presents The New IRS Employment Tax Audit Initiativemedia.straffordpub.com/products/the-new-irs-employment... · 2010. 5. 28. · The New IRS Employment Tax Audit Initiative ... Tuesday,

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The New IRS Employment Tax Audit InitiativeStrategies to Prepare for Audits Given Anticipated Tax and Compensation

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Strategies to Prepare for Audits Given Anticipated Tax and Compensation Targets

A Live 110-Minute Teleconference/Webinar with Interactive Q&AToday's panel features:

Anthony Arcidiacono, Senior Manager, National Tax Practice, Ernst & Young, Iselin, N.J.Edward Froelich, Of Counsel, Morrison & Foerster, Washington, D.C.

James Merritt, Senior Counsel, Morrison & Foerster, Washington, D.C.Ira Mirsky Partner McDermott Will & Emery Washington D CIra Mirsky, Partner, McDermott Will & Emery, Washington, D.C.

Tuesday, June 1, 2010

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Revenue Ruling 87-41Internal Revenue Service 1987-1 C.B. 296

Section 3121.-Definitions

26 CFR 31.3121(d)-1: Who are employees. (Also Sections 3306, 3401; 31.3306(i)-1, 31.3401(c)1.)

Employment status under section 530(d) of the Revenue Act of 1978 . Guidelines are set forth for determining the employment status of a taxpayer (technical service specialist) affected by section 530(d) of the Revenue Act of 1978, as added by section 1706 of the Tax Reform Act of 1986. The specialists are to be classified as employees under generally applicable common law standards.

Rev. Rul. 87-41

ISSUE

In the situations described below, are the individuals employees under the common law rules for purposes of the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24 respectively, subtitle C, Internal Revenue Code)? These situations illustrate the application of section 530(d) of the Revenue Act of 1978, 1978-3 (Vol. 1) C. B. 119 (the 1978 Act), which was added by section 1706(a) of the Tax Reform Act of 1986, 1986-3 (Vol. 1) C.B. 698 (the 1986 Act) (generally effective for services performed and remuneration paid after December 31, 1986).

FACTS

In each factual situation, an individual worker (Individual), pursuant to an arrangement between one person (Firm) and another person (Client), provides services for the Client as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work.

Situation 1

The Firm is engaged in the business of providing temporary technical services to its clients. The Firm maintains a roster of workers who are available to provide technical services to prospective clients. The Firm does not train the workers but determines the services that the workers are qualified to perform based on information submitted by the workers.

The Firm has entered into a contract with the Client. The contract states that the Firm is to provide the Client with workers to perform computer programming services meeting specified qualifications for a particular project. The Individual, a computer programmer, enters into a contract with the Firm to perform services as a computer programmer for the Client's project, which is expected to last less than one year. The Individual is one of several programmers provided by the Firm to the Client. The Individual has not been an employee of or performed services for the Client (or any predecessor or affiliated corporation of the Client) at any time preceding the time at which the Individual begins performing services for the Client. Also, the Individual has not been an employee of or performed services for or on behalf of the Firm at any time preceding the time at which the Individual begins performing services for the Client. The Individual's contract with the Firm states that the Individual is an independent contractor with respect to services performed on behalf of the Firm for the Client.

The Individual and the other programmers perform the services under the Firm's contract with the Client. During the time the Individual is performing services for the Client, even though the Individual retains the right to perform services for other persons, substantially all of the Individual's working time is devoted to performing services for the Client. A significant portion of the services are performed on the Client's premises. The Individual reports to the Firm by accounting for time worked and describing the progress of the work. The Firm pays the Individual and regularly charges the Client for the services performed by the Individual. The Firm generally does not pay individuals who perform services for the Client unless the Firm provided such individuals to the Client.

The work of the Individual and other programmers is regularly reviewed by the Firm. The review is based primarily on reports by the Client about the performance of these workers. Under the contract between the Individual and the Firm, the Firm may terminate its relationship with the Individual if the review shows that he or she is failing to perform the services contracted for by the Client. Also, the Firm will replace the Individual with another worker if the Individual's services are unacceptable to the Client. In such a case, however, the Individual will nevertheless receive his or her hourly pay for the work completed.

Finally, under the contract between the Individual and the Firm, the Individual is prohibited from performing services directly for the Client and, under the contract between the Firm and the Client, the Client is prohibited from receiving services from the Individual for a period of three months following the termination of services by the Individual for the Client on behalf of the Firm.

Situation 2

The Firm is a technical services firm that supplies clients with technical personnel. The Client requires the services of a systems analyst to complete a project and contacts the Firm to obtain such an analyst. The Firm maintains a roster of analysts and refers such an analyst, the Individual, to the Client. The Individual is not restricted by the Client or the Firm from providing services to the general public while performing services for the

Client and in fact does perform substantial services for other persons during the period the Individual is working for the Client. Neither the Firm nor the Client has priority on the services of the Individual. The Individual does not report, directly or indirectly, to the Firm after the beginning of the assignment to the Client concerning (1) hours worked by the Individual, (2) progress on the job, or (3) expenses incurred by the Individual in performing services for the Client. No reports (including reports of time worked or progress on the job) made by the Individual to the Client are provided by the Client to the Firm.

If the Individual ceases providing services for the Client prior to completion of the project or if the Individual's work product is otherwise unsatisfactory, the Client may seek damages from the Individual. However, in such circumstances, the Client may not seek damages from the Firm, and the Firm is not required to replace the Individual. The Firm may not terminate the services of the Individual while he or she is performing services for the Client and may not otherwise affect the relationship between the Client and the Individual. Neither the Individual nor the Client is prohibited for any period after termination of the Individual's services on this job from contracting directly with the other. For referring the Individual to the Client, the Firm receives a flat fee that is fixed prior to the Individual's commencement of services for the Client and is unrelated to the number of hours and quality of work performed by the Individual. The Individual is not paid by the Firm either directly or indirectly. No payment made by the Client to the Individual reduces the amount of the fee that the Client is otherwise required to pay the Firm. The Individual is performing services that can be accomplished without the Individual's receiving direction or control as to hours, place of work, sequence, or details of work.

Situation 3

The Firm, a company engaged in furnishing client firms with technical personnel, is contacted by the Client, who is in need of the services of a drafter for a particular project, which is expected to last less than one year. The Firm recruits the Individual to perform the drafting services for the Client. The Individual performs substantially all of the services for the Client at the office of the Client, using materials and equipment of the Client. The services are performed under the supervision of employees of the Client. The Individual reports to the Client on a regular basis. The Individual is paid by the Firm based on the number of hours the Individual has worked for the Client, as reported to the Firm by the Client or as reported by the Individual and confirmed by the Client. The Firm has no obligation to pay the Individual if the Firm does not+ receive payment for the Individual's services from the Client. For recruiting the Individual for the Client, the Firm receives a flat fee that is fixed prior to the Individual's commencement of services for the Client and is unrelated to the number of hours and quality of work performed by the Individual. However, the Firm does receive a reasonable fee for performing the payroll function. The Firm may not direct the work of the Individual and has no responsibility for the work performed by the Individual. The Firm may not terminate the services of the Individual. The Client may terminate the services of the Individual without liability to either the Individual or the Firm. The Individual is permitted to work for another firm

while performing services for the Client, but does in fact work for the Client on a substantially full-time basis.

LAW AND ANALYSIS

This ruling provides guidance concerning the factors that are used to determine whether an employment relationship exists between the Individual and the Firm for federal employment tax purposes and applies those factors to the given factual situations to determine whether the Individual is an employee of the Firm for such purposes. The ruling does not reach any conclusions concerning whether an employment relationship for federal employment tax purposes exists between the Individual and the Client in any of the factual situations.

Analysis of the preceding three fact situations requires an examination of the common law rules for determining whether the Individual is an employee with respect to either the Firm or the Client, a determination of whether the Firm or the Client qualifies for employment tax relief under section 530(a) of the 1978 Act, and a determination of whether any such relief is denied the Firm under section 530(d) of the 1978 Act (added by section 1706 of the 1986 Act).

