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Complex tax code can mean filing errors; create audit anxiety

The concept of taxing is fairly easy to comprehend. In its simplest form, taxes are the charges the government makes on its people in order to pay for the services it provides. Over the 200-plus years the United States has been around, the tax code that lays out what individuals and businesses must pay has become so overwhelming that it can seem almost like a secure encryption. That can lead to mistakes by District of Columbia area filers, and that can result in an IRS audit.

Even if a business owner is sure that he or she hasn't done anything wrong, the mere process of being given a thorough going over by the Internal Revenue Service can be cause for anxiety. And a lot of the reason for that is because the code doesn't make it very easy to be sure you're following it.

One aspect of particular concern is how businesses designate who is a full-time employee and who is a contract worker working full time. According to state studies, local business operators tend to mistakenly identify full-time employees as independent contractors between 10- and 60-percent of the time. And that can trigger the IRS to come knocking.

Since 2010, as part of a joint operation with the Labor Department, the IRS has been cracking down on employers with an eye toward correcting the improper classifications. The Labor Department says that since 2011, some 11,400 have been found in which employers improperly identified full-time workers as independent contractors, making them liable for payroll tax violations.

The attraction of hiring independent contractors, of course, is on the rise. Many businesses, large and small, find that using contractors helps them maintain a competitive advantage in a fast-moving market environment. It also reduces their tax obligation and paperwork. And no less significant is the savings in benefit costs. Independent contractors don't typically get health care or paid maternity.

Despite the appeal of using such contractors, some observers say that the threat of IRS audits may be driving some small employers to opt for full-time employees. They say the legal cost and disruption that an audit can generate just isn't worth the risk, even if no errors are found.

Source: The Wall Street Journal, "Payroll Audits Put Small Employers on Edge," Angus Loten and Emily Maltby, March 13, 2013

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