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Advocating for Taxpayers.

Solving IRS Problems.

Beware! Employee vs. Independent Contractor – A Big Deal for Employers

The U.S. Tax Court released an opinion today in the case of Mescalero Apache Tribe v. Commissioner of Internal Revenue. This case is worth noting for all small and medium-sized businesses that pays workers in its operations.

A key tax decision made by any business that employs or engages workers in its operations is whether those workers are employees or independent contractors. If they are employees, then the employer is required to withhold income tax with respect to them and remit those withheld income taxes to the IRS. If the workers are independent contractors, no income tax withholding is required.

As you might imagine, the classification of workers is a big deal with the IRS. The problem is this: if a company misclassifies its workers as independent contractors when they should be classified as employees, the company does not remit withheld income taxes to the IRS. Since income tax withholding is a major method by which the IRS receives tax revenues, a failure by a company to properly remit income tax withholding on its workers by misclassifying them as independent contractors can lead to big problems for the employing company.

On an IRS audit, the company can be made to remit all unpaid income taxes of these workers that should have been withheld, together with penalties and interest. If a number of workers is involved and a number of tax years is involved, the amount owed by the company to the IRS could be a huge amount.

In Mescalero Apache Tribe, the Tribe had either employed or engaged the services of several hundred workers during a 3-year period. The Tribe issued W-2 forms to its employees and 1099 forms to the workers it classified as contractors.

The IRS audited the Tribe, claiming that some of the workers that the Tribe treated as contractors were really employees.

Under Section 3402 of the Internal Revenue Code, an employer is not responsible for the income taxes it should have withheld on misclassified workers if the workers actually paid the required income tax on their earnings. The Tribe was able to get a lot of their workers to sign Form 4669, showing that they had, indeed, paid their income tax. The problem the Tribe had, though, was that they couldn’t find 70 of the workers in question. So, the Tribe asked the IRS to search their records on these 70 workers to see if they had, in fact, paid their income taxes on the payments they had received from the Tribe.

But the IRS did not want to comply with the Tribe’s discovery request.

In the end, the U.S. Tax Court said that the IRS had to provide the Tribe with the requested information. Thus, if the Tribe were able to show through the discovered material from the IRS that the workers had actually paid their taxes, the Tribe would not be responsible for that tax liability.

This case is important for a couple of reasons. First, it shows the serious and fundamental judgment that a company must make in determining whether its workers are employees or independent contractors. A mistake in judgment or a later disagreement with the IRS could lead to a serious tax problem for the company. Second, this case demonstrates that even if a company runs into problems on audit with the IRS, all is not necessarily lost. The Tribe’s attorney was able to successfully argue that the Tribe was entitled to return information from the Tribe’s workers, which the IRS was unwilling to provide without a legal fight to get it.

The IRS is aggressive, but an equally aggressive lawyer for the taxpayer in this case was able to prevail.

Probate & Estate and Trust Planning Alert – Problems with an Irrevocable Trust? Consider Decanting

If you are following Tennessee probate and estate planning matters and news, you may have seen some recent articles talking about decanting irrevocable trusts.

In effect, decanting permits a trustee in certain situations to distribute assets from an irrevocable trust to a newly set-up trust. This is a planning strategy that may allow a change in how trust assets are administered under an irrevocable trust agreement that has terms that are no longer considered to be appropriate under the circumstances.

Although not directly changing an irrevocable trust, the impact is much the same.

Click here to read one of those recent articles on decanting irrevocable trusts: Click to read Decanting Article.

Of particular interest to Tennessee residents is that Tennessee is a decanting-friendly jurisdiction.



The Coming Tax Reform – Is the Federal Estate Tax on the Chopping Block?

There has been talk recently that Congress is preparing to pivot from healthcare reform (which failed to materialize, at least to this point) to federal tax reform.

One of the key planks of the Republican platform for tax reform is the elimination of the federal estate tax.

Whether this will actually happen is anyone’s guess. So, I will guess.

I am predicting . . . (drum roll) . . .that the federal estate tax will indeed be eliminated from the Internal Revenue Code through upcoming federal tax reform.

Check back as tax reform heats up in Congress, and I will try to keep you informed of developments as they arise.

Taxpayers, Beware! The IRS is Turning Some Overdue Accounts Over to Collection Agencies . . . This Month!

The IRS announced today that it will begin later this month sending letters to some taxpayers with overdue tax accounts, informing them that their accounts are being turned over to a private collection agency.

The program involving private collection agencies or PCA’s was approved by Congress in December 2015.

The IRS will first send a letter to the taxpayer whose account is being turned over to a PCA, informing it of this fact. Then, the PCA will send a letter to the taxpayer, confirming that it has received the taxpayer’s account for collection.

It is important to note that payments on overdue tax debts will still be payable only to the United States Treasury–the PCA should not and cannot ask for or receive a payment made payable to it.

In addition, the PCA will not have the authority to take any type of enforcement action against the taxpayer, such as the filing of a lien or issuing a levy–only the IRS will be able to do that.

Finally, the PCA is supposed to comply with the federal Fair Debt Collection Practices Act and to treat taxpayers with courtesy and to respect the Taxpayer Bill of Rights that govern interactions between the IRS and taxpayers.

Although only several hundred taxpayers are expected to have their cases turned over to PCAs this week, the IRS intends to ramp up this program so that thousands of taxpayers per week will see their cases assigned to PCAs later this spring and summer.


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