An individual is an employee for federal employment tax purposes if the individual has the status of an employee under the usual common law rules applicable in determining the employer-employee relationship. Guides for determining that status are found in the following three substantially similar sections of the Employment Tax Regulations: sec-tions 31.3121(d)-1(c); 31.3306(i)-1; and 31.3401(c)-1.

These sections provide that generally the relationship of employer and employee exists when the person or persons for whom the services are performed have the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but as to how it shall be done. In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if the employer has the right to do so.

Conversely, these sections provide, in part, that individuals (such as physicians, lawyers, dentists, contractors, and subcontractors) who follow an independent trade, business, or profession, in which they offer their services to the public, generally are not employees.

Finally, if the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial. Thus, if such a relationship exists, it is of no consequence that the employee is designated as a partner, coadventurer, agent, independent contractor, or the like.

As an aid to determining whether an individual is an employee under the common law rules, twenty factors or elements have been identified as indicating whether sufficient control is present to establish an employer-employee relationship. The twenty factors have been developed based on an examination of cases and rulings considering whether an individual is an employee. The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed. The twenty factors are designed only as guides for determining whether an individual is an employee; special scrutiny is required in applying the twenty factors to assure that formalistic aspects of an arrangement designed to achieve a particular status do not obscure the substance of the arrangement (that is, whether the person or persons for whom the services are performed exercise sufficient control over the individual for the individual to be classified as an employee). The twenty factors are described below:

1. Instructions. A worker who is required to comply with other persons' instructions about when, where, and how he or she is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions. See, for example, Rev. Rul. 68-598, 1968-2 C.B. 464, and Rev. Rul. 66-381, 1966-2 C.B. 449.

2. Training. Training a worker by requiring an experienced employee to work with the worker, by corresponding with the worker, by requiring the worker to attend meetings, or by using other methods, indicates that the person or persons for whom the services are performed want the services performed in a particular method or manner. See Rev. Rul. 70-630, 1970-2 C.B. 229.

3. Integration. Integration of the worker's services into the business operations generally shows that the worker is subject to direction and control. When the success or continuation of a business depends to an appreciable degree upon the performance of certain services, the workers who perform those services must necessarily be subject to a certain amount of control by the owner of the business. See United States v. Silk, 331 U.S. 704 (1947), 1947-2 C.B. 167.

4. Services Rendered Personally. If the services must be rendered personally, presumably the person or persons for whom the services are performed are interested in the methods used to accomplish the work as well as in the results. See Rev. Rul. 55-695, 1955-2 C.B. 410.

5. Hiring, Supervising, and Paying Assistants. If the person or persons for whom the services are performed hire, supervise, and pay assistants, that factor generally shows control over the workers on the job. However, if one worker hires, supervises, and pays the other assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, this factor indicates an independent contractor status. Compare Rev. Rul. 63-115, 1963-1 C.B. 178, with Rev. Rul. 55593, 1955-2 C.B. 610.

6. Continuing Relationship . A continuing relationship between the worker and the person or persons for whom the services are performed indicates that an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals. See United States v. Silk.

7. Set Hours of Work. The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control. See Rev. Rul. 73-591, 1973-2 C.B. 337.

8. Full Time Required. If the worker must devote substantially full time to the business of the person or persons for whom the services are performed, such person or persons have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work. An independent contractor, on the other hand, is free to work when and for whom he or she chooses. See Rev. Rul. 56-694, 1956-2 C.B. 694.

9. Doing Work on Employer's Premises. If the work is performed on the premises of the person or persons for whom the services are performed, that factor suggests control over the worker, especially if the work could be done elsewhere. Rev. Rul. 56-660, 1956-2 C.B. 693. Work done off the premises of the person or persons receiving the services, such as at the office of the worker, indicates some freedom from control. However, this fact by itself does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require that employees perform such services on the employer's premises. Control over the place of work is indicated when the person or persons for whom the services are performed have the right to compel the worker to travel a designated route, to canvass a territory within a certain time, or to work at specific places as required. See Rev. Rul. 56-694.

10. Order or Sequence Set. If a worker must perform services in the order or sequence set by the person or persons for whom the services are performed, that factor shows that the worker is not free to follow the worker's own pattern of work but must follow the established routines and schedules of the person or persons for whom the services are performed. Often, because of the nature of an occupation, the person or persons for whom the services are performed do not set the order of the services or set the order in-frequently. It is sufficient to show control, however, if such person or persons retain the right to do so. See Rev. Rul. 56-694.

11. Oral or Written Reports. A requirement that the worker submit regular or written reports to the person or persons for whom the services are performed indicates a degree of control. See Rev. Rul. 70-309, 1970-1 C.B. 199, and Rev. Rul. 68-248, 1968-1 C.B. 431.

12. Payment by Hour, Week, Month. P ayment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job. Payment

made by the job or on a straight commission generally indicates that the worker is an independent contractor. See Rev. Rul. 74-389, 1974-2 C. B. 330.

13. Payment of Business and/or Traveling Expenses. If the person or persons for whom the services are performed ordinarily pay the worker's business and/or traveling expenses, the worker is ordinarily an employee. An employer, to be able to control expenses, generally retains the right to regulate and direct the worker's business activities. See Rev. Rul. 55-144, 1955-1 C.B. 483.

14. Furnishing of Tools and Materials. The fact that the person or persons for whom the services are performed furnish significant tools, materials, and other equipment tends to show the existence of an employer-employee relationship. See Rev. Rul. 71-524, 1971-2 C.B. 346.

15. Significant Investment. If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees (such as the maintenance of an office rented at fair value from an unrelated party), that factor tends to indicate that the worker is an independent contractor. On the other hand, lack of investment in facilities indicates dependence on the person or persons for whom the services are performed for such facilities and, accordingly, the existence of an employer-employee relationship. See Rev. Rul. 71-524. Special scrutiny is required with respect to certain types of facilities, such as home offices.

16. Realization of Profit or Loss. A worker who can realize a profit or suffer a loss as a result of the worker's services (in addition to the profit or loss ordinarily realized by employees) is generally an independent contractor, but the worker who cannot is an employee. See Rev. Rut. 70309. For example, if the worker is subject to a real risk of economic loss due to significant investments or a bona fide liability for expenses, such as salary payments to unrelated employees, that factor indicates that the worker is an independent contractor. The risk that a worker will not receive payment for his or her services, however, is common to both independent contractors and employees and thus does not constitute a sufficient economic risk to support treatment as an independent contractor.

17. Working for More Than One Firm at a Time. If a worker performs more than de minimis services for a multiple of unrelated persons or firms at the same time, that factor generally indicates that the worker is an independent contractor. See Rev. Rul. 70-572, 1970-2 C.B. 221. How ever, a worker who performs services for more than one person may be an employee of each of the persons, especially where such persons are part of the same service arrangement.

18. Making Service Available to General Public. The fact that a worker makes his or her services available to the general public on a regular and consistent basis indicates an independent contractor relationship. See Rev. Rul. 56-660.

19. Right to Discharge. The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer's instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifica-tions. Rev. Rul. 75-41, 1975-1 C.B. 323.

20. Right to Terminate. If the worker has the right to end his or her relationship with the person for whom the services are performed at any time he or she wishes without incurring liability, that factor indicates an employer-employee relationship. See Rev. Rul. 70-309.

Rev. Rul. 75-41 c onsiders the employment tax status of individuals performing services for a physician's professional service corporation. The corporation is in the business of providing a variety of services to professional people and firms (subscribers), including the services of secretaries, nurses, dental hygienists, and other similarly trained personnel. The individuals who are to perform the services are recruited by the corporation, paid by the corporation, assigned to jobs, and provided with employee benefits by the corporation. Individuals who enter into contracts with the corporation agree they will not contract directly with any subscriber to which they are assigned for at least three months after cessation of their contracts with the corporation. The corporation assigns the individual to the sub-,, scriber to work on the subscriber's premises with the subscriber's equipment. Subscribers have the right to require that an individual furnished by the corporation cease providing services to them, and they have the further right to have such individual replaced by the corporation within a reasonable period of time, but the subscribers have no right to affect the contract between the individual and the corporation. The corporation retains the right to discharge the individuals at any time. Rev. Rul. 75-41 concludes that the individuals are employees of the corporation for fed-eral employment tax purposes.

