QUALIFYING EMPLOYERS WHO VOLUNTARILY RECLASSIFY WORKERS AS EMPLOYEES CAN PAY REDUCED TAX LIABILITY ON PAST WAGES.
In Announcement 2011-64, the IRS details a voluntary program for correcting past worker misclassification (i.e. treating workers as subcontractors when they should have been treated as employees subject to payroll tax liabilities.) The IRS is actively pursuing the worker classification issue - it wants to collect the payroll taxes.
To qualify for the reduced tax liability and the waiver of interest and penalties, the employer must have filed the appropriate 1099 forms for the affected workers for the last three years, and must not be under audit by the IRS, Department of Labor, or state tax authorities, and must agree to treat such workers as employees prospectively.
The announcement contains other important details, but the gist of the matter is to encourage noncompliant employers to "come clean before we find you...."
(This is the "carrot" part, as opposed to the audit "stick.")
For additional info on the employee vs. contractor issue, see Subcontractor or Employee? in the Smorgasbord pages.
Please call me to discuss these matters before you take any action.