The problem of classification actually centers on the 20-factor test itself because it is vague and subjective. This leaves plenty of room for the IRS to use its discretion in its interpretation of whether your workers are employees or independent contractors. During the period of 1988-1995, the IRS conducted 12,983 employment tax audits. These resulted in employers being assessed $830 million in back taxes, interest and penalties and a total of 527,000 workers to be reclassified as employees.

However, all is not lost for companies that classify individuals as independent contractors rather than as employees. A company may be able to avoid employment taxes by showing it qualifies for Section 530 Relief. What all this means is that even if you misclassify an individual as an independent contractor, you may still not be liable for the back employment taxes, interest and penalties if you can qualify for Section 530 Relief. However, you must start treating your workers as employees if it is determined that the are common-law employees. Effective for audits beginning after 1996, IRS officers or employees must give the taxpayer written notice of Section 530 Relief provisions at or before the commencement of an audit involving worker classification. You can qualify for this relief if the employer can prove, by a preponderance of evidence, that it had a "reasonable" basis for not treating its workers as employees.