Rev. Rul. 70-309 considers the employment tax status of certain individuals who perform services as oil well pumpers for a corporation under contracts that characterize such individuals as independent contractors. Even though the pumpers perform their services away from the headquarters of the corporation and are not given day-to-day directions and instructions, the ruling concludes that the pumpers are employees of the corporation because the pumpers perform their services pursuant to an arrangement that gives the corporation the right to exercise whatever control is necessary to assure proper performance of the services; the pumpers' services are both necessary and incident to the business conducted by the corporation; and the pumpers are not engaged in an independent enterprise in which they assume the usual business risks, but rather work in the course of the corporation's trade or business. See also Rev. Rul. 70-630, 1970-2 C.B. 229, which considers the employment tax status of salesclerks furnished by an employee service company to a retail store to perform temporary services for the store.

Section 530(a) of the 1978 Act, as amended by section 269(c) of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-2 C.B. 462, 536, provides, for purposes of the

employment taxes under subtitle C of the Code, that if a taxpayer did not treat an individual as an employee for any period, then the individual shall be deemed not to be an employee, unless the taxpayer had no reasonable basis for not treating the individual as an employee. For any period after December 31, 1978, this relief applies only if both of the following consistency rules are satisfied: (1) all federal tax returns (including in-formation returns) required to be filed by the taxpayer with respect to the individual for the period are filed on a basis consistent with the taxpayer's treatment of the individual as not being an employee ("reporting consistency rule"), and (2) the taxpayer (and any predecessor) has not treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for periods beginning after December 31, 1977 ("substantive consistency rule").

The determination of whether any individual who is treated as an employee holds a position substantially similar to the position held by an individual whom the taxpayer would otherwise be permitted to treat as other than an employee for employment tax purposes under section 530(a) of the 1978 Act requires an examination of all the facts and circumstances, including particularly the activities and functions performed by the in-dividuals. Differences in the positions held by the respective individuals that result from the taxpayer's treatment of one individual as an employee and the other individual as other than an employee (for example, that the former individual is a participant in the taxpayer's qualified pension plan or health plan and the latter individual is not a participant in either) are to be disregarded in determining whether the individuals hold substantially similar positions.

Section 1706(a) of the 1986 Act added to section 530 of the 1978 Act a new subsection (d), which provides an exception with respect to the treatment of certain workers. Section 530(d) provides that section 530 shall not apply in the case of an individual who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work. Section 530(d) of the 1978 Act does not affect the determination of whether such workers are employees under the common law rules. Rather, it merely eliminates the employment tax relief under section 530(a) of the 1978 Act that would otherwise be available to a taxpayer with respect to those workers who are determined to be employees of the taxpayer under the usual common law rules. Section 530(d) applies to remuneration paid and services rendered after December 31, 1986.

The Conference Report on the 1986 Act discusses the effect of section 530(d) as follows:

The Senate amendment applies whether the services of [technical service workers] are provided by the firm to only one client during the year or to more than one client, and whether or not such individuals have been designated or treated by the technical services firm as independent contractors, sole proprietors, partners, or employees of a personal service corporation controlled by such individual. The effect of the provision cannot be avoided by claims that such technical service personnel are employees of personal service corporations controlled by such personnel. For example, an engineer retained by a

technical services firm to provide services to a manufacturer cannot avoid the effect of this provision by organizing a corporation that he or she controls and then claiming to provide services as an employee of that corporation

. . . . The provision does not apply with respect to individuals who are classified, under the generally applicable common law standards, as employees of a business that is a client of the technical services firm.

2 H.R. Rep. No. 99-841 (Conf. Rep.), 99th Cong., 2d Sess. II-834 to 835 (1986).

Under the facts of Situation 1, the legal relationship is between the Firm and the Individual, and the Firm retains the right of control to insure that the services are performed in a satisfactory fashion. The fact that the Client may also exercise some degree of control over the Individual does not indicate that the individual is not an employee. Therefore, in Situation 1, the Individual is an employee of the Firm under the common law rules. The facts in Situation 1 involve an arrangement among the Individual, Firm, and Client, and the services provided by the Individual are technical services. Accordingly, the Firm is denied section 530 relief under section 530(d) of the 1978 Act (as added by section 1706 of the 1986 Act), and no relief is available with respect to any employment tax liability incurred in Situation 1. The analysis would not differ if the facts of Situation 1 were changed to state that the Individual provided the technical services through a personal service corporation owned by the Individual.

In Situation 2, the Firm does not retain any right to control the performance of the services by the Individual and, thus, no employment relationship exists between the Individual and the Firm.

In Situation 3, the Firm does not control the performance of the services of the Individual, and the Firm has no right to affect the relationship between the Client and the Individual. Consequently, no employment relationship exists between the Firm and the Individual.

HOLDINGS

Situation 1. The Individual is an employee of the Firm under the common law rules. Relief under section 530 of the 1978 Act is not available to the Firm because of the provisions of section 530(d).

Situation 2. The Individual is not an employee of the Firm under the common law rules.

Situation 3. The Individual is not an employee of the Firm under the common law rules.

Because of the application of section 530(b) of the 1978 Act, no inference should be drawn with respect to whether the Individual in Situations 2 and 3 is an employee of the Client for federal employment tax purposes.

Section 530, The Revenue Act of 1978Sec. 530. Controversies involving whether individuals are employees for purposes of the employment taxes.

(a) Termination of certain employment tax liability.

(1) In general. If --

(A) for purposes of employment taxes, the taxpayer did not treat an individual as an employee for any period, and

(B) in the case of periods after December 31, 1978, all Federal tax returns (including information returns) required to be filed by the taxpayer with respect to such individual for such period are filed on a basis consistent with the taxpayer's treatment of such individual as not being an employee,

then, for purposes of applying such taxes for such period with respect to the taxpayer, the individual shall be deemed not to be an employee unless the taxpayer had no reasonable basis for not treating such individual as an employee.

(2) Statutory standards providing one method of satisfying the requirements of paragraph (1). For purposes of paragraph (1), a taxpayer shall in any case be treated as having a reasonable basis for not treating an individual as an employee for a period if the taxpayer's treatment of such individual for such period was in reasonable reliance on any of the following:

(A) judicial precedent, published rulings, technical advice with respect to the taxpayer, or a letter ruling to the taxpayer;

(B) a past Internal Revenue Service audit of the taxpayer in which there was no assessment attributable to the treatment (for employment tax purposes) of the individuals holding positions substantially similar to the position held by this individual; or

(C) long-standing recognized practice of a significant segment of the industry in which such individual was engaged.

(3) Consistency required in the case of prior tax treatment. Paragraph (1) shall not apply with respect to the treatment of any individual for employment tax purposes for any period ending after December 31, 1978, if the taxpayer (or a predecessor) has

treated any individual holding a substantially similar position as an employee for purposes of the employment taxes for any period beginning after December 31, 1977.

(4) Refund or credit of overpayment. If refund or credit of any overpayment of an employment tax resulting from the application of paragraph (1) is not barred on the date of the enactment of this Act by any law or rule of law, the period for filing a claim for refund or credit of such overpayment (to the extent attributable to the application of paragraph (1) shall not expire before the date 1 year after the date of the enactment of this Act.

(b) Prohibition against regulations and rulings on employment status.

No regulation or Revenue Ruling shall be published on or after the date of the enactment of this Act and before the effective date of any law hereafter enacted clarifying the employment status of individuals for purposes of the employment taxes by the Department of the Treasury (including the Internal Revenue Service) with respect to the employment status of any individual for purposes of the employment taxes.

(c) Definitions.

For purposes of this section --

(1) Employment tax. The term employment tax means any tax imposed by subtitle C of the Internal Revenue Code of 1954.

(2) Employment status. The term employment status means the status of an individual, under the usual common law rules applicable in determining the employer-employee relationship, as an employee or as an independent contractor (or other individual who is not an employee).

(d) Exception.

This section shall not apply in the case of an individual who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work.

(e) Special rules for application of section.

