From Forbes, Gene Zaino discusses what do to if you are being audited for misclassifying workers as independent contractors and offers some advice on how to avoid audits. Gene writes:
An Audit: From Beginning To End
If your organization is audited, you’ll receive a letter from the IRS detailing the reason for the audit and instructions on how to handle the issue.
To prepare for an audit, there are a number of actions to work through. Retaining legal representation experienced in employment tax and labor law is an important first step. Your legal representation should help guide you through the correct processes, communicate with the auditor and try to limit the scope of the audit. They will assist in gathering background information, reviewing records, assessing whether or not misclassification took place and determining if there are any instances of fraud.
During the audit, the auditor will likely request records such as 1099s, bank statements, income tax returns and financial statements. Appointing an internal audit team with representatives from your organization’s main departments can be helpful in quickly locating these records. Depending on the scope of the audit, you may also meet with the auditor to review particular cases or information.
As the audit wraps up, your legal representation will negotiate a settlement amount, penalties or fines, if applicable. From there, it’s important to make voluntary changes to protect your company in the future.Avoiding Misclassification From The Start
Of course, minimizing your risk of an audit from the start is your best defense. Conducting an internal audit to take stock of company polices, practices and records regarding independent contractors can help to identify gaps and areas that need improvement.
When engaging independent contractors, it is important to have detailed policies and processes in place in order to properly classify workers to the best of your ability. Keep supporting documents on file as proof of self-employment and always use a written contract. A contract should include provisions to protect your company, such as specifying that the person you are engaging is an independent contractor, that they are free from control and that they have a business license and insurance.
While there are many additional internal precautions you can take, most of these involve detailed legal research, a dedicated team and a substantial investment of time and resources. Many organizations that contract independent workers, therefore, choose to work with firms that specialize in independent contractor compliance and engagement. Partnering with a third party can help companies adhere to compliance standards, reduce misclassification risk and create a reliable program to manage independent workers.
Read the full story at When Misclassification Comes Your Way, Here’s What To Do