Jump to content
ATX Community
Sign in to follow this  
Edsel

Next Wave of Audits??

Recommended Posts

One of the strategies I have recommended for my clientele is to find reasons to work as a consultant or sideline business, as the ability to deduct expenses on Sch A have been diminished, and totally eliminated for job expenses.

Do all of you remember about 10 years ago when the IRS audited and slashed through gazillions of Schedule Cs and reclassified almost everyone to employee status?  Very few of these taxpayers survived the reclassification.  For some of these, they really were employees.  For others, it didn't seem to matter about the 20 factors (which they threw out and replaced with totally objective opinions of the auditor).  Legitimate consultants and subcontractors were reclassified according to the IRS agenda.

The obvious solution to employee expenses will be an accountable plan, but many taxpayers will be switching to consultant status as I've advised them to do if they can qualify.

Do you believe in light of increased status of consultants and subcontractors that the IRS will return to its agenda of reclassification no matter what?

 

 

Share this post


Link to post
Share on other sites

I think it's the federal and state Departments of Labor that you need to worry about. Check on their criteria for employee vs. IC. They seem to have the manpower to chase employers who mis-classify employees. I've heard labor audits referred to as "the audits from hell." Most states also have agreements with the feds to "cross report" their findings. Be careful what you advise.

  • Like 1

Share this post


Link to post
Share on other sites

Lion, I too have had aggressive action by the SUTA people.  One prolific instance was a Tennessee Dept of Labor auditor who reclassified a recipient of $25,000 when the recipient had $500,000 of other revenue from 4 other payers.  We had an appointment at 2:30, and she showed up at 12:00 and terrified the payer into reclassifying.  The recipient was medical professional who had issued 1099s of her own.

Share this post


Link to post
Share on other sites

Be careful here.  Employees who choose to become IC lose benefits like health insurance, pensions, paid time off, unemployment and disability comp.  They really have to think if the trade off is worth it.  This discussion is enlightening.  Most of the time I see ICs who really should be employees, and most of the employee "business" expenses I saw were bs.  Among my clients who were most affected by the elimination of the 2% category were outside sales people who drove zillions of miles with only partial reimbursement and those who had huge brokerage fees.

  • Like 3

Share this post


Link to post
Share on other sites

"They really have to think if the trade off is worth it".

Sara, you are absolutely correct because there is definitely an upside and a downside.  The "upsides" of being employee, however, may be quite different depending on where your clientele lives and works.  Your location in VA could range from Alexandria in DC area to Clintwood in the mountains - and employees who work would have drastically different "upsides."

I am in rural Tennessee, where more than half of the "employees" in my county earn $10.00 or less, with no benefits outside of the required payroll benefits.  Our largest corporate employer is WalMart, who built their fortune on working employees with part-time hours and zero benefits.  Fat chance of a future for those working there.  The minimum wage has not been raised since 2007 (except for some states - NONE of them states down here).  This varies greatly compared to places like Nashville, where good jobs are abundant and employers HAVE to provide better pay and benefits, or else their best employees will go down the street and get a better job.  Black Bart also lives in a rural area - would love to hear what he thinks.

Thanks to all who have responded, but the impact has mostly been on the lack of wisdom advising taxpayers to be true consultants and subcontractors, and no comment on whether the IRS will proceed, as if on a vendetta, to slash these arrangements.  For what it's worth, just yesterday I advised one of my larger clients to do just the reverse - to begin a payroll because they are issuing 1099s for subcontractors who are not legitimate.

Share this post


Link to post
Share on other sites
11 hours ago, Edsel said:

..."Black Bart also lives in a rural area - would love to hear what he thinks."...

Thanks for the invite, Ed (also, I'm going to have the above quote framed for display if you don't mind).

Actually, since I've been both employer (although a tad smaller than Walmart) and employee, I have mixed emotions about the debate.  We're a small town (6,000 population) and my clientele now is mostly 55 or older including several who work at WMT.  Most are good middle-class  people - careful, thrifty, stable adults who help themselves (and others if need be). They live in decent houses (mostly frame-some brick).  They drive decent (but not new) cars.  Although they take advantage of a good bargain, they aren't self-indulgent and are not on food stamps.  Most are women making about $15-17K and hubby makes 25-30 elsewhere (that's okay here - probably not in others' worlds).  In other words, they'll do.  It's the younger cart-pushers that I see raising all the hell about how they're mistreated. But...I have hopes; managers generally figure out sooner or later who's a worker and who's not (I don't know if they'll get a raise or not).