(1) Notice of availability of section. An officer or employee of the Internal Revenue Service shall, before or at the commencement of any audit inquiry relating to the employment status of one or more individuals who perform services for the taxpayer, provide the taxpayer with a written notice of the provisions of this section.

(2) Rules relating to statutory standards. For purposes of subsection (a)(2) --

(A) a taxpayer may not rely on an audit commenced after December 31, 1996, for purposes of subparagraph (B) thereof unless such audit included an examination for employment tax purposes of whether the individual involved (or any individual holding a position substantially similar to the position held by the individual involved) should be treated as an employee of the taxpayer,

(B) in no event shall the significant segment requirement of subparagraph (C) thereof be construed to require a reasonable showing of the practice of more than 25 percent of the industry (determined by not taking into account the taxpayer), and

(C) in applying the long-standing recognized practice requirement of subparagraph (C) thereof --

(i) such requirement shall not be construed as requiring the practice to have continued for more than 10 years, and

(ii) a practice shall not fail to be treated as long-standing merely because such practice began after 1978.

(3) Availability of safe harbors. Nothing in this section shall be construed to provide that subsection (a) only applies where the individual involved is otherwise an employee of the taxpayer.

(4) Burden of proof.

(A) In general. If --

(i) a taxpayer establishes a prima facie case that it was reasonable not to treat an individual as an employee for purposes of this section, and

(ii) the taxpayer has fully cooperated with reasonable requests from the Secretary of the Treasury or his delegate,

then the burden of proof with respect to such treatment shall be on the Secretary.

(B) Exception for other reasonable basis. In the case of any issue involving whether the taxpayer had a reasonable basis not to treat an individual as an employee for purposes of this section, subparagraph (A) shall only apply for purposes of determining whether the taxpayer meets the requirements of subparagraph (A), (B), or (C) of subsection (a)(2).

(5) Preservation of prior period safe harbor. If --

(A) an individual would (but for the treatment referred to in subparagraph (B)) be deemed not to be an employee of the taxpayer under subsection (a) for any prior period, and

(B) such individual is treated by the taxpayer as an employee for employment taxpurposes for any subsequent period,

then, for purposes of applying such taxes for such prior period with respect to the taxpayer, the individual shall be deemed not to be an employee.

(6) Substantially similar position. For purposes of this section, the determination as to whether an individual holds a position substantially similar to a position held by another individual shall include consideration of the relationship between the taxpayer and such individuals.

26 USC Sec. 3509 02/01/2010

TITLE 26 - INTERNAL REVENUE CODESubtitle C - Employment TaxesCHAPTER 25 - GENERAL PROVISIONS RELATING TO EMPLOYMENT TAXES

Sec. 3509. Determination of employer's liability for certainemployment taxes

(a) In general If any employer fails to deduct and withhold any tax underchapter 24 or subchapter A of chapter 21 with respect to anyemployee by reason of treating such employee as not being anemployee for purposes of such chapter or subchapter, the amount ofthe employer's liability for -(1) Withholding taxesTax under chapter 24 for such year with respect to such

employee shall be determined as if the amount required to bededucted and withheld were equal to 1.5 percent of the wages (asdefined in section 3401) paid to such employee.(2) Employee social security taxTaxes under subchapter A of chapter 21 with respect to such

employee shall be determined as if the taxes imposed under suchsubchapter were 20 percent of the amount imposed under suchsubchapter without regard to this subparagraph.

(b) Employer's liability increased where employer disregardsreporting requirements(1) In generalIn the case of an employer who fails to meet the applicable

requirements of section 6041(a), 6041A, or 6051 with respect toany employee, unless such failure is due to reasonable cause andnot willful neglect, subsection (a) shall be applied with respectto such employee -

(A) by substituting "3 percent" for "1.5 percent" inparagraph (1); and(B) by substituting "40 percent" for "20 percent" in

paragraph (2).(2) Applicable requirements For purposes of paragraph (1), the term "applicablerequirements" means the requirements described in paragraph (1)which would be applicable consistent with the employer'streatment of the employee as not being an employee for purposesof chapter 24 or subchapter A of chapter 21.

(c) Section not to apply in cases of intentional disregardThis section shall not apply to the determination of the

employer's liability for tax under chapter 24 or subchapter A ofchapter 21 if such liability is due to the employer's intentionaldisregard of the requirement to deduct and withhold such tax.(d) Special rulesFor purposes of this section -(1) Determination of liabilityIf the amount of any liability for tax is determined under this

section -(A) the employee's liability for tax shall not be affected by

the assessment or collection of the tax so determined,(B) the employer shall not be entitled to recover from the

employee any tax so determined, and

(C) sections (!1) 3402(d) and section 6521 shall not apply.

(2) Section not to apply where employer deducts wage but notsocial security taxesThis section shall not apply to any employer with respect to

any wages if -(A) the employer deducted and withheld any amount of the tax

imposed by chapter 24 on such wages, but(B) failed to deduct and withhold the amount of the tax

imposed by subchapter A of chapter 21 with respect to suchwages.

(3) Section not to apply to certain statutory employeesThis section shall not apply to any tax under subchapter A of

chapter 21 with respect to an individual described in subsection(d)(3) of section 3121 (without regard to whether such individualis described in paragraph (1) or (2) of such subsection).

-SOURCE-(Added Pub. L. 97-248, title II, Sec. 270(a), Sept. 3, 1982, 96Stat. 553; amended Pub. L. 100-647, title II, Sec. 2003(d), Nov.10, 1988, 102 Stat. 3598; Pub. L. 101-508, title V, Sec.5130(a)(4), Nov. 5, 1990, 104 Stat. 1388-289.)

-MISC1-AMENDMENTS

1990 - Subsec. (d)(3). Pub. L. 101-508 substituted "subsection(d)(3)" for "subsection (d)(4)".1988 - Subsec. (d)(3). Pub. L. 100-647 substituted "subsection

(d)(4)" for "subsection (d)(3)".

EFFECTIVE DATE OF 1990 AMENDMENT Amendment by Pub. L. 101-508 effective as if included in the

enactment of Pub. L. 100-647, Sec. 2003(d), see section 5130(b) ofPub. L. 101-508, set out as a note under section 1402 of thistitle.

EFFECTIVE DATE Section 270(c) of Pub. L. 97-248 provided that: "The amendment

made by this section [enacting this section] shall take effect onthe date of the enactment of this Act [Sept. 3, 1982], except that

such amendments shall not apply to any assessment made beforeJanuary 1, 1983."

I

111TH CONGRESS 1ST SESSION H. R. 3408

To amend the Internal Revenue Code of 1986 to modify the rules relating to the treatment of individuals as independent contractors or employees, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JULY 30, 2009 Mr. MCDERMOTT (for himself, Mr. NEAL of Massachusetts, and Mr.

TIERNEY) introduced the following bill; which was referred to the Com-mittee on Ways and Means

A BILL To amend the Internal Revenue Code of 1986 to modify

the rules relating to the treatment of individuals as inde-pendent contractors or employees, and for other pur-poses.

