This guest post is by Dagny Kight, author of “Lower Your IRS Debt”.

The Internal Revenue Service has announced another seemingly uncharacteristic new program befitting an ostensibly “kindler, gentler” tax collector. Last year it was the overhauled Offer in Compromise program which relaxed the requirements to lessen the liability for those deep in tax debt. (Read about the big changes in ebook, Lower Your IRS Debt) This year the IRS would like to kiss and make up with businesses that may be in violation of regulations governing the compensation of independent contractors. Dropping penalties to as low as 1% with an “amnesty” program, the IRS says all will be forgiven if employers step forward and come clean. Sounds like a good way to avoid a potentially complex problem. This is the IRS we’re talking about. Could amnesty be a deal with the devil?

Since 2008, businesses have struggled to find creative ways to cut labor costs and remain afloat. Replacing employees with independent contractors or converting full-timers into part-time contractors eliminates paying benefits and withholding taxes along with reducing payroll and tax reporting paperwork. There are benefits to both sides of the arrangement and for employees who find themselves converted into contractors, many are simply grateful to still have an income in the current economy.

Some employers might like to believe that as long as work is getting done, people are getting paid, and everybody’s happy with the arrangements, there’s nothing to worry about. Not in the IRS’s view! An employer can’t pay a worker like an independent contractor while treating them like an employee, even if the worker agrees to it. There are a lot of ways the IRS might get wise to what’s going on. A company risks audits and penalties if any worker’s tax forms raise a red flag. A disgruntled former employee could blow the whistle or a contractor’s legitimate inquiries for tax advice or unemployment benefits could have a business owner facing Federal tax scrutiny.

For employers who may have run afoul of tax regulations with independent contractors, wouldn’t taking the amnesty program be like dodging a bullet? If a business is found to have been in violation of tax laws, they’ll have to pay any back taxes that are owed. Amnesty will reduce penalties but from that day on, an employer’s business practices could remain under the IRS’s watchful eye for years to come. But this may be a bigger risk—A company might get a slap on the wrist from the Feds but state tax authorities will extend no special treatment. Audits and penalties at the state level could be severe.

A company’s best plan of action may be to bite that bullet instead. Invest the time and effort in getting compliant, as tough as that may be. The general rule is whether the worker is “under the direction and control” of the employer. An employee is; an independent contractor is not. The quickest route to legal status is to use workers provided by a placement agency. For existing workers, make sure no employee and contractor are doing the same job. Contractors may be given assignments but they choose how, when, even where they’ll get the work done. They just have to deliver it on time. No setting work hours, no training in company procedures, no instructions how to do the work, no requiring attendance at meetings. Payment is made on a commission or per project basis and a business should have an invoice from the contractor.

The IRS amnesty program looks tempting but be aware there are potential risks that can’t be mitigated once it’s determined that a company has violated Federal tax regulations. Confession may be good for the soul but a mea culpa to the Internal Revenue Service might not do much for the bottom line.