Employer Question: Temporary Employment = Contract Labor?

These are definitely not the same thing.  The question posed is this:  An employer is hiring a person in a low-level position who was laid off from his previous high-paying job and the new employer knows that this person is going to be looking for permanent employment elsewhere.  If that person is probably only going to be working for the company temporarily, can the employer keep things easy and pay that person as contract labor?  The answer is a definite NO.  There is no period of time of employment that enters into the decision of contractor versus employee.  Regardless of the amount of time that person works for you, if he meets the definition of an employee, then he should be set up as such.  

IRS CP2000 Notices

It is the time of year for the IRS to send out CP2000 notices for tax year 2007.  This type of notice is generated when the IRS computers find a discrepancy between what was reported on the tax return versus the documents filed by various sources (1099-INT, 1099-R, etc.).  If you fail to report for example a 1099-R that you received for an early retirement distribution, the IRS will discover the discrepancy and you will eventually receive a notice.  It takes about a year from the time that the tax return was filed for the IRS to catch any discrepancies.  This is why you will see many CP2000 notices being sent around the time period of March, April, and May. 

If you receive one of these notices, do not panic.  It is not an audit.  The IRS simply wants you to respond to the discrepancy.  Also, do not just blindly send them a check for the amount due.  Read the notice carefully to see what the IRS is describing as the discrepancy.  It is possible that a mistake was made by the creator of the source document.  Here is an example that I just dealt with recently:  someone in the business of making mortgage loans accidently prepared a 1099-INT for interest income rather than a Form 1098 for mortgage interest paid.  This triggered a notice because the IRS was looking for the taxpayer to report interest income.  Rather than the originator having to file a corrected 1099/1098, the IRS simply required a letter signed by the originator acknowledging the error.  We attached a copy of that letter as a response to the notice.

If upon examining the notice you do discover that the IRS is correct, you will have 30 days from the date of the notice to make the payment.  If you need additional time for research, you can request an additional 30 days by calling the IRS.  There will just be additional interest assessed for the extra time.   The fact that it takes a year for the discrepancy to be found, unfortunately means that interest and penalties have accrued on the balance for that period.  It is possible to have the penalty abated, if you feel that you have a good reason.  Sometimes it is worth a shot.  Simply attached a letter explaining the reason you feel that the IRS should consider your request for penalty abatement.  All they can do is deny it.  Don't bother to try and abate the interest.  The IRS sees that as a time value of money issue (you had the use of the funds and not them) and therefore I have never seen them agree to abate interest.

If you are unable to pay the full balance, then the IRS will allow you to set up an installment plan.  You should find an installment plan application included with the copy of the notice.

IRS Audits Contract Labor

A CPA colleague contacted me yesterday to let me know that one of her clients is being audited by the IRS for paying contract labor.  This particular issue is emphasized by one of my prior posts.  The IRS and the state unemployment commissions do not like the contract labor classification, and it is a difficult position for an employer to defend.  If I hear any more detail regarding this case, I will post it here.