The penalties are stiff for violations of worker classification laws, particularly stiff if it is systemic and the employer had no reasonable basis for the classification. IRC § 3509. There are ways to settle with the IRS though if one comes forward voluntarily through the Voluntary Classification Settlement Program. If a business gets caught, and it had a reasonable basis for classifying as independent contractor, the IRS has a relief program available. How does the IRS get tipped off to misclassification? Workers come forward and file a form asking the IRS to investigate. Workers and employers can also file a Form SS-8 asking the IRS to make a determination. Turnaround time on these can be varied but I’ve seen them take 4-6 months.
If an employer misclassifies for purposes of the FLSA, back wages will be granted and penalties will be imposed. This can pack a punch. Additionally, Field Assistance Bulletin No. 2021-2 (April 9, 2021) reinstated that the DoL Wage and Hour Division can seek liquidated damages when the minimum wage and overtime laws are breached.