IRS has never been comfortable with how some firms classify some workers and independent contractor. To assist with turning this issue towards the direction they wish they have issued a carrot and a stick for firms that misclassify workers as contractors.
Firms not under audit can voluntarily correct errors and pay a low penalty. To qualify, a company must have consistently treated the workers in question as contractors and must have given them 1099s for the past three years. A firm needn’t have a reasonable basis for the misclassification to use the program. The business must agree to treat the workers as employees for future tax periods, and the maximum penalty is just 1.068% of compensation paid to them last year.
Firms need to use Form 8952 to sign up. Announcement 2011-64 has the complete details.
Also the Labor Dept. and IRS are now working together and are sharing leads on perceived misclassified workers. And the Service will screen referrals for examination and in return will forward cases to agencies in seven states (surprising Illinois is not one of those states, yet).