The IRS is increasing its auditing staff and sees the construction industry as one of its primary targets. In July of 2009, the IRS issued a new Audit Technique Guide (ATG) for their field agents to use when auditing businesses in the construction industry. One of the big changes, from the prior ATG, is a series of tables, at the end, designed to help agents determine how much income should have been reported from various types of construction contracts.
The IRS seems mostly concerned with construction companies that are cash basis sole-proprietorships. They believe that this group represents the largest portion of the "tax gap" (unreported income). Below is a link to an excerpt from Chapter 11 of the new audit technique guide. It demonstrates very well the IRS's intent on increasing audit activity on the construction industry.
The IRS has always been interested in this issue, but now they are particularly interested in construction workers who have been misclassified as independent contractors. It could be that in their increased audit activity of cash basis "independent contracting" businesses, they may discover individuals who really are employees. Since the IRS is not very fond of employees being treated as independent contractors, they will probably pursue this fairly aggressively. For more information, see my page titled Employee vs. Independent Contractor.
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