summary summary summary summary

Transcription

1 summary summary summary summary OCTOBER 2017 Summary Page i [p. 1] Self-Study Steps/ CPE Requirements iii [p. 3] Group Live/ CPE Requirements vi [p. 6] Segment One 1 1 [pp. 7 36] Segment Two 2 1 [pp ] Segment Three 3 1 [pp ] Segment Four 4 1 [pp ] Evaluation Form A 1 [pp ] Index B 1 [pp ] Group Live Attendance Form C 1 [p.137] 68] 1. Surviving an Independent Contractor Crackdown: Are You Prepared? 2. Dangerous Deductions: From Business Bad Debts to RVs 3. Hedge Accounting: Why Easier Is Also Simpler 4. Sizable Tax Benefits, as Well as Dangers, from Conservation Easements CPA Report is a product of SUBSCRIBERS GUIDE SmartPros (A Kaplan Company) OCT. 17 Field of Study: Taxes According to the IRS, most workers should be classified as employees, even those who are treated as independent contractors. While many other federal enforcement initiatives are waning, the Service is continuing to emphasize worker classification audits. Edward Zollars, a partner in Thomas, Zollars & Lynch, Ltd. and a discussion leader for the Loscalzo Institute, highlights what tools such as section 530 relief businesses and their advisers are successfully using, and with which you should become familiar in order to minimize penalties for your clients. Field of Study: Taxes As always, the IRS is targeting and the courts are resolving those tax deductions that benefit your clients. For instance, careful tax planning that maximizes the business bad debt deduction can help minimize your client s overall economic loss. But how, and when, should your client substantiate their intent to create a debtor-creditor relationship? In our next segment, regular expert commentator Barbara Weltman analyzes the results of these recent controversies, along with their year-end implications for you and your clients. Field of Study: Accounting For more than a decade, enterprises have had to apply the complex and voluminous rules on financial reporting for derivatives. Last month, FASB issued a new standard that is designed to make hedge accounting easier for your clients, as well as simpler for you to prepare. In our next segment, Dr. Ira Kawaller explains how these new rules should also meet twin goals: to align hedge accounting more closely with your clients risk management strategies; and to make it easier for financial statement users to understand. Field of Study: Taxes The charitable contribution of conservation easements provides dual benefits: property owners do obtain a substantial federal tax deduction, while they are helping to conserve land for public use or enjoyment. The good news is that Congress has made the conservation easement a permanent, and very powerful, part of the tax code. But according to Kelly Garrison, a tax partner with Frazier & Deeter, LLC, you should warn your clients: not only is the deduction being consistently challenged and audited by the IRS, but the Service also now considers it to be a listed reportable transaction.

2

3 online steps for completing self-study CPE Requirements When properly administered, the CPA Report (CPAR) educational program meets the requirements for group live and self-study participation as defined in the Statement for Standards in CPE Reporting. Note: CPE requirements vary from state to state. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. CPAs should contact their state board regarding specific CPE requirements. Self-Study Format SELF-STUDY SUBSCRIBER NOTICE: The online components of the CPAR self-study program are delivered via SmartPros enhanced e-learning Player (elp). What does this mean to you and your students? In brief, a better self-study learning experience a more intuitive learning environment and a higher level of user compatibility as the elp is based on today s most widely accepted media delivery platforms and is corporate firewall friendly. The elp requires Adobe Flash Player 8 or higher (formerly Macromedia Flash Player) a free download if you don t already have it. Please note: This issue of CPA Report is scheduled to be available on the CPAR Self-Study PEC on November 22, When taking a CPA Report segment on a self-study basis, an individual earns CPE credit by doing the following: 1. Viewing the video (approximately minutes). 2. Completing the Required Reading (approximately minutes). 3. Completing the following steps online (approximately minutes): Steps for Using the Self-Study Professional Education Center To access the Self-Study Professional Education Center to take quizzes and check credits, follow these steps: Step 1: How to Create and Access Your Account 1. Visit Tip: Add this page to your Favorites for easy access. 2. Click on New User? to create an account.* We recommend to use your address as your username. * If you have already created an account at the CPAR Self-Study Professional Education Center, enter your username and password, and click on LOGON. 3. You are logged into Your Account. From Your Account, you can view your CPE credits, take quizzes, track external CPE credits and more. iii CPAR/ OCT. 17

4 Step 2: How to Take a Quiz iv online steps for completing self-study 1. Click on Video Quiz Catalog on the left-hand side of Your Account in the Self-Study Professional Education Center. Note: You must already be logged in for this link to be available to you. See Step 1 if you are not already logged in. 2. Enter your firm code. l Your firm code is on your CPAR Video mailing label, and may also be available from your CPE administrator. 4. Click on the course for which you would like to receive self-study credit. 5. Click enroll in course on the course description page. 6. You will now be at Your Account. l 3. Select the Subject Area for the course you re taking. (Refer to the Subscriber Guide or Summary Page.) The course you just selected will launch automatically, and it will also be available in the Enrolled Courses section of My Courses. 7. To proceed, watch the video (offline), then online follow these steps in order and take the Final Examination: 1. Mid-Review Questions 5. Other Resources 2. Final Review Questions 6. Discussion Issues 3. Required Reading 7. Final Exam 4. Required Reading Questions

