TAX NEWS - 2010

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Are You Ready for an Employment Tax Audit?

You get a letter from the state EDD or the IRS informing you that your company has been selected for an employment tax audit. Are you Ready?

Did you know that:

- Over 70% of all employment tax audits conducted result in a finding of misclassified workers?
- The EDD and the IRS win 90% of the cases that go to hearing or trial?
- The EDD and the IRS have been getting increased funding during this recession to enforce IC compliance?

Unfortunately it is too late to prepare for an audit challenge after you receive the letter, or a phone call from the auditor. The best time to prepare is now, before it happens.


Because audits review what was done in the past. Most statutes of limitations for an audit are three years. That means how you classified your consultants three years ago will be scrutinized today. Can you prove today what you did three years ago is right?

But you have a good attorney...

Many times upon receiving a notice of an audit companies will call an attorney. That's not a bad choice, however, at that point it may be too late; the cow is already out of the barn!

A good attorney (one with experience in the area of employment tax and labor law) can help minimize the inconvenience and possibly some of the liability (except his fees of course); however:

- The audit will still happen.
- The assessment will still be issued.
- The audit results will be shared with other enforcement agencies.
- Misclassified workers may file civil suites.
- Word may get out to your customers and investors.

The best the attorney will do is minimize the damage-maybe-but it's better if the audit never happened.

Your best defense is never to be selected for an audit

Enforcement agencies screen businesses to identify and select for audit only those that appear to be misclassifying workers. Agencies like California's EDD have special units whose sole purpose is to identify businesses that appear to be misclassifying workers. Enforcement agencies like to know they will make a tax assessment before they contact you. They almost never perform survey, or random, audits.

So if you are doing it right, and there are no red flags, the odds are very low you will ever be selected for an audit.

Even if you are selected for an audit the proper documentation can, and will, protect you.

It's always possible something will cause your company to be selected for an audit. If this occurs just knowing you are right is not enough. However, the correct documentation can protect you.  An expert will know the information and level of detail required to protect you in the event of a challenge.

Don't wait to react after you receive the letter.

You should call an expert like Collabrus now. We have the ability and experience to cost effectively help you attract the best talent and properly classify and document their status. But don't' wait until after an auditor or the investigator has called you.

Stay ahead of the curve.

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