The IRS and DOL Team Up to Target Worker Misclassification

Have you heard about the collaboration between the IRS and the Department of Labor? If you didn’t just shudder a bit, be warned that you may soon.

Today, we rejoin Brandon Business-Owner.  Brandon had recently received an audit notice from the IRS due to misclassification. Brandon was just coming up for air when an eerily familiar notice hit his desk but this time…it was from the Department of Labor.

“What the heck?” Brandon thought. He had no idea he was about to get a crash course in regulatory cooperation.

It’s all due to their Memorandum of Understanding (MOU) and trust me, this is something you need to know.

Now, I know what you’re thinking. “Memorandum of Understanding? That sounds like something I’d hear at a fancy dinner party.”

What is the MOU and Why Should You Care?

The MOU is an agreement between the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) to share information and coordinate their enforcement efforts. Essentially, if one agency finds out that you’re misclassifying workers, they can “tattle” to the other agency. It’s like having two watchdogs on your back instead of just one.

Additionally, the IRS also has MOU with some states, where information about audits and non-compliance is shared with their departments of revenue and workforce agencies.

These alliances are a big deal for business owners of all sizes, especially when it comes to your worker classification. Imagine the DOL finds out that your business has misclassified workers, yes, even if it was unintentional.

They audit you, and you face penalties.

Ouch, right?

But wait – it gets worse.

The DOL can then pass this information to the IRS, who might decide to audit you as well.

Double ouch!

You could be facing audits from both the IRS and DOL which can be time-consuming, stressful, and disruptive to your business’s operations.

Why Is This Happening?

Worker misclassification occurs when a business wrongfully classifies an employee as an independent contractor. This often leads to employees losing out on essential benefits and protections (and they lose employer tax dollars), which is why the IRS and DOL are putting their heads together to tackle this issue more effectively.

Consequences of Misclassification

1. Double Audits and Penalties: First, the DOL audits you. If they find misclassification issues, they penalize you and then share that info with the IRS. The IRS might then audit you too, multiplying your stress and penalties. These agencies may also share this information with your state agencies.
2. Owing Back Taxes + Interest: You may have to pay back payroll taxes (including Social Security and Medicare taxes) for misclassified workers, which can become a considerable sum.
3. Legal Battles and Financial Repercussions: Misclassified workers can file lawsuits, and you might have to provide back pay and benefits they should have been entitled to. This can drain your finances and disrupt your business operations.

How to Stay Compliant

Properly classifying workers is now more crucial than ever. The DOL and IRS evaluate three crucial factors to determine a worker’s classification.

1. Review Your Worker Roles: Analyze the roles and responsibilities of each employee. The IRS and DOL look at behavioral control, financial control, and the nature of your relationship with the worker.   Example: If Barbara Business-Owner tells Frank Freelancer exactly how to design the website and demands he uses a company laptop during specific hours, Frank is likely an employee.
2. Get Organized and Keep Documentation: Always maintain thorough documentation such as contracts, work schedules, and payment records. This can help you prove proper classification if you’re ever audited.
3. Seek Expert Advice: It’s worth consulting with a legal expert to ensure your worker classifications are correct. Given the MOU, a small investment in legal advice could save you a lot of money and headache down the line.

Proper Worker Classification

Properly classifying your workers is crucial in avoiding the double whammy of audits and penalties under the MOU’s enhanced enforcement.

If you’re not sure whether your workers are classified correctly, do yourself a favor and contact us today. We’ll help ensure your classifications are in line with federal guidelines.

And stay tuned for our upcoming article, where we’ll dive deeper into the world of Employee/Employer Compliance and provide you with valuable insight to help keep your business on the right track.

ClearPath is a leading Human Resources Outsourcing company focusing on assisting employers to leverage the independent contractor labor market. We’re committed to helping business owners stay compliant and minimize the risks associated with their contingent labor requirements.

No Legal Advice Intended. This article includes general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to contact a lawyer licensed in your jurisdiction for advice on specific legal issues.