Posted tagged ‘worker classification’

Must Taxpayers File “Timely” Forms 1099 to Obtain Section 530 Relief? Unexpected Answers from a Recent Worker-Classification Case

April 29, 2013

By Hale Sheppard

When battling the IRS, knowledge is power.  Nowhere is this more true than in worker-classification cases, where the IRS often seems hell-bent on treating all workers as employees, regardless of the facts.  One bright spot for taxpayers under IRS scrutiny is an obscure provision, commonly known as Section 530, that grants taxpayers a brand of “civil immunity” if they meet three criteria.  One requirement is that taxpayers file Forms 1099 (Miscellaneous Income) for all workers considered to be independent contractors.

For over three decades, the IRS has taken the position that Section 530 relief is not available unless taxpayers file their Forms 1099 in a “timely” manner.  One problem with the IRS’s stance is that it has been questioned and contradicted by at least two courts, including the Fifth Circuit Court of Appeals in a recent case called Bruecher Foundation Services, Inc. v. United States.  The bigger problem is that too many taxpayers, unaware of the relevant rules and caselaw, allow themselves to lose worker-classification cases, unnecessarily prolong audits, and/or miss opportunities to seek fee reimbursement from the IRS.  This article, published in the May 2013 issue of TAXES – The Tax Magazine, aims to alleviate these problems by highlighting and analyzing the taxpayer-favorable authorities regarding Section 530 relief and the Form 1099 filing requirement.

Employment Tax: Yet Another Opportunity to Come Clean –

December 17, 2012

Employment Tax: Yet Another Opportunity to Come Clean –

Whether a worker is performing services as an employee or as an independent contractor depends on the facts and circumstances.  This determination may be difficult for many companies and may lead to significant exposure.  In order to facilitate voluntary resolution of  potential worker classification issues and achieve the benefits of increased tax compliance and certainty for all parties, taxpayers, workers and the government, the IRS established the Voluntary Classification Settlement Program (“(VCSP”) on September 11, 2011.  The program was created to allow for voluntary reclassification of workers as employees outside the administrative context.

In light of feedback received, today the IRS has announced changes to the VCSP. (Announcement 2012-45; 2012-51 IRB 724).  The VCSP has been modified to: 1) permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP; 2) clarify the current eligibility requirement that a taxpayer that is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCP if any member of the affiliated group is under employment tax audit; 3) clarify that a taxpayer is not eligible to participate in the VCSP if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or the Department of Labor; and 4) eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

In addition, today the IRS announced a temporary expansion of eligibility for the VCSP through June 30, 2013.  The temporary eligibility expansion makes a modified VCSP available to taxpayers who would otherwise be eligible for the current VCSP but have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified.  Eligible taxpayers that take advantage of this limited, temporary eligibility expansion agree to prospectively treat workers as employees and will receive partial relief from federal employment taxes. (Announcement 2012-46; 2012-51 IRB 725)

This program can be used as a tax planning tool with the advice of your tax counsel.

Direct Sellers Hit by IRS Worker – Classification Audits

December 5, 2012

By Hale Sheppard

Despite the recent increase in online commerce, traditional methods of moving product, such as so-called “direct selling,” are alive and well.  Indeed, according to a recent IRS study, direct selling is a significant industry, with annual sales of nearly $30 billion and more than 13 million salespersons in the United States alone.  The IRS has intensified worker-classification audits over the past few years, generally claiming that workers should be treated as employees instead of independent contractors.  Theoretically, these audits should cause little concern for direct sellers because they enjoy a special status under the Internal Revenue Code.  The reality, though, is that the IRS’s recent audits have caused problems for many direct sellers, particularly those who fail to appreciate their unique tax status and/or assert their rights.  The attached article, called “Direct Sellers Hit by IRS Worker-Classification Audits:  An Analysis of the Obscure Rules and Strategies Applicable to These Workers,” is designed to alleviate these problems.  The article was published in a recent issue of Taxes – The Tax Magazine.

Settlement Program for Worker-Classification Issues: Putting the Latest Employment Tax Offer into Perspective

February 23, 2012

By Hale Sheppard

The difference between what taxpayers should pay and what they actually pay the IRS is called the “tax gap.”  A significant portion of the tax gap is attributable to non-compliance with employment tax laws, including worker misclassification.  The IRS is currently conducting a three-year research project, which entails an additional 6,000 random employment tax audits.  This research will inevitably lead to the conclusion that worker misclassification is rampant and depriving the federal government of billions of dollars in tax revenues each year.  Therefore, the IRS likely will deem it necessary to dedicate significantly more resources to enforcement of employment tax laws in the future.

Against this backdrop, the IRS announced in September 2011 a new voluntary classification settlement program (“VCSP”), which is designed to entice companies into reclassifying their workers from independent contractors to employees.  The VCSP may seem appealing at first blush, but further analysis reveals that participation in this pseudo-amnesty program may not be the best decision for many companies.  Of course, the challenge is that many companies grappling with this critical issue lack a complete picture of the options and their true implications.   These companies and/or their advisors have, as they say, just enough information to be dangerous.  The attached article, called “IRS Introduces New Settlement Program for Worker-Classification Issues:  Putting the Latest Employment Tax Offer into Perspective,” analyzes the major choices available to companies that could be facing worker-classification disputes with the IRS in the near future.  The article was published in the most recent issue of Taxes – The Tax Magazine.