5 Step 3: How to View and Print a Course Certificate v online steps for completing self-study Once an online quiz is completed, and you have scored 70% or better, you can view and print completion certificates from Your Account. l In the Completed Courses section of Your Account, click on View Certificate next to the title of the course for which you would like to view the certificate of completion. l Click View for Print. Step 4: How to Check and Track CPE Credits From Your Account in the Self-Study Professional Education Center: 1. Credit Hours Report l Click on the My Courses tab. Click on the Credit Hours Report tab. Select your start and end date and click submit. From here, you can print your report for CPE reporting. 2. To track CPE credits earned from external sources (other than CPAR Video): l Use the External Course Journal. Click Add course to journal to begin tracking an external course. If you need more information or have any questions, please contact Customer Service at admin@smartpros.com or SmartPros Ltd. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: CPAR/ OCT. 17

6 Group Live Format vi group live group live When taking a CPA Report segment on a group live basis, individuals earn CPE credits when they (or their organization) do the following: 1. Select discussion leaders who have the appropriate education and/or experience both to teach the segment subject and conduct the subsequent group discussion. 2. Have each discussion leader review the video segment and the written materials in the Subscribers Guide prior to the presentation of the segment. 3. Make sure that each discussion leader certifies the attendance at his/her discussion group by signing and dating the Group Live Attendance Form. 4. (Individuals) View the video segment (approximately 30 minutes). How to Implement CPA Report The following information will help you plan and implement CPA Report within your firm: 1. Each month, by , you may receive a CPA Report Summary Page in advance of the video program notifying you of the upcoming Continuing Professional Education topics that will be covered (Note: CPAR is not issued in March). 2. The CPAR video and Subscribers Guide will arrive 11 months of the year. If you do not have a standard day and time each month designated as CPE day, issue a memo with the date of your upcoming seminar. (If attendance is not required, please provide plenty of advance notice for optimum participation). 3. Select the topic(s) you wish to cover in your session when the CPAR Summary Page or the actual program arrives. 5. (Individuals) Discuss the segment materials as they relate to his/her own work and/or organization (approximately 20 minutes). 6. (Individuals) Evaluate the discussion leader using the criteria listed on the Evaluation Form. 7. Check with your State Board of Accountancy for specific details, including group live sponsorship registration requirements. 4. It is best for a firm to have its CPE classes on a regular and consistent basis, so it is easy for the staff to remember when scheduling clients. For example, on the second and fourth Mondays of the month, on the 10 th of the month, etc. 5. You may wish to provide each group live attendee a Certificate of Completion noting the hours earned and the topic areas. 6. Always check with your State Board of Accountancy for specific details, including group live sponsorship registration requirements. Note: CPE requirements vary from state to state. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. CPAs should contact their state board regarding specific CPE requirements. If you need more information or have any questions, please contact Customer Service at admin@smartpros.com or

7 segment one segment one segment one Segment 1

8

9 segment one segment one segment one 1. Surviving an Independent Contractor Crackdown: Are You Prepared? Learning Objectives: Segment Overview: Field of Study: Expiration Date: Course Level: Course Prerequisites: Advance Preparation: Recommended Accreditation: Required Reading (Self-Study): Video Transcript: Running Time: According to the IRS, most workers should be classified as employees, even those who are treated as independent contractors. While many other federal enforcement initiatives are waning, the Service is continuing to emphasize worker classification audits. Edward Zollars, a partner in Thomas, Zollars & Lynch, Ltd. and a discussion leader for the Loscalzo Institute, highlights what tools such as section 530 relief businesses and their advisers are successfully using, and with which you should become familiar in order to minimize penalties for your clients. Taxes January 4, 2019 Update Work experience in tax planning or tax compliance, or an introductory course in taxation None 1 hour group live 2 hours self-study Taxpayer Can Obtain Information on Payment of Tax by Contractors from IRS By Ed Zollars, CPA, of Loscalzo Institute For additional info, go to: Section 530 Relief for Worker Classification Controversies By Claire Y. Nash, Ph.D., CPA, Florida Atlantic University Excerpted with permission from The Tax Adviser For complete article, go to: See page See page minutes 1 1 Upon successful completion of this segment, you should be able to: l Explain why the IRS prefers to classify workers as employees; l Identify the various sources of worker classification cases for the IRS; l Identify the requirements for qualifying for section 530 relief; and l Explain which factors the IRS uses to classify a worker. CPAR/ OCT. 17