Be it enacted by the Senate and House of Representa-1

tives of the United States of America in Congress assembled, 2

SECTION 1. SHORT TITLE. 3

This Act may be cited as the ‘‘Taxpayer Responsi-4

bility, Accountability, and Consistency Act of 2009’’. 5

VerDate Nov 24 2008 04:57 Aug 01, 2009 Jkt 079200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\H3408.IH H3408tjam

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SEC. 2. INFORMATION REPORTING FOR PAYMENTS TO COR-1

PORATIONS.2

(a) IN GENERAL.—Section 6041 of the Internal Rev-3

enue Code of 1986 (relating to information at source) is 4

amended by adding at the end the following new sub-5

section: 6

‘‘(h) PAYMENTS TO CORPORATIONS.— 7

‘‘(1) IN GENERAL.—Notwithstanding any regu-8

lations prescribed by the Secretary before the date 9

of the enactment of this subsection, subsection (a) 10

shall apply to payments made to a corporation. 11

‘‘(2) EXCEPTION.—Paragraph (1) shall not 12

apply to payments made to a hospital or extended 13

care facility described in section 501(c)(3) which is 14

exempt from taxation under section 501(a) or to a 15

hospital or extended care facility owned and oper-16

ated by the United States, a State, the District of 17

Columbia, a possession of the United States, or a 18

political subdivision, agency or instrumentality of 19

any of the foregoing.’’. 20

(b) EFFECTIVE DATE.—The amendment made by 21

this section shall apply to payments made more than 1 22

year after the date of the enactment of this Act. 23


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SEC. 3. DETERMINATION OF ELIGIBILITY FOR SAFE HAR-1

BOR TREATMENT OF INDIVIDUALS AS NON- 2

EMPLOYEES FOR PURPOSES OF EMPLOY-3

MENT TAXES. 4

(a) IN GENERAL.—Chapter 25 of the Internal Rev-5

enue Code of 1986 (relating to general provisions relating 6

to employment taxes) is amended by adding at the end 7

the following new section: 8

‘‘SEC. 3511. SAFE HARBOR. 9

‘‘(a) TERMINATION OF CERTAIN EMPLOYMENT TAX 10

LIABILITY.— 11

‘‘(1) IN GENERAL.—If— 12

‘‘(A) for purposes of employment taxes, the 13

taxpayer did not treat an individual as an em-14

ployee for any period, and 15

‘‘(B) in the case of periods after December 16

31, 1978, all Federal tax returns (including in-17

formation returns) required to be filed by the 18

taxpayer with respect to such individual for 19

such period are filed on a basis consistent with 20

the taxpayer’s treatment of such individual as 21

not being an employee, 22

then, for purposes of applying such taxes for such 23

period with respect to the taxpayer, the individual 24

shall be deemed not to be an employee unless the 25

taxpayer had no reasonable basis for not treating 26


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•HR 3408 IH

such individual as an employee. This paragraph shall 1

not apply with respect to an individual for any peri-2

ods beginning after the date of notice of a deter-3

mination that such individual should be treated as 4

an employee of the taxpayer. 5

‘‘(2) STATUTORY STANDARDS FOR SATISFYING 6

THE REQUIREMENTS OF PARAGRAPH (1).—For pur-7

poses of paragraph (1), a taxpayer shall be treated 8

as having a reasonable basis for not treating an indi-9

vidual as an employee only if— 10

‘‘(A) the taxpayer’s treatment of such indi-11

vidual was in reasonable reliance on— 12

‘‘(i) a written determination issued to 13

the taxpayer addressing the employment 14

status of such individual or another indi-15

vidual holding a substantially similar posi-16

tion with the taxpayer, or 17

‘‘(ii) a concluded examination (for em-18

ployment tax purposes) of whether such in-19

dividual (or another individual holding a 20

substantially similar position) should be 21

treated as an employee of the taxpayer, 22

with respect to which there was no deter-23

mination that such individual (or another 24

individual holding a substantially similar 25


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•HR 3408 IH

position) should be treated as an employee, 1

and 2

‘‘(B) the taxpayer (or a predecessor) has 3

not treated any other individual holding a sub-4

stantially similar position as an employee for 5

purposes of employment taxes for any period 6

beginning after December 31, 1977. 7

‘‘(b) DEFINITIONS.—For purposes of this section— 8

‘‘(1) EMPLOYMENT TAX.—The term ‘employ-9

ment tax’ means any tax imposed by this subtitle. 10

‘‘(2) EMPLOYMENT STATUS.—The term ‘em-11

ployment status’ means the status of an individual, 12

under the usual common law rules applicable in de-13

termining the employer-employee relationship, as an 14

employee or as an independent contractor (or other 15

individual who is not an employee). 16

‘‘(c) SPECIAL RULES FOR APPLICATION OF SEC-17

TION.— 18

‘‘(1) NOTICE OF AVAILABILITY OF SECTION.— 19

An officer or employee of the Internal Revenue Serv-20

ice shall, before or at the commencement of any ex-21

amination relating to the employment status of one 22

or more individuals who perform services for the tax-23

payer, provide the taxpayer with a written notice of 24

the provisions of this section. 25


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‘‘(2) RULES RELATING TO STATUTORY STAND-1

ARDS.—For purposes of subsection (a)(2), with re-2

spect to any period beginning after the date of the 3

enactment of this paragraph, a taxpayer may not 4

rely on an examination commenced, or a written de-5

termination issued, if— 6

‘‘(A) the controlling facts and cir-7

cumstances that formed the basis of a deter-8

mination of employment status have changed or 9

were misrepresented by the taxpayer, or 10

‘‘(B) the Secretary subsequently issues 11

contrary guidance relating to the determination 12

of employment status that has bearing on the 13

facts and circumstances that formed the basis 14

of a determination of employment status. 15

‘‘(3) SUBSTANTIALLY SIMILAR POSITION.—For 16

purposes of this section, the determination as to 17

whether an individual holds a position substantially 18

similar to a position held by another individual shall 19

be made by the Secretary in a manner consistent 20

with the Fair Labor Standards Act of 1938. 21

‘‘(d) BURDEN OF PROOF.—A taxpayer must establish 22

entitlement to relief under this section by a preponderance 23

of the evidence. 24

‘‘(e) PETITIONS FOR REVIEW OF STATUS.— 25


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‘‘(1) IN GENERAL.—Under procedures estab-1

lished by the Secretary not later than 1 year after 2

the date of the enactment of this section, any indi-3

vidual who performs services for a taxpayer may pe-4

tition (either personally or through a designated rep-5

resentative or attorney) for a determination of the 6

individual’s status for employment tax purposes. 7

‘‘(2) ADMINISTRATIVE PROCEDURES.—The pro-8

cedures established under paragraph (1) shall pro-9

vide for— 10

‘‘(A) a determination of status not later 11

than 90 days after the filing of the petition 12

with respect to employment in any industry 13

(such as the construction industry) in which 14

employment is transient, casual, or seasonal, 15

and 16

‘‘(B) an administrative appeal of any de-17

termination that an individual is not an em-18

ployee of the taxpayer. 19

‘‘(3) DUTY TO SEEK SERVICE PROVIDER INFOR-20

MATION.—In the case of a request by a taxpayer for 21

a determination of an individual’s status for employ-22

ment tax purposes, the Secretary shall, to the extent 23

practicable— 24


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•HR 3408 IH

‘‘(A) seek to obtain from such individual 1

information relating to the individual’s perform-2

ance of services for the taxpayer, and 3

‘‘(B) provide written notice to the indi-4

vidual detailing any written determination of 5

the individual’s status for employment tax pur-6

poses. 7

‘‘(f) RESULTS OF MISCLASSIFICATION DETERMINA-8

TIONS.—In any case in which the Secretary determines 9

that a taxpayer has misclassified an individual as not an 10

employee for employment tax purposes, the Secretary shall 11

inform the Secretary of Labor about such misclassification 12

and notify the individual of any eligibility for the refund 13

of self-employment taxes under chapter 2. 14

‘‘(g) REGULATIONS.—The Secretary shall, not later 15

than 1 year after the date of the enactment of this section, 16

prescribe such regulations as may be necessary and appro-17

priate to carry out the purposes of this section.’’. 18

(b) CONFORMING AMENDMENTS.— 19

(1) Paragraph (2) of section 7436(a) of such 20

Code is amendment by striking ‘‘section 530 of the 21

Revenue Act of 1978’’ and inserting ‘‘section 3511’’. 22

(2) The table of sections for chapter 25 of such 23

Code is amended by adding at the end the following 24

new item: 25

‘‘Sec. 3511. Safe harbor.’’.


