Uncle Sam Goes after His Own with Contractor Audit

Posted by Dave Putt

Last fall, I learned of a curious event in the world of Independent Contractor risk: a government agency was being audited by the IRS for its use of Independent Contractors. The audit found the agency to be liable, and the IRS levied penalties. Although the fines did not seem to be of the level I have seen with private industries, it did come with the stipulation that the agency clean up its act in the next six months or it would look at an additional three years of scrutiny.

The company I work for, MBO Partners, has helped a number of government agencies manage their independent contractors, but tax compliance was never the driving force to bring us in. Government agencies tend to use MBO Partners to consolidate all their Independent Contractors under one convenient contract vehicle/GSA Schedule. They also value the cost savings that come from the efficiencies our paperless systems can introduce, and the speed in processing payments that we are known for. But as for independent contractor tax risk, they believe the IRS is focused on private industry. This turns out to be a bit of whistling past the graveyard.

Seeing the IRS take action on Federal agency activities heralds a sea-change in the landscape of Independent Contractor Compliance, and for a number of reasons. First, the cannibalism suggested by the situation of government agencies going after other government agencies shows desperation by the IRS to capture revenue wherever it can get it. Since government agencies books are open under FOIA, they represent some low hanging fruit. Second, the so-called ”beltway bandits” should be nervous, as they are no longer safe by proxy. Government contractors’ common practice of using “consultants” would likely be the next casualty (this practice I will expand on later). Finally, public or private companies who have not enjoyed an IRS audit for Independent Contractor Classification Compliance should be on notice: if government agencies can get dinged, so could they.

Dave Putt is Vice President of Client Services for MBO Partners. An expert on Independent Contractor Compliance issues, he sits on the Advisory Board for the Human Capital Institute’s Contract Talent Research Practice Area.

Tags: contractor agreement, independent contractor, audit, classification, risk, compliance, government, Federal