10 outline outline outline outline outline Outline I. Worker Classification: IRS Versus Employers A. IRS Prefers to Classify Workers as Employees 1. Timing of tax withholding 2. Assurance of tax collection B. Businesses Prefer to Avoid Classifying Workers as Employees 1. Additional cost to business of employment/payroll taxes and benefits 2. Cost to worker of being classified as an employee II. Reclassifying Employees A. After Reclassification, Employer Must 1. Pay past payroll taxes, plus interest and penalties 2. Treat workers as employees going forward B. Sec. 530: Penalty Relief from Misclassification for Employers 1. Reporting consistency 2. Substantive consistency 3. Reasonable basis for treating workers as independent contractors i. Or a prior IRS examination III. Independent Contractor or Employee? A. Classification of Workers as Employees 1. Is not based on number of hours worked 2. Is based on factors, like level of control B. IRS Worker Classification Is Based on 1. Behavioral control 2. Financial control 3. Relationship of parties C. Sources of Worker Classification Cases for IRS 1. Worker compensation claims 2. Unemployment compensation claims 3. Social Security claims 4. Targeted industries/occupations C. Sec. 530 Incentive to Find Former Independent Contractors 1. While you ll still be liable for employer s share of FICA a. You reduce amount owed to IRS by any taxes that employee remitted 2. You must locate and get former workers to sign IRS Form 4669, indicating taxes paid C. Independent Contractor Typically 1. Provides services to large number of employers 2. Has a risk of loss 3. Is not subject to control 1 2

11 outline outline outline outline outline Outline (continued) IV. Issues Related to Worker Reclassification A. Labor Dept. s ERISA Classifies Workers as Employees 1. To protect pension and retirement plans, not to raise revenue 2. If reclassified, you must make workers whole : contribution; match; earnings 3. Also applies to employee stock options: Vizcaino v. Microsoft B. Sources of Worker Classification Cases for IRS 1. Worker compensation claims 2. Unemployment compensation claims 3. Social Security claims 4. Targeted industries/occupations 5. State taxing authorities C. Reclassification of a Worker Might Trigger 1. Federal withholding tax issues from IRS 2. State sales tax issues from prior years 3. Federal withholding and state sales taxes are trust fund taxes with personal liability if the company does not remit V. The Gig Economy and Worker Classification A. Gig Economy Based on Independent Contractors 1. Can decide when they want to work 2. Not subject to non-compete clauses 3. Can deduct auto expenses fully against Schedule C income B. For Businesses in a Gig Economy 1. Good news: they would also prefer to hire independent contractors 2. Potential challenges: not from regulators, but from drivers and competitors 3. Ed Zollars: be aware of uncertainty since no final answer yet 1 3 CPAR/ OCT. 17

12 1 4 outline outline outline outline outline Outline (continued) VI. Case: Mescalero Apache Tribe A. Workers for Mescalero Apache Tribe 1. Part-time workers treated as independent contractors 2. Tribe = independent contractors, but IRS = employees 3. After reclassification, tribe attempted to get former employees to sign IRS Form 4669, but couldn t locate 70 VII. Going Forward A. Ed Zollars Counsels Enterprises to 1. Take inventory of all service providers who are not employees for reasonableness of classification 2. Have an updated written contract with anyone working as independent contractor 3. Report fully and consistently B. Labor Dept. s ERISA Classifies Workers as Employees 1. To protect pension and retirement plans, not to raise revenue 2. If reclassified, you must make workers whole : contribution; match; good and earnings 3. Also applies to employee stock options: Vizcaino v. Microsoft B. Mescalero Indian Tribe, 148 T.C. 11 (2017) 1. Court: IRS should disclose info to Tribe about former workers a. Since it directly relates to transaction between Tribe and former workers 2. IRS: court ruled that we COULD disclose info, not that we MUST disclose info 3. CCA : info can be required during court discovery, but not during examination C. Voluntary Classification Settlement Program (VCSP) 1. Fines and penalties are much less when you come forward voluntarily than when agency contacts you 2. Be prepared to treat workers as employees going forward " are you paying people that a reasonable or in the case of the IRS, an unreasonable person could conceivably view as being an employee?" Edward Zollars

