The Eleventh Circuit Court of Appeals said that the managers, who were routinely expected to put in shifts totally 60-70 hour per week, were wrongly treated as executive employees exempt from OT.

According to the appeals court, the managers were non-exempt for three main reasons:

1. They spent 80-90% of their time performing non-exempt labor (running cash registers, stocking shelves, etc.)
2. Non-exempt tasks were considered an “essential” part of the managers’ jobs, as opposed to “incidental.”
3. Managers had relatively little freedom. Instead, district managers handled most managerial decisions, such as pricing, choosing inventory, etc.
4. The average manager’s “exempt” salary was barely more than the average assistant manager’s salary.

Cite: Morgan v. Family Dollar Stores, Inc.; 11th Circuit Ct. of Appeals, 12/18/08.

IRS has warned its going to start doing random employment tax audits in 2010. It’s aim: To find out exactly how much tax revenue the feds are losing due to employees being misclassified as independent contractors (ICs).

IC classification has always been a gray area — which is why many companies have relied on making an educated guess and then knocking on wood. Without any other red flags, many potentially misclassified employees (and their employers) have flown under the radar.

Random audits could be done at any company — there’s no way to minimize your risk of getting flagged.

What you can do: Go through your hiring procedures now and review the work done by ICs. The first random audits won’t be done until around April 2010, so there’s still time to address any questionable classifications you have on your books.

In fact, the audit rate for small companies actually went up a bit, from 0.92% in ’07 to 0.95% in ’08.

It won’t last

Unfortunately, the trend toward fewer audits isn’t likely to continue. IRS said the reason for the drop was that it had to reassign agents from audits to handle the influx of questions regarding the 2008 tax rebate program.

With that program all but over, the agents are expected to go back to their old tasks — auditing companies like yours.

GAO just released a report, and the news isn’t pretty. According to the report, between 1997 and 2007:

• Total number of enforcement actions is down.
• Most complaints from workers are handled as “conciliations” done over the phone.
• Wage-and-Hour-initiated actions are down 45% — and usually target the same handful of industries (hotels and food services, agriculture, manufacturing, health care and social services).
• Total back wages assessed is up 41%– but penalties are up only 6%.

GAO is recommending DOL make several changes to improve enforcement of the existing laws. Among them:

• Entering all complaints and actions into a Wage and Hour database.
• Getting input from employer and industry associations as well as employee advocacy organizations.
• Using existing tools such as tiplines and partnerships to track that proper penalties are assessed and collected. 

What’s your take on the report? Is it good that DOL is being encouraged to clean up? Or will this eventually mean more meddling into your company’s processes? Sound off in the comments. 

The hope is that people will then ‘fess up what they actually owe, and IRS can save itself the time and money of repeatedly contacting those who underreport, as well as avoid collections efforts for small-dollar amounts.

If it works, it could save A/P a lot of grief: ICs who underreport cost IRS billions each year in lost taxes. And if the “honor program” doesn’t put a big dent in that, you can expect IRS to look for different methods to collect that “lost” money. 

So far, the most “popular” plans to make up the so-called tax gap all involve more work on A/P’s end: More reporting, gathering more info on vendors, etc.

Sound off in the comments: Will this honor program save you from having to do more work? Or will IRS have to bring down the hammer — and shove its tax enforcement work onto you?

You won’t just be getting more info — you’ll have to send out more, too. With each 1099, you’ll be required to give ICs contact info for the Dept. of Labor. So, it’s that much easier for them to report your company for any mistakes — real or imagined — that a contractor thinks you might’ve made. 

(Let’s face it, even if you do everything by the book, an IRS audit is probably the last thing you need.)

Has your company ever mistakenly classified an employee as an IC (maybe you suspect that it did but it was never caught by the feds)? Penalties for that and related mistakes would also increase under this legislation. Under the bill, (H.R. 6111) your company could pay up to $10,000 per violation. 

There are several related bills pending in both the House and Senate, so it’s too early to say exactly which version (or combinations thereof) might end up as law. 

But with Congress and IRS both looking at increased IC enforcement as a good way to close the so-called Tax Gap, you can be sure some version of these bills will pass. And most likely, it’ll be sooner than you expect.

Due to the economic doom and gloom, state (and city) budget shortfalls are getting more widespread — and far worse than expected.

When states are pressed for cash, they tend to ramp up enforcement of existing taxes to make sure they get their hooks on every penny they can. Which means you can expect state auditors to not only do more audits, but to be a lot more rigorous in their work.

Don’t take our word for it: According to a survey by the sales tax experts at Sabrix, 60 % of companies are already reviewing their internal procedures to make sure they’re complying with the letter of the law.

Once you’ve got year-end wrapped up, consider doing a mini-audit of your company’s sales tax procedures. If you have any surprises lurking in your books, you’ll be better off if you address them now — not after the auditor has already been in touch.