The I.R.S. is starting an initiative to reclassify subcontractors asemployees. They are taking aim at small businesses.

1. MCMILLAN
CONSULTING
February 2010
Employment Tax Audit Initiative
Tax Clients,
As part of its National Research Program the I.R.S. has announced details of its
employment tax audit initiative (ETAI). The ETAI is a nationwide three year program
targeting at least 6’000 businesses beginning this month. The first of those audited will
receive letters during the end of February and March 2010.
The audit’s focus is to identify and collect employment taxes from companies they feel are
misclassifying their employees as subcontractors. There was a similar audit performed
about 25 years ago. This audit resulted in many reclassifications and huge bills for large
companies. The I.R.S. has stated that while they’ll audit large companies the vast
majority will be small businesses.
The prior audit focused just on reclassification. In addition to reclassifications the current
audit will also target compensation, benefits, withholdings and more. We have learned
that several states are preparing to create similar programs. State tax authorities will
select companies which will increase your chances of being audited. The state and federal
entities are going to cooperate and share information.
Lastly, if your company is found to have employment tax issues, it may trigger a more
traditional audit from the I.R.S. and/or your state authority.
McMillan Consulting can audit your company and asses the classification of your
subcontractors.
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