13 discussion questions discussion questions Group Live Option Instructions for Segment For additional information concerning CPE requirements, see page vi of this guide. l As the Discussion Leader, you should introduce this video segment with words similar to the following: In this segment, Edward Zollars examines the tools businesses and their advisers are successfully using in respect to IRS worker classification audits, and with which you should become familiar in order to minimize penalties for your clients. Discussion Questions 1. Surviving an Independent Contractor Crackdown: Are You Prepared? 1. According to Ed Zollars, tax regulation is complicated and fast-changing. He also notes the significant costs that stem from a lack of compliance with worker classification laws. To what extent do your clients incur direct (e.g., litigation) or indirect (e.g., reputation loss) expenses from a failure to comply with worker classification rules? 2. Ed Zollars indicates that many enterprises are susceptible to arguments that it is easier and cheaper to build your workforce with independent contractors. How do your clients determine the classification of a worker as an employee or independent contractor? How consistent are your clients in terms of determining whether there is an element of control over the duties of a worker? l l l Show Segment 1. The transcript of this video starts on page 1 18 of this guide. After playing the video, use the questions provided or ones you have developed to generate discussion. The answers to our discussion questions are on pages 1 7 and 1 8. Additional objective questions are on pages 1 9 amd After the discussion, complete the evaluation form on page A 1. You may want to assign these discussion questions to individual participants before viewing the video segment. 3. Why has the issue of worker classification arisen again? To what extent are your clients now hiring permanent or temporary workers? 4. How do worker classification controversies often emerge? To what extent have your clients become involved in worker classification as a result of the five sources that Ed Zollars cites? What can your clients do to limit the possibility of an independent contractor who wants to be reclassified as an employee? 5. To what extent are you aware of settlement initiatives by regulators, such as the IRS Voluntary Classification Settlement Program? To what extent should your clients consider them as a means of limiting their liability for misclassification of workers? 1 5 CPAR/ OCT. 17

14 discussion questions discussion questions Discussion Questions (continued) 6. Why are enterprises interested in contacting former workers when their workforce has been reclassified from independent contractors to employees? To what extent have your clients tried to contact their former workers? With what degree of success? 7. What actions does Ed Zollars recommend to reduce the likelihood of worker classification taxes and penalties? What do your clients do in this regard? 1 6

15 suggested answers to discussion questions Suggested Answers to Discussion Questions 1. Surviving an Independent Contractor Crackdown: Are You Prepared? 1. According to Ed Zollars, tax regulation is complicated and fast-changing. He also notes the significant costs that stem from a lack of compliance with worker classification laws. To what extent do your clients incur direct (e.g., litigation) or indirect (e.g., reputation loss) expenses from a failure to comply with worker classification rules? l Participant response is based on your practice and its structure, on your clients their activities, their risk tolerance, and their filing habits as well as on your perspective and experience. 2. Ed Zollars indicates that many enterprises are susceptible to arguments that it is easier and cheaper to build your workforce with independent contractors. How do your clients determine the classification of a worker as an employee or independent contractor? How consistent are your clients in terms of determining whether there is an element of control over the duties of a worker? l Participant response is based on your practice and its structure, on your clients their activities, their risk tolerance, and their filing habits as well as on your perspective and experience. 3. Why has the issue of worker classification arisen again? To what extent are your clients now hiring permanent or temporary workers? l According to Ed Zollars, the issue arises whenever: governments are seeking additional revenues; businesses are being more aggressive in classifying their workers as independent contractors; workers become aware of potential benefits from suing for reclassification. l Participant response is based on your practice and its structure, on your clients their activities, their risk tolerance, and their filing habits as well as on your perspective and experience. 4. How do worker classification controversies often emerge? To what extent have your clients become involved in worker classification as a result of the five sources that Ed Zollars cites? What can your clients do to limit the possibility of an independent contractor who wants to be reclassified as an employee? l Ed Zollars cites five sources of worker classification cases for the IRS: worker compensation claims; unemployment compensation claims; Social Security claims; targeted industries and occupations; and state taxing authorities. l Participant response is based on your practice and its structure, on your clients their activities, their risk tolerance, and their filing habits as well as on your perspective and experience. 5. To what extent are you aware of settlement initiatives by regulators, such as the IRS Voluntary Classification Settlement Program? To what extent should your clients consider them as a means of limiting their liability for misclassification of workers? l Ed Zollars counsels employers to perform an internal audit in order to raise any potential classification problems or issues to the surface. He urges organizations to conduct these reviews on a regular basis as well as whenever a performance review is performed or whenever you are aware of actions by regulators against other employers in your industry. l Participant response is based on your practice and its structure, on your clients their activities, their risk tolerance, and their filing habits as well as on your perspective and experience. 1 7 CPAR/ OCT. 17

16 suggested answers to discussion questions Suggested Answers to Discussion Questions (continued) 6. Why are enterprises interested in contacting former workers when their workforce has been reclassified from independent contractors to employees? To what extent have your clients tried to contact their former workers? With what degree of success? l When workers are reclassified as employees, a business can reduce the amount owed to the IRS by the amount of any taxes that the independent contractor remitted. In these cases, you must locate and get forward workers to sign IRS Form l Participant response is based on your practice and its structure, on your clients their activities, their risk tolerance, and their filing habits as well as on your perspective and experience. 7. What actions does Ed Zollars recommend to reduce the likelihood of worker classification taxes and penalties? What do your clients do in this regard? l According to Ed Zollars, you should take an annual inventory of all service providers who are not employees for purposes of gauging the reasonableness of classification. He also suggests having an updated written contract with any independent contractor, and reporting their income fully and consistently. l Participant response is based on your practice and its structure, on your clients their activities, their risk tolerance, and their filing habits as well as on your perspective and experience. 1 8

