eTax Alert: Employment Tax July 19, 2017

In a recent decision, the Tax Court provided relief to an employer who misclassified workers as independent contractors. If your client is facing a big employment tax bill, this case may provide help in minimizing the taxes due.

Court Says That IRS Can Provide Info on Taxes Paid by Reclassified Workers((Mescalero Apache Tribe v. Comm., 148 TC No. 11 (April 5, 2017))

The IRS reclassified hundreds of Mescalero Apache Tribe workers as employees. Reclassification made the Tribe liable for taxes for its workers whom it improperly labeled as contractors during the 2009-2011 tax years.

Form 4669 to the rescue. Section 3402 lets an employer in this situation escape tax liability if it can show the workers whom it labeled independent contractors paid income tax on their earnings (see also §31.3402(d)-1). One way to get relief would be for the Tribe to ask each worker to complete Form 4669, Statement of Payments Received (Internal Revenue Manual pt. (Oct. 26, 2015)).

Seventy employees failed to return the form. The Tribe asked the IRS to search the records of 70 workers to determine whether they reported their Form 1099 income and paid their tax liabilities and then to adjust the Tribe’s liability accordingly. The IRS refused, claiming that it is barred under §6103 from providing confidential tax information from another’s tax return.

Tax practitioner note. The Tribe wants to take advantage of §3402(d). But how? It tried to find its old workers and get them to fill out the form the IRS wants employers to use. The Tribe argued that the information is just sitting there in the IRS’s records. Maybe the IRS should be required to look in their own records.Tribe moves for discovery. Discovery is a legal device employed to require the adverse party to disclose information that is essential to the requesting party’s case – in this instance, tax return information from the Tribe’s reclassified workers who failed to complete the Form 4669. The court ruled that the tax return information was disclosable under §6103(h)(4)(C) as the code permits disclosure of returns or return information if such “return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer, which directly affects the resolution of an issue in the proceeding.” And even though the Tribe bore the burden of proof that the employees paid their income taxes, the court found the worker information discoverable under the court’s Rule 70(b).

Tax planning idea. If your client’s workers are reclassified as employees, first make a bona fide attempt to secure Form 4669 from each worker to show that the worker reported and paid their taxes. If some employees do not return the form, cite this case and ask the IRS to secure the workers’ information from the IRS records.

© 2017 Sharon Kreider and Vern Hoven

Sharon Kreider, CPA, has helped more than 15,000 California tax preparers annually get ready for tax season. She also presents regularly for the AICPA, the California Society of Enrolled Agents, CCH Audio, and Western CPE. You’ll benefit from the detailed, hands-on tax knowledge Sharon will share with you—knowledge she gained through her extremely busy, high-income tax practice in Silicon Valley. With her dynamic presentation style, Sharon will demystify complex individual and business tax legislation. She’s a national lecturer for business and professional groups and consistently receives outstanding evaluations. In 2014, she was awarded the prestigious AICPA 2014 Sidney Kess Award for Excellence in Continuing Education.

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