My IT client received an Audit from State of NJ, Department of Labor and Workforce Development. The auditor reviewed all the Wage information and 1099-Misc information.

It appears that the State of NJ is very strict with its definition of independent contractors rules. They require all independent contractors to have an actual business address, business card, business listing and perhaps a website to substantiate the independent status! The fact that my IT client had consultants working for him at various client sites whilst meeting some of the independent contractor rules made no difference to the State.

Apparently, an independent contractor may claim unemployment at the conclusion of the temporary engagement and this has resulted in NJ State paying out unemployment claims. Thus, the NJ State is going after Companies that have unincorporated independent contractors and charging the Corporations with the possible delinquent disability and unemployment tax liabilities.

Thus, per my audit experience, it appears that my client will not employ any further incorporated individuals as independent contractors, and they are ready to pay the tax liabilities due as a result of all unincorporated contractors employed in NJ! Further, NJ State has demanded to review prior year's tax returns to determine whether there are possible further tax liabilities.

A word of caution to all Tax Professionals, beware of this new audit targeting NJ Corporations employing individual contractors that are engaged substantially with 1 employer. The State of NJ considers this fact to conclude that the consultant is really an employee of the corporation, where substantially all the revenue is derived from one source!

Thanks for posting this information, EpsteinCPA. I heard about this from a couple of people, but it was nice of you to post your experience regarding this matter. I will advise all my clients regarding your experience and ensure that all independent contractors are properly screened per the NJ State rules.

I get the feeling, in 2011 that there have been a substantial increase in audits this year too! I got an Audit for a 2007 Tax return from an IRS for a Schedule C client grossing $50,000!! Of course, there were some items on the tax return that could have triggered an audit such as Meals and Travel Expenses. It was a nasty experience as the Auditor wanted all receipts for all the expenses claimed on the tax return. "Substantiation is the name of the Game!"

Thank you EpsteinCPA for posting your experience, we hope that other CPA's benefit from your experience and we look forward to hearing from other CPA's that would share their experiences both positive and negative so that our members benefit from this forum.

Clearly, we are hearing from across the country that the IRS along with the respective State Tax Authorities increasing their compliance audits. The States are looking for additional sources of revenue and audits generally will yield some discrepancies that will yield to additional revenues.

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