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•HR 3408 IH

(c) TERMINATION OF SECTION 530 OF THE REV-1

ENUE ACT OF 1978.—Section 530 of the Revenue Act of 2

1978 shall not apply to services rendered more than 1 year 3

after the date of the enactment of this Act. 4

(d) EFFECTIVE DATE.—The amendments made by 5

this section shall apply to services rendered more than 1 6


SEC. 4. ANNUAL REPORTS ON WORKER 8

MISCLASSIFICATION.9

The Secretary of the Treasury shall issue an annual 10

report on worker misclassification. Such report shall in-11

clude the following: 12

(1) Information on the number and type of en-13

forcement actions against, and examinations of, em-14

ployers who have misclassified workers. 15

(2) Relief obtained as a result of such actions 16

against, and examinations of, employers who have 17

misclassified workers. 18

(3) An overall estimate of the number of em-19

ployers misclassifying workers, the number of work-20

ers affected, and the industries involved. 21

(4) The impact of such misclassification on the 22

Federal tax system. 23


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(5) Information on the outcomes of the peti-1

tions filed under section 3511(e) of the Internal 2

Revenue Code of 1986. 3

SEC. 5. INCREASE IN INFORMATION RETURN PENALTIES. 4

(a) FAILURE TO FILE CORRECT INFORMATION RE-5

TURNS.— 6

(1) IN GENERAL.—Section 6721(a)(1) of the 7

Internal Revenue Code of 1986 is amended— 8

(A) by striking ‘‘$50’’ and inserting 9

‘‘$250’’, and 10

(B) by striking ‘‘$250,000’’ and inserting 11

‘‘$3,000,000’’. 12

(2) REDUCTION WHERE CORRECTION IN SPECI-13

FIED PERIOD.— 14

(A) CORRECTION WITHIN 30 DAYS.—Sec-15

tion 6721(b)(1) of such Code is amended— 16

(i) by striking ‘‘$15’’ and inserting 17

‘‘$50’’, 18

(ii) by striking ‘‘$50’’ and inserting 19

‘‘$250’’, and 20

(iii) by striking ‘‘$75,000’’ and insert-21

ing ‘‘$500,000’’. 22

(B) FAILURES CORRECTED ON OR BEFORE 23

AUGUST 1.—Section 6721(b)(2) of such Code is 24

amended— 25


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‘‘$100’’, 2


‘‘$250’’, and 4

(iii) by striking ‘‘$150,000’’ and in-5

serting ‘‘$1,500,000’’. 6

(3) LOWER LIMITATION FOR PERSONS WITH 7

GROSS RECEIPTS OF NOT MORE THAN $5,000,000.— 8

Section 6721(d)(1) of such Code is amended— 9

(A) in subparagraph (A)— 10

(i) by striking ‘‘$100,000’’ and insert-11

ing ‘‘$1,000,000’’, and 12

(ii) by striking ‘‘$250,000’’ and in-13

serting ‘‘$3,000,000’’, 14

(B) in subparagraph (B)— 15


ing ‘‘$175,000’’, and 17

(ii) by striking ‘‘$75,000’’ and insert-18

ing ‘‘$500,000’’, and 19

(C) in subparagraph (C)— 20


ing ‘‘$500,000’’, and 22


serting ‘‘$1,500,000’’. 24


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(4) PENALTY IN CASE OF INTENTIONAL DIS-1

REGARD.—Section 6721(e) of such Code is amend-2

ed— 3

(A) by striking ‘‘$100’’ in paragraph (2) 4

and inserting ‘‘$500’’, and 5

(B) by striking ‘‘$250,000’’ in paragraph 6

(3)(A) and inserting ‘‘$3,000,000’’. 7

(b) FAILURE TO FURNISH CORRECT PAYEE STATE-8

MENTS.— 9

(1) IN GENERAL.—Section 6722(a) of such 10

Code is amended— 11


‘‘$250’’, and 13


‘‘$1,000,000’’. 15


REGARD.—Section 6722(c) of such Code is amend-17

ed— 18




(2)(A) and inserting ‘‘$1,000,000’’. 22

(c) FAILURE TO COMPLY WITH OTHER INFORMA-23

TION REPORTING REQUIREMENTS.—Section 6723 of such 24



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(1) by striking ‘‘$50’’ and inserting ‘‘$250’’, 1

and 2

(2) by striking ‘‘$100,000’’ and inserting 3

‘‘$1,000,000’’. 4


this section shall apply with respect to information returns 6

required to be filed after December 31, 2009. 7

Æ


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MAT09878 S.L.C.

111TH CONGRESS 1ST SESSION S. ll

To amend the Internal Revenue Code of 1986 to modify the rules relating to the treatment of individuals as independent contractors or employees, and for other purposes.

IN THE SENATE OF THE UNITED STATES

llllllllll

Mr. KERRY introduced the following bill; which was read twice and referred to the Committee on llllllllll

A BILL To amend the Internal Revenue Code of 1986 to modify

the rules relating to the treatment of individuals as inde-pendent contractors or employees, and for other pur-poses.

Be it enacted by the Senate and House of Representa-1

tives of the United States of America in Congress assembled, 2

SECTION 1. SHORT TITLE. 3

This Act may be cited as the ‘‘Taxpayer Responsi-4

bility, Accountability, and Consistency Act of 2009’’. 5

Doc 2009-27568 (13 pgs)

2

MAT09878 S.L.C.

SEC. 2. EXPANSION OF INFORMATION REPORTING RE-1

QUIREMENTS.2

(a) IN GENERAL.—Section 6041 of the Internal Rev-3

enue Code of 1986 is amended by adding at the end the 4

following new subsections: 5

‘‘(h) APPLICATION TO CORPORATIONS.—Notwith-6

standing any regulation prescribed by the Secretary before 7

the date of the enactment of this subsection, for purposes 8

of this section the term ‘person’ includes any corporation 9

that is not an organization exempt from tax under section 10

501(a). 11

‘‘(i) REGULATIONS.—The Secretary may prescribe 12

such regulations and other guidance as may be appro-13

priate or necessary to carry out the purposes of this sec-14

tion, including rules to prevent duplicative reporting of 15

transactions.’’. 16

(b) PAYMENTS FOR PROPERTY AND OTHER GROSS 17

PROCEEDS.—Subsection (a) of section 6041 of the Inter-18

nal Revenue Code of 1986 is amended— 19

(1) by inserting ‘‘amounts in consideration for 20

property,’’ after ‘‘wages,’’, 21

(2) by inserting ‘‘gross proceeds,’’ after ‘‘emolu-22

ments, or other’’, and 23

(3) by inserting ‘‘gross proceeds,’’ after ‘‘setting 24

forth the amount of such’’. 25

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3

MAT09878 S.L.C.

(c) EFFECTIVE DATE.—The amendments made by 1

this section shall apply to payments made after December 2

31, 2011. 3

SEC. 3. DETERMINATION OF ELIGIBILITY FOR SAFE HAR-4

BOR TREATMENT OF INDIVIDUALS AS NON- 5

EMPLOYEES FOR PURPOSES OF EMPLOY-6

MENT TAXES. 7

(a) IN GENERAL.—Chapter 25 of the Internal Rev-8

enue Code of 1986 (relating to general provisions relating 9

to employment taxes) is amended by adding at the end 10

the following new section: 11

‘‘SEC. 3511. SAFE HARBOR. 12

‘‘(a) TERMINATION OF CERTAIN EMPLOYMENT TAX 13

LIABILITY.— 14

‘‘(1) IN GENERAL.—If— 15

‘‘(A) for purposes of employment taxes, the 16

taxpayer did not treat an individual as an em-17

ployee for any period, and 18

‘‘(B) in the case of periods after December 19

31, 1978, all Federal tax returns (including in-20

formation returns) required to be filed by the 21

taxpayer with respect to such individual for 22

such period are filed on a basis consistent with 23

the taxpayer’s treatment of such individual as 24

not being an employee, 25

Doc 2009-27568 (13 pgs)

4

MAT09878 S.L.C.

then, for purposes of applying such taxes for such 1

period with respect to the taxpayer, the individual 2

shall be deemed not to be an employee unless the 3

taxpayer had no reasonable basis for not treating 4

such individual as an employee. This paragraph shall 5

not apply with respect to an individual for any peri-6

ods beginning after the date of notice of a deter-7

mination that such individual should be treated as 8

an employee of the taxpayer. 9

‘‘(2) STATUTORY STANDARDS FOR SATISFYING 10

THE REQUIREMENTS OF PARAGRAPH (1).—For pur-11

poses of paragraph (1), a taxpayer shall be treated 12

as having a reasonable basis for not treating an indi-13

vidual as an employee only if— 14

‘‘(A) the taxpayer’s treatment of such indi-15

vidual was in reasonable reliance on— 16

‘‘(i) a written determination issued to 17

the taxpayer addressing the employment 18

status of such individual or another indi-19

vidual holding a substantially similar posi-20

tion with the taxpayer, or 21

‘‘(ii) a concluded examination (for em-22

ployment tax purposes) of whether such in-23

dividual (or another individual holding a 24

substantially similar position) should be 25

Doc 2009-27568 (13 pgs)

