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Obama Cracks Down on Use of Contractors

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The IRS plans to audit 6,000 companies over the next three years in a bid to crack down on companies that erroneously classify employees as independent contractors.


President Barack Obama's proposed 2011 budget suggests tough times ahead for employers who rely heavily on independent contractors in order to keep down labor costs.

If the budget is approved, the Internal Revenue Service will add 100 new enforcement personnel as part of a $25 million plan to crack down the misclassification of workers as independent contractors. Though it's a mere drop in the $3.8 trillion spending plan, it's expected to more than pay for itself: Obama claims stronger misclassification enforcement will add $7 billion to the federal bank account over 10 years.

The issue is particularly hot when you consider that 50 percent of jobs created during the economic recovery are contingent labor, according to figures from labor law firm Littler Mendelson. Obama's plan also comes on the heels of several other policies designed to close the $350 billion tax gap the president says is caused by noncompliance with tax law. In November, for example, he issued an executive order to reduce improper payments to contractors by "intensifying efforts to eliminate payment error, waste, fraud and abuse in the major programs administered by the Federal Government."

This month the IRS also began a three-year audit of 6,000 companies (2,000 per year.) And don't assume the agency is only interested in big targets -- unlike routine employment tax audits that often are triggered by questions about company returns, the 6,000 audits are being chosen by statistical sampling -- luck of the draw.  And if you aren't chosen this round, you may be soon. "It's essentially a recon mission in preparation for a much bigger onslaught, and they've said as much," observed talent management firm MBO Partners' 1099 Risk Blog.

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Written by By Courtney Rubin | For Inc.com

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Author of this article: By Courtney Rubin
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