[Case Study] Pet Sitter Audit: Investigation Due To Company Collecting Money, Not The Independent Contractor.

 loisIn our Audit Case Study series we will go under the hood of pet sitting businesses and do what no one else is doing in the industry. Find out why companies were audited, how they survived, and their reflections looking back. We are so thankful to these companies for helping us to put truth to all of the rumors that fly around.

This audit case study is interesting because Lois was not under a typical formal audit. She was under investigation by the IRS where they sent her a huge list of questions, most likely, according to Lois, because one of her sitters was under an audit. So they essentially flagged her.  However, while going through the Voluntary Classification Settlement Program (VCSP) she was told that her staff were employees, even through they were classified as ICs.  She was lucky because if she was going through an audit, it is my understanding that she wouldn’t qualify for the VCSP.

BEFORE THE AUDIT:

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Do you want this to be anonymous or do you mind telling who you are?  I am okay with being identified.

If yes, what is your name and company name?  Four Paws Pet Sitting Services, LLC

When did you start your business?  June, 2003

Tell us if you had legal council advise you on how to set up and what was right and proper (accountant and lawyer)  No, I just started as me and really had no clue I would turn this business into what it is today. When I started, I thought it would be me and never really thought of having anyone else. I did make it a LLC.

I owned and operated a clothing store years before that with a few employees so I felt I was doing the right thing in registering my name and doing various things. I had been a vet tech but still went through a first aid and pet first aid class. And joined PSI.

Approximately, what was your annual revenue at the time?  Alternatively, would you consider yourself a small (Under 100K) medium (100-250K) or large (250K+) company?   I assume you mean at the time of the audit?    I was a medium sized business.

Did you have ICs or employees at the time?  I had IC’s.

How long did you have staff and what made you choose that classification of workers?  My first IC started with me back in 2005 and she is still with me today as an employee. Julie Frederick and I actually got accepted into the [Voluntary Classification Settlement] Program a day apart.  Technically, I was not audited but I was told by the IRS that that my IC’s are in fact employees.

So, either one of my IC’s was audited and in turn the red flag turned to me or a IC said she thought she should be classified as an employee. Either way the red flag was on me for over a year and I had a lot of stress in my life.

I received a letter from the IRS stating they were investigating this and I had several pages of questions to answer. I promptly called my accountant.

His first question was “Who did you piss off?”  I said no one. So we sat down together and went over all the questions.

It’s pretty scary! I kept coming up with questions in my mind as to how certain other business get away with this when I know I am doing so many of these things right. In fact I felt I was doing them all by the book of an IC.

Then I started thinking over the next several months; well I do give my sitter diaries they can use if they want. (oops, no no!) The big issue apparently for me was the fact that I collected the payment and not the IC. I only accept credit cards so all payments go through me. BIG no no!

*NOTE FROM BELLA: The VCSP set up so those business owners who know they are using ICs incorrectly and want to switch to employees can do it with their blessing. Through the program they will grant you a small penalty with the agreement that they will not audit you. Check out the link above.

Were you ever afraid of being audited? Was it ever in the back of your mind?   No, not before this started. I felt like this is what most pet sitting companies do. It is the industry standard.

 

TELL ME ABOUT YOUR AUDIT:

How were you notified that you were being audited? What department audited you? How long did the entire process take?  Answered partly above. It took a little over a year.

What was their reasoning for auditing you?   One particular IC was mentioned (and after the fact) I was told by my attorney that most likely she was audited. She had been laid off from her job when she started with me. She is very thorough and detailed with her record keeping.

I was also told I can’t ask her if she started this or if she was audited and I haven’t.

Tell us about the help that you had going through the audit. Did your lawyer, accountant, another agency/advisor help guide you through it?

I have a great attorney as well as some great support from Bella and Julie Frederick and I talk and that is thanks to the FB page of Bella’s.

I have to say after I got the letter that said a decision had been made and my IC’s are employees and I talked to my accountant, my husband first freaked out. The first couple of weeks were really tough. I was numb.

The reclassification was best my best case scenario and it was accepted. I was facing that it might not be accepted and I may have to pay thousands of dollars in penalties for federal and state.

My accountant referred me to an attorney who specializes in this. When I got her name I felt a little relieved, as I knew her. She was one of my clients! Then I thought oh oh, we actually met because I went with the new sitter on the consultation because it was the sitter’s first consultation. Was that a no no and another thing I was not allowed to do? Crap, maybe if I ever get through all this I will be happy not to worry about all this and can really train sitters like I want and can have more control over them.

I won’t have to put up with people who want to take off whenever they feel like. 

The attorney was great and went over all my options.

This was not cheap to go through but she handled everything for me and was my representative.

She said you don’t want to fight this, you will never ever win and it will be very costly.

You really have to have great paperwork in place for your IC’s and honestly, I didn’t.

Like I said once I accepted what was going on, I could see a few things that would go against me.

I accepted the facts and started moving forward.

Now I was just praying the reclassification would be accepted.

While waiting on this I bought the Quick Start Program from Bella and worked on that.

I realized I had to change my pricing, get workers compensation, change my website, change my attitude.  I went through a metamorphosis.

What did they require from you throughout the audit?  The first part that I was rather naïve about was the questionnaire that I answered with my accountant. Once I got the letter saying they are employees, I let the attorney handles everything. I definitely learned you need to have a good team that you can call on and work for you as far as professionals.