5

MAT09878 S.L.C.

treated as an employee of the taxpayer, 1

with respect to which there was no deter-2

mination that such individual (or another 3

individual holding a substantially similar 4

position) should be treated as an employee, 5

and 6

‘‘(B) the taxpayer (or a predecessor) has 7

not treated any other individual holding a sub-8

stantially similar position as an employee for 9

purposes of employment taxes for any period 10

beginning after December 31, 1977. 11

‘‘(b) DEFINITIONS.—For purposes of this section— 12

‘‘(1) EMPLOYMENT TAX.—The term ‘employ-13

ment tax’ means any tax imposed by this subtitle. 14

‘‘(2) EMPLOYMENT STATUS.—The term ‘em-15

ployment status’ means the status of an individual, 16

under the usual common law rules applicable in de-17

termining the employer-employee relationship, as an 18

employee or as an independent contractor (or other 19

individual who is not an employee). 20

‘‘(c) SPECIAL RULES FOR APPLICATION OF SEC-21

TION.— 22

‘‘(1) NOTICE OF AVAILABILITY OF SECTION.— 23

An officer or employee of the Internal Revenue Serv-24

ice shall, before or at the commencement of any ex-25

Doc 2009-27568 (13 pgs)

6

MAT09878 S.L.C.

amination relating to the employment status of one 1

or more individuals who perform services for the tax-2

payer, provide the taxpayer with a written notice of 3

the provisions of this section. 4

‘‘(2) RULES RELATING TO STATUTORY STAND-5

ARDS.—For purposes of subsection (a)(2), with re-6

spect to any period beginning after the date of the 7

enactment of this paragraph, a taxpayer may not 8

rely on an examination commenced, or a written de-9

termination issued, if— 10

‘‘(A) the controlling facts and cir-11

cumstances that formed the basis of a deter-12

mination of employment status have changed or 13

were misrepresented by the taxpayer, or 14

‘‘(B) the Secretary subsequently issues 15

contrary guidance relating to the determination 16

of employment status that has bearing on the 17

facts and circumstances that formed the basis 18

of a determination of employment status. 19

‘‘(3) SUBSTANTIALLY SIMILAR POSITION.—For 20

purposes of this section, the determination as to 21

whether an individual holds a position substantially 22

similar to a position held by another individual shall 23

be made by the Secretary in a manner consistent 24

with the Fair Labor Standards Act of 1938. 25

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7

MAT09878 S.L.C.

‘‘(d) BURDEN OF PROOF.—A taxpayer must establish 1

entitlement to relief under this section by a preponderance 2

of the evidence. 3

‘‘(e) PETITIONS FOR REVIEW OF STATUS.— 4

‘‘(1) IN GENERAL.—Under procedures estab-5

lished by the Secretary not later than 1 year after 6

the date of the enactment of this section, any indi-7

vidual who performs services for a taxpayer may pe-8

tition (either personally or through a designated rep-9

resentative or attorney) for a determination of the 10

individual’s status for employment tax purposes. 11

‘‘(2) ADMINISTRATIVE PROCEDURES.—The pro-12

cedures established under paragraph (1) shall pro-13

vide for— 14

‘‘(A) a determination of status not later 15

than 90 days after the filing of the petition 16

with respect to employment in any industry 17

(such as the construction industry) in which 18

employment is transient, casual, or seasonal, 19

and 20

‘‘(B) an administrative appeal of any de-21

termination that an individual is not an em-22

ployee of the taxpayer. 23

‘‘(3) DUTY TO SEEK SERVICE PROVIDER INFOR-24

MATION.—In the case of a request by a taxpayer for 25

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8

MAT09878 S.L.C.

a determination of an individual’s status for employ-1

ment tax purposes, the Secretary shall, to the extent 2

practicable— 3

‘‘(A) seek to obtain from such individual 4

information relating to the individual’s perform-5

ance of services for the taxpayer, and 6

‘‘(B) provide written notice to the indi-7

vidual detailing any written determination of 8

the individual’s status for employment tax pur-9

poses. 10

‘‘(f) RESULTS OF MISCLASSIFICATION DETERMINA-11

TIONS.—In any case in which the Secretary determines 12

that a taxpayer has misclassified an individual as not an 13

employee for employment tax purposes, the Secretary shall 14

inform the Secretary of Labor about such misclassification 15

and notify the individual of any eligibility for the refund 16

of self-employment taxes under chapter 2. 17

‘‘(g) REGULATIONS.—The Secretary shall, not later 18

than 1 year after the date of the enactment of this section, 19

prescribe such regulations as may be necessary and appro-20

priate to carry out the purposes of this section.’’. 21

(b) CONFORMING AMENDMENTS.— 22

(1) Paragraph (2) of section 7436(a) of such 23

Code is amendment by striking ‘‘section 530 of the 24

Revenue Act of 1978’’ and inserting ‘‘section 3511’’. 25

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9

MAT09878 S.L.C.

(2) The table of sections for chapter 25 of such 1

Code is amended by adding at the end the following 2

new item: 3

‘‘Sec. 3511. Safe harbor.’’.

(c) TERMINATION OF SECTION 530 OF THE REV-4

ENUE ACT OF 1978.—Section 530 of the Revenue Act of 5

1978 shall not apply to services rendered more than 1 year 6

after the date of the enactment of this Act. 7


this section shall apply to services rendered more than 1 9


SEC. 4. ANNUAL REPORTS ON WORKER 11

MISCLASSIFICATION.12

The Secretary of the Treasury shall issue an annual 13

report on worker misclassification. Such report shall in-14

clude the following: 15

(1) Information on the number and type of en-16

forcement actions against, and examinations of, em-17

ployers who have misclassified workers. 18

(2) Relief obtained as a result of such actions 19

against, and examinations of, employers who have 20

misclassified workers. 21

(3) An overall estimate of the number of em-22

ployers misclassifying workers, the number of work-23

ers affected, and the industries involved. 24

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10

MAT09878 S.L.C.

(4) The impact of such misclassification on the 1

Federal tax system. 2

(5) Information on the outcomes of the peti-3

tions filed under section 3511(e) of the Internal 4

Revenue Code of 1986. 5

SEC. 5. INCREASE IN INFORMATION RETURN PENALTIES. 6

(a) FAILURE TO FILE CORRECT INFORMATION RE-7

TURNS.— 8

(1) IN GENERAL.—Section 6721(a)(1) of the 9

Internal Revenue Code of 1986 is amended— 10


‘‘$250’’, and 12


‘‘$3,000,000’’. 14

(2) REDUCTION WHERE CORRECTION IN SPECI-15

FIED PERIOD.— 16

(A) CORRECTION WITHIN 30 DAYS.—Sec-17

tion 6721(b)(1) of such Code is amended— 18


‘‘$50’’, 20


‘‘$250’’, and 22

(iii) by striking ‘‘$75,000’’ and insert-23

ing ‘‘$500,000’’. 24

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11

MAT09878 S.L.C.

