Do you have employees or contractors???

[Account Closed]

I have seen a dramatic increase in the number of audits of both state and federal agencies around the use of contractors. Be aware that it is not uncommon for the IRS to pick returns that are three years old to audit. If they find discrepancies you are guaranteed that they will bring in additional years to review. I am completing an audit with a new client that unfortunately used home depot workers back in 2007 to the tune of 60K. Guess what this is being called a disallowed expense. Quite fortunately he has been properly reporting contractors and employees since 2007. There are many things that I can do to help, but somethings are lost battles.

I have seen a substantial increase in unemployment and L&I agency audits as well. The biggest issue in these audits generally surrounds the use of contractors vs employees. Often they will ask if a contractor has a UBI number. Timeslips and proper reporting is essential if you want to come through these audits unscathed.

[Don Konipol]

The law of unintended consequences again. Now if you find a contractor that does a great job at a reasonable price you can not use him as often as you would like because if you begin to account for a major portion of his revenue that can be construed by authorities as he is being misclassified as a contractor instead of your employee.
Maybe we need a "safe harbor" like real estate brokers received years ago for their salespersons.

[Jon Klaus]

Thanks for the heads up on this. It's a good reminder to.be diligent on documentation.

How many different contractors did you client's $60k go to? Did he 1099 them? Or even get their SSNs or EINs?

[Account Closed]

Jon,

This client had a job foreman that accounted for half of the money. They hired laborers from the millionaire club and home depot. No 1099s were issued.

My client would have been okay if these payments had been better documented and if 1099s had been issued for those making more than $600. You should always get contractor agreements and W-9s. If you pay in cash document how the cash was used who was paid, how much, how many hours etc.

I have several other audits, one for a restaurant/bar employing entertainers, wait staff and kitchen staff that had some workers reclassed. I managed to pull them through the audit okay, but there were issues because of conflicting documents and some were reported both ways.