Here is my situation:
I worked for a company as an independent contractor during 2007 - signed independent contractor agreement and provided a W-4 giving my business name and EIN. Frequently during course of working for this company, officials made statements about business travel being deductible from 1099 earnings as a business expense, etc. I received a 1099 from them and completed my taxes by filing a Schedule C and deducting from my business gross significant 179(a) expenses, as well as other equipment, services, etc (common business deductions). Because of my income level and number of children, I qualified for a substantial refund due largely to EIC.
Last week, I get a letter from them explaining that "after a review of operations" myself and others who operated in a similiar position within the company were being reclassified retroactively as employees rather than independendent contractors. We were issued a "corrected" 1099 showing zero income in 2007 and a W-2 stating our gross pay as wages (of course, the W-2 states my EIN, since they don't have my SSN).
I crucnch a few numbers and realize that amending my return to show this income as W-2 wages and not business income will cost me over $3,000.00 in taxes and reduced (eliminated) Earned Income Credit for that year. I also qualified for some food and medical assistance from the State that year based on my earned income, and my amended return would cause me not to have qualified, possibly leading to a recoupment claim.
My questions: (1) Can an employer retroactively and unilaterally reclassify a person as an employee when there was a contract stating otherwise and the person does not wish to be so classified?
(2) If the employer can do this, can the taxpayer (me) petition the IRS to reclassify me as an IC and not an employee using the procedure usually employed in reverse by people seeking to be considered employees, claiming the IC designation to have been improper?
(3) If I can't get relief under the above theories, would the employer's actions constitute an actionable breach of the independent contractor agreement (where they state specifically that I am an IC and my income will be reported by 1099 and not W-2, since I relied upon their representations of status to my detriment (by making large purchases and engaging in travel in reliance upon such items being deductible)? Sounds like first year contracts to me, but I've been out of the game for a while.
Note: I have a JD and was an atty in private for 10 years before getting out of the rat race, so I know the basics, but very little about the nuts & bolts of tax law. Any assistance, particularly in terms of keeping my IC status and not having to file suit, would be greatly appreciated.