South Carolina Tax Attorney

    One question I am asked in this type of situation is what can the IRS do if I have classified a worker as an independent contractor and it turns out that the IRS believes he is an employee. 

    Worst-case: the IRS may assess all of the employment related taxes against the employer for the workers who were incorrectly classified.  What this means to the employer is a potentially huge liability - including penalties and interest - that they had no idea they would be responsible for.  Even worse than just being assessed the taxes is that the IRS may assess those employment taxes against the employer individually in the form of the Trust Fund Recovery Penalty if the business is unable to pay those taxes.  What is bad about this type of civil penalty is that it cannot be bankrupted.  The taxpayer will be forced to deal with repaying the tax in some way.  At least the tax can be reduced by going through the offer in compromise process if the taxpayer qualifies. 

    Is there anything else the employer can do?  There is a non-statutory provision that was enacted by Congress nearly 30 years ago as a "temporary solution" that can shiled a taxpayer who has mistakenly classified his workers as independent contractors when they are actually employees.  The employer must show that there was a "reasonable basis" for such a failure to pay the employment taxes.  The employer must also be filing alll of the required Federal tax forms and paying those taxes in a manner consistent with the taxpayers’ classification.  The trick is to be able to show that the employer had a "reasonable basis."  The employer could go about doing this by showing other companies in the same business do things in that manner, by showing a judicial decision on point, or a tax ruling letter sent to the taxpayer by the IRS, or a past audit where the tax was not assessed against the taxpayer for the same situation. 

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