to avoid or evade employment tax obligations, including filing false payroll tax returns or failing to file payroll tax returns, which may result from misclassifying workers as independent contractors or making cash payments.  The IRS may assess civil penalties against a business in connection with an employment audit, including for failure to withhold for income tax and employees’ share of payroll taxes, for failure to pay the employer’s share of payroll taxes and for failure to deposit withheld income and payroll taxes.   Fraud penalties may also be assessed.  Business owners, corporate officers, and those in charge of payroll may be held personally liable for penalties equal to the amount of  the employees’ share of the payroll taxes.  Criminal charges may also be brought when the failure to meet payroll filing and payment obligations is willful, with maximum sentences of 5 years and criminal penalties as high as $200,000.

The IRS’s commitment to enforcement in this area, which may follow or result in related action by the Department of Labor and state and local tax and labor authorities, makes decisions concerning worker classification and payment methods critical….”

Read the full story at All Employers Face Independent Contractor, Employment Tax Scrutiny 

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