“In an audit IRS agents will most always examine worker classification issues, i.e. to determine whether individuals who should be classified as ’employees’ have been wrongly classified instead as ‘independent contractors.’ Reclassifying the individual as an employee can not only have unpleasant consequences for the employer, but also for the individual who is no longer being treated as an independent contractor…
Two things to note here:
(1) Employers should beware of reclassifying employees as “independent contractors” just to avoid coverage under benefit plans. Such actions can lead to ERISA section 510 claims as well as problems with the IRS in an audit, which can impact both the employer as well as the individual being reclassified.
(2) An individual or a business may ask the IRS to determine the whole matter of employment status by filing Form SS-8…”
For more details, a discussion of relevant recent cases and links to useful resources, see this post from Benefitsblog.