17 objective questions objective questions Objective Questions I. Surviving an Independent Contractor Crackdown: Are You Prepared? You may want to use these objective questions to test knowledge and/or to generate further discussion; these questions are only for group live purposes. Most of these questions are based on the video segment; a few may be based on the required reading for self-study that starts on page The differences between employee and independent contractor treatment result in: a) revenues differences only b) timing differences only c) neither revenue nor timing differences d) both revenue and timing differences 2. Sources of worker classification cases for the IRS come from all of the following EXCEPT: a) worker compensation claims b) unemployment compensation claims c) tax preparer claims d) social security claims 3. Under Section 530 of the Revenue Act of 1978, employers are NOT liable for employment taxes on workers: a) if they show a reporting consistency and a reasonable basis for treating workers as independent contractors b) if they can show a reporting and substantive consistency and a reasonable basis for treating workers as independent contractors c) if they show only a reporting and substantive consistency but not necessarily a reasonable basis for treating workers as independent contractors d) if they show a reasonable basis for treating workers as independent contractors but not necessarily reporting and substantive consistency 4. In recent years, when determining whether a worker is an independent contractor or an employee, the IRS uses a: a) three part test based on control b) reasonableness test c) 20 factor test d) there is no test used by the IRS 5. Reclassification of a worker from independent contractor to employee may result in: a) federal withholding tax issues only b) state sales tax issues from prior years only c) personal liability for the payer only d) all of the above 6. An independent contractor typically: a) has a risk of loss b) is subject to the control of the employer c) provides services to a smaller group of employers d) has no risk of loss 7. In the Mescalero Indian Tribe case: a) the Tax Court held that the IRS did not have to disclose certain information to the taxpayer plaintiffs b) the IRS decided it did not have to disclose the requested information to the taxpayer plaintiffs c) the IRS provided the requested information to the taxpayers soon after the Tax Court's ruling d) the IRS determined it could not disclose the information to the taxpayer plaintiffs even if it wanted to 1 9 CPAR/ OCT. 17

18 1 10 objective questions objective questions Objective Questions (continued) 8. Whether a worker is an employee is predicated: a) on whether the worker is subject to the taxpayer's control and whether the taxpayer has the right to control the worker b) only on whether the worker is subject to the taxpayer's control c) only on whether the taxpayer has the right to control the worker d) on factors other than the control of the taxpayer 9. Case law has demonstrated that the courts have historically construed Section 530 of the Revenue Act: a) narrowly b) strictly c) liberally d) case law has not been determinative in this regard 10. The current FICA tax rate paid by employers is: a) 1.45% b) 6.2% c) 5.65% d) 7.65%

19 1 11 required reading required reading Self-Study Option Instructions for Segment When taking a CPA Report segment on a self-study basis, an individual earns CPE credit by doing the following: 1. Viewing the video (approximately minutes). The transcript of this video starts on page 1 18 of this guide. 2. Completing the Required Reading (approximately minutes). The Required Reading for this segment starts below. Required Reading (Self-Study) By Ed Zollars, CPA, of Loscalzo Institute For additional info, go to: In the case of the Mescalero Apache Tribe v. Commissioner, 148 TC No. 11 the Tax Court had to consider the taxpayer s request to obtain information from the IRS regarding other taxpayers, specifically if those taxpayers had reported income received from the Tribe on their income tax returns. Or, as the IRS claimed, did the law (specifically IRC 6103) prevent the agency from disclosing such information about other taxpayers. The question arose because the IRS had decided in an examination that the Tribe had failed to treat certain individuals as employees that were, in the agency s view, truly employees. While the Tribe is still contesting that fact, the Tribe sought information from the IRS to reduce the amount due. Specifically, the Tribe wished to know if contractors they had been unable to contact had paid their taxes. That is important because, while the Tribe is on the hook generally for payroll taxes if these individuals are found to truly be 3. Completing the online steps (approximately minutes). Please see pages iii to v at the beginning of this guide for instructions on completing these steps. TAXPAYER CAN OBTAIN INFORMATION ON PAYMENT OF TAX BY CONTRACTORS FROM IRS employees, IRC 3402 removes the employer s liability if the employer can show the person had included the amounts on their return for the year in question. [IRC 3402(d)] The Tribe had used the method outlined in the Internal Revenue Manual (IRM ) and attempted to contact the individuals in question. While it located many of the individuals, the Tribe was unable to locate 70 of the individuals in question. Some had moved and the Tribe had no current address, while others were in hard to reach areas that lacked utilities or cell phone service. While the Tribe was unable to obtain the information from the individuals regarding whether they had included the amounts in their income, clearly there was one other source that could answer that question. The IRS clearly had the tax returns for these individuals (or knew they had not filed returns) and thus could provide information that likely would show that some of those 70 that the Tribe could not contact had paid their taxes. CPAR/ OCT. 17