11 hours ago, Edsel said:

...For what it's worth, just yesterday I advised one of my larger clients to do just the reverse - to begin a payroll because they are issuing 1099s for subcontractors who are not legitimate.

For others, I don't know what to advise.  I did the same as you on your client above at the beginning of 2018.  Mine had to close and take bankruptcy six months ago.

Share this post


Link to post
Share on other sites
On 1/10/2020 at 8:51 PM, Edsel said:

Do you believe in light of increased status of consultants and subcontractors that the IRS will return to its agenda of reclassification no matter what?

 

Getting back to the original Q!  To answer the question  I know of a little office down on 4th St., over a store front, that has a neon sign in the window with a lady wearing a turban that says "palm and card readings $25".   Tomorrow, I'm going to run down there and ask her your question. ☺️

Seriously, I think the answer is No. The ten years referred to I think was more than 20 years ago and came in on Section 1122 Small Business Job Protection Act of 1996.  It probably came on with a big push, but those audits are still ongoing.

I also think it is No, because the states will do the job with CA leading the way as they have just done with AB-5.  It is not necessarily the state enforcement that will force much of the change, it is the new legislation that has opened the door to employees, treated as IC's by the employers, to file complaints against the employers for re-classification.

https://www.natlawreview.com/article/california-legislature-adopts-several-new-employment-laws-2020

https://www.irs.gov/government-entities/worker-reclassification-section-530-relief

Share this post


Link to post
Share on other sites

Well! Whatta ya know.  Here is the answer to Edsel's question courtesy of cbslee's posting two lines below Edsel's.

"Employers who misclassify workers:  with the lack of experienced IRS field audit resources (i.e. revenue agents), this important issue is not on the IRS radar.  The IRS only audits 0.14% of employment tax returns, and reserves complex worker status (employee or independent contractor) audits as a part of its small business audits. The growing gig economy and incentives to classify workers as independent contractors is a concern for the IRS – but there is little the IRS can do about it until they train more auditors to specialize in complex employment tax issues."

 

  • Like 2

Share this post


Link to post
Share on other sites

Ok so, I have a client who has paid a couple of guys to build an office for his business. Each guy received somewhere around $800.00 to $1400.00 each. I talked with the client, told him to get the tax ID numbers and addresses. The guys won't give it up. I told my client no deduction. I think I have to stick to my guns here simply because I have knowledge, advised and it wasn't followed. My client would rather forego the deduction then tick these guys off and not use them again. Small town politics. Everyone knows everyone, all go to the same church;  you get the picture.

  • Like 1

Share this post


Link to post
Share on other sites

Max, thanks for your response, and yes I think the post by CBSLEE was terrific.

Terry D, war stories such as yours are common.  One reason these "subcontractors" insist on not receiving a 1099 is because they are so cheap.  I encountered someone painting a large barn who told my client he would paint it for $1500 but would have to get $2500 if he was to receive a 1099.  I told my client that the effect of not deducting these payments means he would be paying the taxes that the painter didn't want to pay.  Client says if the IRS came calling he would tell them that guy painted his house and he couldn't deduct it anyway.

I believe the burden is on the payer to issue a 1099 even if he gets no benefit from the deduction, and irrespective of whether the subcontractor has intentions of claiming it or not.

Share this post


Link to post
Share on other sites
On ‎1‎/‎12‎/‎2020 at 3:51 PM, Max W said:

Getting back to the original Q!  To answer the question  I know of a little office down on 4th St., over a store front, that has a neon sign in the window with a lady wearing a turban that says "palm and card readings $25".   Tomorrow, I'm going to run down there and ask her your question. ☺️

Seriously, I think the answer is No. The ten years referred to I think was more than 20 years ago and came in on Section 1122 Small Business Job Protection Act of 1996.  It probably came on with a big push, but those audits are still ongoing.

I also think it is No, because the states will do the job with CA leading the way as they have just done with AB-5.  It is not necessarily the state enforcement that will force much of the change, it is the new legislation that has opened the door to employees, treated as IC's by the employers, to file complaints against the employers for re-classification.

https://www.natlawreview.com/article/california-legislature-adopts-several-new-employment-laws-2020

https://www.irs.gov/government-entities/worker-reclassification-section-530-relief

Max: If she asks you why you are there, you should respond "You tell me." 

If she then replies "You're here to ask about IRS reclassification of IC's", please tell us what she said next.

  • Haha 3

Share this post


Link to post
Share on other sites

At the same time, I am going to ask her who is going to win the Super Bowl.  She has a 1 in 4  chance of getting that one right. 🤣

  • Like 2
  • Haha 1

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Restore formatting

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

×
×
  • Create New...