MORE BREAKING NEWS: IRS Announces New Voluntary Worker Classification Settlement Program

September 21, 2011
On September 21, 2011, the IRS announced the launching of the Voluntary Classification Settlement Program.  This program will provide employers with the ability to resolve past worker classification issues and achieve certainty under the tax law at a significantly reduced employment tax rate by voluntarily reclassifying their workers. Under the program, eligible employers can obtain substantial relief from federal payroll taxes owed for misclassification in the past, if they agree to prospectively treat workers as employees. In exchange, the employer will pay 10 % of the employment liability that may have been due on compensation paid to workers for the most recent year, determined under the reduced rates of IRC section 3509, will not be liable for any interest and penalties on the liability and will not be subject to an employment tax audit with respect to worker classification of the workers for prior years.  Certain eligibility requirements must be met including that the employer cannot be currently under audit concerning the classification of workers by the Department of Labor or by a state government agency.  This program can be used as a tax planning tool with the advice of your tax counsel.


September 20, 2011

On September 19, 2011, Commissioner Shulman and Secretary of Labor Solis signed a memorandum of understanding that will allow for the sharing of information intended to combat employee misclassification.  The sharing of information and collaboration between the two agencies is intended to help reduce the incidence of misclassification, reduce the tax gap, and improve compliance with federal tax and labor laws.  The increased collaboration will also strengthen the relationship between the IRS and DOL, enable both agencies to leverage existing resources and send a consistent message to employers about their duties to properly classify workers and pay employment taxes.  The memorandum of understanding’s specific objectives include the following:

  • Expanding the IRS-DOL partnership launched in the Questionable Employment Tax Practices Program
  • Reduce the employment tax portion of the tax gap
  • Increase compliance with federal employment and unemployment tax requirements
  • Increase compliance with federal labor laws enforced by the DOL
  • Reduce fraudulent filings
  • Reduce abusive employment/unemployment schemes
  • Reduce worker classification
  • Reduce questionable employment tax practices
  • Reduce worker misclassification
  • Reduce questionable employment tax practices
  • Work together to create educational and outreach materials and guidance for employer and employees

The initiative will be coordinated by an IRS-DOL team.  The members of the team will meet regularly and make recommendations for improvement in partnership activities.  In addition, the DOL will refer to the IRS, Wage and Hour Investigation information and other data that the DOL believes may raise Internal Revenue Service employment tax compliance issues related to misclassification.  The IRS will share the employment tax referrals provided by the DOL with the state and municipal taxing agencies that are authorized to receive tax return information under approved agreements.  The IRS will provide annual reports to the DOL summarizing the results achieved by using DOL referrals.  Moreover, the IRS will provide the DOL with information which may constitute evidence of a violation of any federal criminal law that the DOL enforces.

In addition to this landmark signing hosted at the U.S. Department of Labor headquarters in Washington, DC, labor commissioners and other agency leaders representing several states signed memorandums of understanding with the Department’s Wage and Hour Division and, in some cases, its Employee Benefits Security Administration, Occupational Safety and Health Administration, Office of Federal Contract Compliance Programs and Office of the Solicitor.  The signatory states are Connecticut,Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington.  Secretary Solis also announced agreements for the Wage and H our Division to enter into memorandums of understanding with the state labor agencies of Hawaii, Illinois, and Montana, as well as New York’s attorney general.  The memorandums of understanding will enable the U.S. Department of Labor to share information and coordinate law enforcement with the IRS and participating states in order to combat worker misclassification.

In a press release issued on September 19, 2011, Secretary Solis is quoted “We’re here today to sign a series of agreements that together send a coordinated message: We’re standing united to end the practice of misclassifying employees.  We are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike.”  Commissioner Shulman said “This agreement takes the partnership between the IRS and Department of Labor to a new level.  In this new phase of our relationship, we will work together more efficiently to address worker misclassification issues…. 

The stakes are higher than before.  The government has forged an inter-agency team to combat the issue.  Business owners should prepare and seek assistance of trusted legal advisors to ensure compliance with federal and state employment tax and labor laws.

Another Player in the Worker Classification Arena?

February 21, 2011

According to the Department of Homeland Security, the federal government has started its crackdown on businesses suspected of hiring illegal immigrants.  Federal agents are expected to visit companies to verify employees’ identity and eligibility for employment in the United States.  Documentation, such as Forms I-9 will be reviewed.

ICE is not expected to name the companies listed in its audit plans but may identify the specific sectors that will be targeted.

Companies should manage these audits carefully because there is a significant potential for the findings to result in identifying worker classification issues which may give rise to issues with the Department of Labor, IRS and state taxing authorities.

This article was co-authored by Heather Pesikoff and Jaremi Chilton.

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