20 1 12 required reading required reading As the Court writes: The Tribe wants to take advantage of section 3402(d) in this case. But how? It tried to find its old workers and get them to fill out the form the IRS wants employers in this situation to use, but the Tribe argues that the information is just sitting there in the IRS s records. Isn t that what discovery is for? The IRS objected to providing this information for two reasons. First, as noted above, the IRS claimed that IRC 6103(a) prohibited the IRS from releasing this information to another taxpayer. Second, the agency argued this created an impermissible shift in the burden of proof from the taxpayer to the agency to gain the benefits of IRC 3402(d). Exception to the No- Disclosure Rule The Court agrees that the information the Tribe seeks is return information as defined by IRC 6103 and that the general rule bars such disclosure. But, as the Court notes general rules usually have exceptions in trail, and section 6103 is no different. There is a potential exception found at IRC 6103(h)(4) which provides: (4) Disclosure in judicial and administrative tax proceedings. A return or return information may be disclosed in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only (B) if the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding; [or] (C) 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. The opinion first notes that the title of IRC 6103(h) is Disclosure to Certain Federal Officers and Employees For Purposes of Tax Administration, Etc. and that the first Circuit Court to look at the issue (the Fifth Circuit Court of Appeals in the case of Chamberlain v. Kurtz, 589 F.2d 827, (5th Cir. 1979)) had used that title to limit such disclosure only to Treasury officials. But the Court goes on to note that most other circuits have rejected that view, instead following the Tenth Circuit s reasoning in the case of First W. Gov t Sec., Inc. v. United States, 796 F.2d 356, 360 (10th Cir. 1986) that the specific discussion of judicial proceedings broadens the application of the provision. Since this case would be appealable to the Tenth Circuit, the Tax Court is bound by that Circuit s view. The Court concludes that subsection (B) may be a problem because it does not provide for release of return information but rather just a return. Whether an item had been included in income would not necessarily be clear from merely looking at the return in question, although the IRS could have other information related to the return (such as all 1099MISC issued to the taxpayer) that would allow for answering the question. However, the Court notes that subsection (C) does allow for disclosure of return information. But there are a couple of hurdles to be overcome. As the opinion notes: First, what is a transactional relationship under section 6103, and is the employer/worker relationship included within it? Next, does the return information that the Tribe wants directly relate to this relationship? And, finally, does the information related to the transactional relationship directly affect the resolution of the issue in this case? The opinion notes that historically courts have taken a broad view of what is a transactional relationship: To transact means simply to carry on business. Webster s Third New International Dictionary 2425 (2002). And the wide variety of business relationships that other courts have held are included in the general phrase lead us now to hold that the relationship between an employer and his worker is one that pertains to the carrying on of business.

21 1 13 required reading required reading But is the information sought directly related to the transactional relationship, the next requirement of (C)? Here the Court turns to a Nebraska District Court opinion: Here we have some help from a district court in Nebraska. In Guarantee Mut. Life, 42 A.F.T.R.2d (RIA) , a company sued for a tax refund by establishing that its workers were independent contractors and not employees. The district court there found that the workers tax records would contain evidence of how the workers viewed their status a significant factor in a worker-classification case and allowed disclosure under section 6103(h)(4)(C). Id. We agree that whether the Tribe s workers paid their tax liabilities in full tends to show whether they considered themselves independent contractors or employees and thus directly relates to their relationship with the Tribe. Follow-Up: IRS Is Not Required to Disclose Return Information The IRS Chief Counsel s office reacted shortly after the Mescalaro decision in an (Chief Counsel ), indicating that in its view this case does not grant taxpayers facing such liability may not require the IRS to provide worker tax information during the exam. Rather the agency s position is that the case only holds that such disclosure may be required by the Court during discovery, not that employers facing potential liability have the right to obtain that information directly from the service immediately upon the issue being raised in exam. The notes: In worker classification employment tax examinations where examiners have concluded that the use of a mandatory reduced rate provided in Code section 3509(a) or 3509(b) is not applicable because intentional disregard has occurred, and thus abatement of income tax withholding under Code section 3402(d) may be available, and in employment tax examinations where worker classification is not at issue, the Service should continue to follow the procedures outlined in Internal Revenue Manual section , Procedures for Relief Under IRC 3402(d) and/or IRC 3102(f)(3) in Examination.These procedures authorize examiners to accept original Forms 4669 (Statement of Payments Received) before an examination is closed and to consider such forms prima facie evidence of the reporting and payment of tax. These procedures do not authorize examiners to disclose worker return information to the taxpayer or its representative during an examination. The bases this on the facts of the case: It is important to note that the court s determination that the workers return information was discoverable was based largely on the representation by the Tribe that it has already made a significant effort to locate the workers and that it had failed only with respect to a relatively small number. It is also important to note that IRC 6103(h)(4) authorizes disclosure, but does not require it; thus the court s determination that the workers return information is disclosable under section 6103(h)(4)(C) does not create a requirement that the Service disclose the information. Thus, Mescalero does not stand for the proposition that taxpayers and/or their representatives are entitled to workers return information during the conduct of an employment tax audit or at the Appeals consideration level. Instead, the Mescalero decision is limited to discovery requests made by a taxpayer during the pendency of a Tax Court proceeding, where the Tax Court has the ability to determine whether the requested information is disclosable pursuant to IRC 6103(h)(4), AND has balanced the relevancy of the requested information against the burden placed on the Service pursuant to Tax Court Rules 70(b) and 70(c). CPAR/ OCT. 17

