WEST MICHIGAN — On its surface, the current IRS offer seems like an olive branch to employers.

The Internal Revenue Service moved Sept. 21 to allow employers to voluntarily reclassify contractors as employees and pay a 10-percent employment tax penalty. The IRS released its Voluntary Classification Settlement Program, an employment tax amnesty for business owners, as a means to bring contractors onto tax rolls. Within that offer of amnesty comes the threat of employment audits and stepped up enforcement.

The IRS believes many contractors are misclassified and should be considered employees, experts say. In an effort to bring these independent contractors under the umbrella of employee status so it can capture a greater percentage of employee withholding taxes, the IRS is offering the carrot of amnesty while bearing the stick of stepped-up enforcement action.

Owners of thousands of Michigan businesses have been hoping for years that they would not have to face an employment tax audit, as any workers historically treated as independent contractors may have avoided paying employment tax and such an audit would not end well, said Paul L.B. McKenney, partner at Varnum LLP.

“For the IRS, this is low-hanging fruit. It doesn’t take much work, and the penalties can be stiff. This can break small employers if they are non compliant,” McKenney said. “The IRS knows if you have employees classified as W2 status, compliance (with employment taxes) is 99 percent plus. With contract workers, there is 80-85 percent compliance. There are numerous economic incentives for the IRS to go after (employment taxes).”

The risks of audits are very real as those in the employment law community estimate billions of dollars are at stake in uncollected employment taxes nationwide. Even for a small business with as few 10 employees, fines and fees from an audit that turns up misclassified employees can quickly reach the six figures.

The amnesty may be attractive to employers, as the amnesty requires a “look-back” period of three years in which the IRS will assess the 10-percent penalty. McKenney points to a tax amnesty program the IRS offered in 2009 on offshore accounts and the enforcement action that followed.

“(The IRS) said that the criminal gloves were off. … If you don’t take this deal, this (amnesty) will look like the deal of all deals if we catch you,” he said. “Amnesty is the only way to go — if you don’t take the deal, you will get clobbered.”

For those who are audited and find their 1099 compliance lacking or that they have misclassified employees, there is no statute of limitations. McKenney is blunt in his advice to employers: At the very least, ensure that you are complying with 1099 requirements.

“Quit screwing around and do it. The only people who would not do it are those who are scamming and paying some cash under the table. For any legitimate thing, get the 1099s in,” McKenney said. “You are in much better position if you have been filing 1099s.”

The amnesty will allow employers to avoid the brunt of federal tax penalties, but may open them up to investigation by state and local treasurers, who share investigations with the IRS, said Cameron Evans, partner in the labor and employment practice at Honigman Miller Schwartz and Cohn LLP.

“This carrot is a very big carrot from the federal government, but there is not any carrot from the state. By completing this IRS form, it may be deemed an admission that an employer had misclassified workers as independent contractors,” Evans said. “There is no safe harbor from state and local employment taxes — the State of Michigan is likely to come. If you are subject to local tax, there is potential liability there.”