Did the agency involve your staff? Just the one IC was involved.

How did you feel throughout the process? What impact did it have on your life? Your family? Your business?

STRESS. My husband was fearful that we would lose everything, not just the business. My husband was laid off from Nortel several years ago and this business has sustained us to where he can do what he truly loves to do and that is coach baseball. He is a volunteer assistant high school baseball coach. He was talking about he would have to get a job. I felt horrible because this could have been prevented if I had done this right from the beginning and not jeopardized our lives.

I had another scare during this time where one of my sitters was doing an overnight and fell down the stairs. They have hardwood floors and stairs. She was wearing socks, not smart but didn’t change the fact that she went sliding down numerous steps. The sitter told the people the next day what happened and they were so worried that they were going to be sued.

The sitter had another job and was worried she was going to be really hurt and miss her “real job” and pay.  I realized if things were different, my client would not have been so worried. I wondered why the sitter said anything to the client in the first place. I didn’t say anything because, well, she was an IC! They haven’t used me since.

I know I’m paying for WC now but I do have peace of mind.

When you submitted the evidence they requested, how sure were you that you were going to pass through with flying colors?  While waiting for the reclassification to go through, I was about 50-50. I was worried, scared, stressed.

How much penalties did you have to pay? $1181 to the IRS. 

AFTER THE AUDIT:

Tell me about how you feel about that audit now. Are you happy or sad that you went through it? Did it make you better What advice would you give to other pet sitters to try NOT to be audited?

I would never want anyone to be stressed the way my husband and I were over this. If I were starting again, I would go to an attorney from the beginning and when ready to hire start with employees.

I feel I have to have control of my sitters to do a great job for my clients.

The only way to legally have control is to have employees.

If already in business and you have IC’s , I would switch.

I feel the IRS is targeting the pet sitting industry and better to reclassify voluntarily then be told like I was.

Sure, there are expenses involved but I will have better trained employees, I will know that a injury won’t wipe me out. I have a great outlook about my business again.

I think doing something voluntarily is always better than being forced and will be less stressful and cheaper.

If you knew then, what you knew now, is there anything you would have done differently?   Started with employees for sure vs IC’s and started delegating some things further back.

Anything else you would like to add? I am so glad I am through it and I thank you for being there and Julie is awesome. I love the FB group.

MY THOUGHTS:

First, I would like to thank Lois for taking the time to let us learn from her experiences. In this case study we learned that your business could be doing perfectly, not raising flags, but outside sources could raise them for you. In this case, it is speculated that it was one of her ICs who was under and IRS investigation and that lead them to Lois’ company. I also think it is important to note that Lois had her “team” helping her through this entire process. I am thankful that she was able to leave it all behind her with a $1181.00 penalty.

I found it equally as interesting to learn that she was told that she wasn’t in compliance with the flow of the money. She was charging the clients and then paying out her ICs. The IRS told her that the client would have to pay the IC and then the IC would pay her. Interesting… huh?
As with all of these audit case studies… these are personal experiences of each individual pet sitter. As we learned from Jennifer’s Audit Case Study, you can’t always go with what the auditor says, because then they could audit you again and say that things changed… so my warning to everyone who is reading is this: Learn from these examples. Let these examples challenge the way in which you seek advice, conduct business, and run your ship. Do not take these Case Study’s for the Bible and apply it to your business because of an experience someone else went through. Do your homework, and get a great team on your side. In the end, that is what counts! (In my eyes, at least!)

Please sound off below with your thoughts and be sure to thank Lois as well!!!

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3 replies
  1. Julie Fredrick
    Julie Fredrick says:

    This is really a great case study! I took 4 things away from this case study. 1.”The big issue apparently for me was the fact that I collected the payment and not the IC. I only accept credit cards so all payments go through me. BIG no no!” Over the years this is one of those things that I thought about over and over and I knew I wasn’t going to do it that way and I could be nailed for this (as was one of my local friendly peer competitors). 2. Lois’ attorney’s advice: “She said you don’t want to fight this, you will never ever win and it will be very costly.” 3. The fact that Lois was resistant at first, but then started thinking about all the benefits of going to employees…she embraced going to employees in the end. 4. The sitter sliding down the stairs….anyone with an injured IC can relate to the stress of not knowing who will end up being liable….IC sitter? Client? Business owner? and the stress of being a helpless by stander. Ugh.

    Reply
    • Bella Vasta
      Bella Vasta says:

      It is tough. Just because the IRS told Lois Kelly that was the way it needed to be done, doesn’t mean that they use that rule to everyone all the time. What I am actually seeing is that there is no consistency. So be careful to not just read these and apply them straight to your business. There are multiple grey areas and in the end, *I believe* that being in business is really a question of HOW MUCH RISK ARE YOU WILLING TO TAKE? We all have a different limit.

      It is just like Jennifer Haralson’s case study. The auditor told her one thing the first time, and then the second audit they held her accountable for following their directions the first time…

      Unfortunatly, it isn’t cut and dry. =(

      Reply
  2. Kelly Hall
    Kelly Hall says:

    First of all, thanks to Bella for creating this series of informative interviews and thank you to Lois for allowing us to benefit from your experience. Knowledge is power. I am learning a lot from each of these interviews.

    Reply

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