22 required reading required reading SECTION 530 RELIEF FOR WORKER CLASSIFICATION CONTROVERSIES By Claire Y. Nash, Ph.D., CPA, Florida Atlantic University Excerpted with permission from The Tax Adviser For complete article, go to: l l l l It can be difficult to determine whether workers are independent contractors or employees, and making a mistake can be expensive if a taxpayer is audited. Taxpayers may be liable for employment taxes and penalties, which can be financially devastating. One relatively new form of relief is the IRS s voluntary classification settlement program (VCSP), which permits taxpayers who qualify to begin treating their workers as employees prospectively while paying a fraction of the prior employment tax liability and no penalties. Taxpayers who do not qualify for the VCSP or otherwise choose not to participate may qualify for relief under Section 530, which applies to taxpayers who have a reasonable basis for treating their workers as independent contractors, even if it is later found to be mistaken. A large body of case law demonstrates that the courts continue to construe Section 530 relief liberally. The IRS continues to be concerned about the appropriateness of taxpayers classifications of workers as independent contractors. IRS estimates show that the underpayment of federal income taxes on self-employment income and the underpayment of selfemployment taxes contribute $122 billion and $57 billion, respectively, to the tax gap. To reduce underreporting of these taxes and narrow this portion of the tax gap, the IRS will generally scrutinize the classification of workers as independent contractors, rather than employees, during income tax audits of firms, and assess taxpayers for the underpayment of employment taxes. In an effort to increase tax compliance and provide certainty for taxpayers, in September 2011 the IRS announced a new voluntary classification settlement program (VCSP). The VCSP provides partial relief from retroactive federal employment tax assessments for eligible taxpayers that agree to prospectively treat their workers, or a class or group of their workers, as employees. To be eligible for the VCSP, a taxpayer must have consistently treated the workers in question as nonemployees and must have filed all required Forms 1099 for the workers for the previous three years. Taxpayers must apply for admission to the program. At the time of application, the taxpayer cannot be under audit by the IRS or, concerning the classification of its workers, by the U.S. Department of Labor or a state government agency. By design, the initial cost to participate in the VCSP is relatively small. Consequently, the IRS retains discretion whether to admit a taxpayer into the program. Taxpayers admitted into the program must pay 10% of the employment tax liability that might have been due on compensation paid to the workers reclassified as employees for the most recent tax year, determined under the reduced rates of Sec. 3509(a). Participants will not be liable for any interest and penalties on the reduced employment tax amount, and the IRS will not challenge the prior classification of the workers reclassified under the VCSP. However, taxpayers with more than one class of workers should be aware that participation in the program will not prevent an IRS challenge to the classification of workers not covered under the VCSP. Additionally, for the first three years following admission to the program, participants must agree to an extended sixyear statute of limitation on employment taxes for the workers involved. After careful analysis of the VCSP, taxpayers might find that, even though the initial cost to participate in the program is relatively small, the future costs (i.e., the future employment taxes and future employee benefit costs associated with the prospective reclassification of workers as employees) may be too high and untenable for the certainty it provides. Under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act 1 14

