Despite increasing evidence that the use of independent contractors is a “long-standing industry practice,” the IRS continues to conduct employment audits of limousine companies. In areas as yet not surveyed by the National Limousine Association (NLA), the IRS judges companies according to 20 “Common Law” factors for determining independent contractor status. To date, most companies have been forced to reclassify chauffeurs as employees, and pay back taxes, penalties and interest.
One problem with the 20 question method of classifying independent contractors is that it relies on the subjective judgment of an IRS examiner. In Florida, two drywall companies doing business in a similar way recently underwent employment audits by different IRS examiners. One company was forced to reclassify its independent contractors while the other was not. What makes subjectivity obvious in this case is that the worker in question at both companies was the same person.
It is likely Congress will rewrite the 20 questions so that independent contractors can be identified in a less subjective way. Congress has shown that it does recognize the legitimate role of independent contractors in certain industries by designating real estate agents and direct sellers as employment groups that are truly independent contractors.
But, the limousine industry remains a favored target of the IRS. And the heat may intensify in the near future as the IRS seeks a new procedure for identifying companies for employment audits. One possibility suggested by the Congressional Committee on Government Operations is to match the information on 1099 information returns with the income reported on individual tax returns. If a contractor received all of his income from one employer, an audit would follow.
Another proposal by this committee is to increase the penalty for failure to file a 1099 on correctly classified independent contractors from $50 to the same level as for incorrectly classified independent contractors for whom no 1099 is filed. For a contractor making $20,000 a year, the estimated penalty is $3,200. The IRS estimates that more than a billion dollars in revenue is lost each year because employers fail to file 1099s.
Some feel that filing 1099s for chauffeurs invites an IRS employment audit, but we encourage limousine companies using independent contractors to show good faith by filing 1099s and documenting that contractors have been advised of their tax liabilities.
The NLA is currently attempting to resolve the independent contractor issue by proposing the IRS accept a nationwide survey as proof that the use of independent contractors by limousine companies is standard practice throughout the industry. NLA executive director Wayne Smith has scheduled a meeting with the IRS for early fall. Acceptance of this proposal by the IRS would be a remarkable legislative victory with ramifications for the entire industry. While a favorable resolution may be within sight, the NLA advises any company facing an employment audit to inquire about the possibility of a regional NLA survey.