(B) FAILURES CORRECTED ON OR BEFORE 1

AUGUST 1.—Section 6721(b)(2) of such Code is 2

amended— 3


‘‘$100’’, 5


‘‘$250’’, and 7

(iii) by striking ‘‘$150,000’’ and in-8

serting ‘‘$1,500,000’’. 9

(3) LOWER LIMITATION FOR PERSONS WITH 10

GROSS RECEIPTS OF NOT MORE THAN $5,000,000.— 11

Section 6721(d)(1) of such Code is amended— 12

(A) in subparagraph (A)— 13


ing ‘‘$1,000,000’’, and 15


serting ‘‘$3,000,000’’, 17

(B) in subparagraph (B)— 18


ing ‘‘$175,000’’, and 20

(ii) by striking ‘‘$75,000’’ and insert-21

ing ‘‘$500,000’’, and 22

(C) in subparagraph (C)— 23


ing ‘‘$500,000’’, and 25

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12

MAT09878 S.L.C.


serting ‘‘$1,500,000’’. 2


REGARD.—Section 6721(e) of such Code is amend-4

ed— 5




(3)(A) and inserting ‘‘$3,000,000’’. 9

(b) FAILURE TO FURNISH CORRECT PAYEE STATE-10

MENTS.— 11

(1) IN GENERAL.—Section 6722(a) of such 12



‘‘$250’’, and 15


‘‘$1,000,000’’. 17


REGARD.—Section 6722(c) of such Code is amend-19

ed— 20




(2)(A) and inserting ‘‘$1,000,000’’. 24

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13

MAT09878 S.L.C.

(c) FAILURE TO COMPLY WITH OTHER INFORMA-1

TION REPORTING REQUIREMENTS.—Section 6723 of such 2


(1) by striking ‘‘$50’’ and inserting ‘‘$250’’, 4

and 5

(2) by striking ‘‘$100,000’’ and inserting 6

‘‘$1,000,000’’. 7


this section shall apply with respect to information returns 9

required to be filed after December 31, 2009. 10

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TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Phone Number | 202-622-6500 Email Address | [email protected] Web Site | http://www.tigta.gov

While Actions Have Been Taken to Address Worker Misclassification, an Agency-Wide Employment Tax Program and Better Data

Are Needed

February 4, 2009

Reference Number: 2009-30-035

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

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DEPARTMENT OF THE TREASURY

WASHINGTON, D.C. 20220

TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

February 4, 2009 MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND

ENFORCEMENT

FROM: Michael R. Phillips Deputy Inspector General for Audit SUBJECT: Final Audit Report – While Actions Have Been Taken to Address

Worker Misclassification, an Agency-Wide Employment Tax Program and Better Data Are Needed (Audit # 200730001)

This report presents the results of our review to evaluate the effectiveness of actions the Internal Revenue Service (IRS) had taken and planned to take to address the misclassification of employees as independent contractors. This audit was part of our risk-based audit coverage and was included in the Treasury Inspector General for Tax Administration Fiscal Year 2007 Annual Audit Plan.

Impact on the Taxpayer

The misclassification of employees as independent contractors is a nationwide issue affecting millions of workers that continues to grow and contribute to the tax gap.1 The IRS has taken and plans to take many positive actions to address worker misclassification. However, it does not have an agency-wide employment tax program to coordinate the decision-making process and efforts among its business divisions. The limited data available indicates that the worker classification issue is growing significantly. When an employee is misclassified, tax revenues are not reported or paid and the burden of uncollected taxes shifts to other taxpayers.

1 The tax gap is the difference between the amount of tax that taxpayers should pay and the amount that is paid voluntarily and on time. It is composed of underreporting of tax liabilities on tax returns, underpaying taxes reported on filed returns, and nonfiling of required tax returns altogether or on time.

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While Actions Have Been Taken to Address Worker Misclassification, an Agency-Wide Employment Tax Program and

Better Data Are Needed

2

Synopsis

IRS research indicates that employers often misclassify workers as independent contractors for various reasons. They might do so unintentionally because of a lack of knowledge or because of poor advice received. Some employers might have Section 5302 protection and, as a result, can legally treat workers as independent contractors who would otherwise be employees. Finally, there are employers who deliberately misclassify workers to cut costs and to gain a greater competitive edge. These employers avoid paying their share of employment taxes as well as other expenses such as workers’ compensation, unemployment insurance, and other benefits. Misclassifying employees as independent contractors and not incurring the related costs can give these employers a competitive advantage over employers who treat their workers as employees. The IRS’ interest in this issue is not to reclassify workers from independent contractors to employees. Rather, it is to ensure that employers are making the proper determination and that workers are being treated appropriately. The IRS has dedicated resources to educate taxpayers regarding employee classification as well as to enforce tax laws related to this issue. Despite the many positive actions that the IRS has taken and plans to take to address the misclassification of employees as independent contractors, more needs to be done.

IRS business divisions communicate and coordinate with each other regarding employment tax issues. However, there is no single point of accountability for employment tax below the IRS Deputy Commissioner level, and there is no agency-wide strategy to coordinate the decision-making process and efforts among the divisions.

Misclassified workers are a significant portion of the employment tax gap. However, because studies of the impact of worker misclassification on the tax gap are over 20 years old, the IRS does not know the size of the problem today and is unable to determine the overall effectiveness of its actions to address this issue. The IRS’ most recent estimate3 of the tax gap is approximately $345 billion. The employment tax portion of this figure due to underreporting is estimated to be about $54 billion with an estimated $1.6 billion being attributable to worker misclassification. However, the $1.6 billion estimate is based on Tax Year 1984 data. The IRS conducted a preliminary analysis of Fiscal Year 2006 operational and program data and found that underreporting attributable to misclassified workers is likely to be markedly higher than the $1.6 billion.

2 Section 530 of the Revenue Act of 1978, Pub. L. No. 95-600, 92 Stat. 2763, 2885-86 (current version at Internal Revenue Code Section 3401 note). 3 The National Research Program was a comprehensive compliance study of Tax Year 2001 individual income tax returns that was completed in Calendar Year 2006. It estimated the overall gross tax gap for Tax Year 2001 to be $345 billion, including $285 billion from underreporting, $33 billion from underpaying, and $27 billion from nonfiling.

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3

Recommendations

We recommended that the Deputy Commissioner for Services and Enforcement develop and implement an agency-wide employment tax program to address the issue of worker classification to improve coordination among the business divisions, improve compliance, and reduce the tax gap. The Deputy Commissioner for Services and Enforcement should also consider conducting a formal National Research Program reporting compliance study to measure the impact of worker misclassification on the employment tax gap.

Response

IRS management agreed with all of our recommendations. The Director, Specialty Programs, Small Business/Self-Employed Division, will coordinate an effort with all business divisions, the Criminal Investigation Division, and the Office of Chief Counsel to develop an agency-wide employment tax plan that addresses worker classification along with other employment tax issues. The Director, Specialty Programs, Small Business/Self-Employed Division, will also work with the Research function to coordinate a study that addresses worker classification and other employment tax issues. Management’s complete response to the draft report is included as Appendix IV.

Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services), at (202) 622-5916.

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Table of Contents

Background ..........................................................................................................Page 1

Results of Review ...............................................................................................Page 3 The Internal Revenue Service Has Taken and Plans to Take Many Positive Actions to Address Worker Misclassification ................................Page 3

The Internal Revenue Service Does Not Have an Agency-Wide Employment Tax Program to Address Worker Classification .....................Page 5

Recommendation 1:..........................................................Page 7

The Internal Revenue Service Has Limited Data Regarding the Overall Impact of Worker Misclassification..............................................................Page 8

Recommendation 2:..........................................................Page 9

Appendices Appendix I – Detailed Objective, Scope, and Methodology ........................Page 11

Appendix II – Major Contributors to This Report ........................................Page 12

Appendix III – Report Distribution List .......................................................Page 13

Appendix IV – Management’s Response to the Draft Report ......................Page 14

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Abbreviations

CSP Classification Settlement Program

IRS Internal Revenue Service

SB/SE Small Business/Self-Employed

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Page 1

Background

The misclassification of employees as independent contractors is a nationwide issue affecting millions of workers that continues to grow and contribute to the tax gap.1 When an employee is misclassified, tax revenues are not reported or paid and the burden of uncollected taxes shifts to other taxpayers.

Social Security and Medicare taxes are paid to the Department of the Treasury from two primary sources: 1) employment taxes consisting of amounts withheld from employees and matching amounts paid by employers; and 2) self-employment taxes. Employers are generally required by law to withhold from their employees’ income the employees’ shares of Social Security and Medicare taxes.2 One-half of the calculated tax amount is withheld from the employee’s wages and the employer pays a matching amount. Self-employed taxpayers must pay the entire amount of Social Security and Medicare taxes themselves in the form of self-employment taxes (currently 15.3 percen

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