23 1 15 required reading required reading (FUTA), taxpayers must pay Social Security, Medicare, and unemployment taxes for the benefit of workers classified as employees and withhold and remit amounts from employees wages for the employees share of Social Security and Medicare taxes. FICA and FUTA taxes are significant costs of employing workers. The current FICA tax rate paid by an employer is 7.65%. (Employees pay 5.65% for 2012 because of temporary legislation cutting the rate by 2 percentage points.) A taxpayer with employees must contribute 6.2% of a worker s earnings for Social Security and 1.45% for Medicare. The maximum earnings to which the Social Security rate is applied are adjusted annually; however, there is no maximum level of earnings to which the 1.45% Medicare rate is applied. For 2012, the maximum earnings subject to the Social Security tax are $110,100 per worker. Taxpayers are also required to pay a 6% FUTA tax on the first $7,000 of earnings for each employee annually. Taxpayers that treat workers as independent contractors not only avoid the costs of employment taxes, but they also avoid the administrative costs associated with calculating and withholding taxes from workers earnings; depositing employment taxes with the Treasury; and reporting employment tax withholdings, contributions, and deposits on the appropriate forms during the year. In addition, they avoid employee benefit costs for workers compensation insurance, health and welfare benefits, and retiree plans. However, if upon audit, the IRS determines that a taxpayer should have classified its workers as employees, the retroactive employment tax assessments could be large and potentially financially devastating. Taxpayers that choose to continue to treat their workers as independent contractors can still prevail in an IRS challenge to their worker classifications and avoid retroactive employment tax assessments if they qualify for relief under Section 530 of the Revenue Act of Section 530 provides relief for taxpayers who reasonably, but erroneously, classify workers as independent contractors instead of employees. Recent court decisions show that, consistent with Congress s intent to protect taxpayers that exercised good faith in determining that their workers were not employees, the courts continue to liberally construe the reasonable basis requirement in the law in favor of taxpayers. Taxpayers that meet the consistency requirements (described below) and have a reasonable basis for not treating workers as employees can still prevail in the application of the Section 530 safe-harbor provisions to the facts and circumstances of their respective working relationships. This article reviews the common law principles and authoritative guidance available to distinguish when workers are employees and the Section 530 safe-harbor provisions. This article also discusses how taxpayers have met the statutory standards for the safe harbor and prevailed in IRS challenges to classifications of workers as independent contractors. Common Law Employee or Independent Contractor The extent to which a worker is subject to the control of the taxpayer is the crucial test in determining the nature of the working relationship. However, whether a worker is an employee is predicated not only on whether the worker is subject to the taxpayer s control, but also on whether the taxpayer has the right to control the worker. Regs. Sec (d)-1 defines the common law employer-employee relationship as follows: Generally such relationship exists when the person for whom services are performed has 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 how it shall be done. CPAR/ OCT. 17

24 1 16 required reading required reading Control or the Right to Control Early court decisions establish that the right to control and direct the specific manner in which an individual works toward the desired end work product is just as fundamental as control in defining the employer-employee relationship. In Capital Life & Health Ins. Co., the taxpayer failed to show that the commissioned salesmen it treated as independent contractors were free from the control of the company. The taxpayer provided regular training to the salesmen, did not have a written contract with the salesmen, could terminate the relationship at will, and issued a guidebook of rules governing the salesmen s conduct. Following the termination of their relationship with the company, the salesmen retained no economic interest in the insurance policies they wrote. When considered collectively, all of the elements of the working relationship showed that the salesmen were not free of the company s control. Usually, performing professional services requires a high degree of expertise or skill, which can make it difficult or impossible for the taxpayer to actually supervise the work of a professional. Consequently, a lower standard is applied when considering whether control or the right to control is exercised over the work of a professional. Rev. Rul indicates that the control of an employer over the manner in which professional employees shall conduct the duties of their positions must necessarily be more general than the control over nonprofessional employees. In Professional & Executive Leasing (PEL), PEL attempted to classify physicians and other professionals it leased as employees. PEL devised a plan to hire the professionals and lease them back to their respective practices or businesses. The contract between PEL and the professionals specified that they would be employees of PEL. The Tax Court rejected PEL s classification of the professionals as employees. The control PEL exercised over them was not sufficient to establish an employer-employee relationship even under the lower standard applicable to professionals. The professionals were not PEL s employees but, rather, remained either self-employed or employed by their practice or business. All of the facts and circumstances surrounding the working relationship must be considered when determining a worker s status. In Texas Carbonate Co., the court held the relationship between the taxpayer and worker was so extensive that it outweighed the absence of control by the taxpayer. In this case, Luther Miller, who was a shareholder in the company and a member of its board of directors, vacated his job as general manager and entered into an agreement to work for the company as a commission-based independent contractor. The IRS challenged the change in his worker status. The court ruled in favor of the IRS, noting that, although the company did not control and had no right to control Miller s performance of his duties, his degree of involvement with the company was so extensive that it made the company s lack of control over him irrelevant. The Fifth Circuit s decision shows that, although control or the right to control is the primary consideration, a worker s status is based on all of the facts and circumstances of his or her relationship with the taxpayer. The courts have shown that, absent control, no other single factor is dispositive and determining whether a worker is sufficiently subject to a taxpayer s control to be an employee rather than an independent contractor is subjective. Consequently, conflicting court decisions on workers employment tax status are common. Conclusion Congress intended for Section 530 to provide relief for taxpayers that have a reasonable basis for not treating workers as employees, but taxpayers nonetheless could face large retroactive employment tax assessments as a result of an IRS challenge to the classification of their workers. The safe-harbor provisions of Section 530 protect a taxpayer from retroactive employment tax assessments when the taxpayer has consistently classified workers as independent contractors, filed all appropriate federal tax returns consistent with treating workers as nonemployees, and had a reasonable basis for not treating workers as employees. A taxpayer must make a prima facie case to establish that it had a reasonable basis for the treatment of its workers, but the courts continue to construe the reasonable basis safe harbor liberally in favor of taxpayers. In addition to