TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, December 27, 2004

ABA Tax Section Comments on Worker Classification Settlement Program

Aba_tax_2The ABA Tax Section has submitted to the IRS Comments on the IRS's Classification Settlement Program to resolve worker classification cases.  The comments were prepared by the Committee on Employment Taxes.  Here is the Executive Summary: 


The issue of worker classification – i.e., whether a worker retained by a service recipient to perform services is either an independent contractor or an employee – has received a great amount of attention over the years.  The issue is raised most directly in employment tax audits that are conducted by the IRS.  The proper classification of a worker must be determined accurately to ensure that workers and service recipients can anticipate and meet their tax responsibilities timely and accurately.

Sometimes, however, in the course of an employment tax audit, IRS examiners and other IRS personnel are faced with a very difficult task in determining the proper classification of workers. Congress and the IRS have taken a number of steps in recent years to improve the processes by which such determinations are made, and to promote more certainty and uniformity.  For its part, among other things, the IRS issued extensive, updated guidelines for its personnel in 1996.  That same year, the IRS also established its Classification Settlement Program (CSP), a process for resolving worker classification disputes that arise during employment tax audits.  The CSP is now part of the Internal Revenue Manual.  Although IRS examiners must follow certain procedures set forth in the CSP, those procedures can lead to a voluntary alternative for taxpayers to resolve disputes at the examination level that might otherwise result in more costly, time-consuming and adversarial appeals.

In general, the CSP has been successful in many respects in resolving disputes over the classification of workers as employees or independent contractors. However, now that the CSP has been in operation for several years, it is appropriate to ask whether changes should be made as the result of experience and changes in the law.

We conclude that the success of the CSP could be enhanced by clarifying and expanding the CSP and by including some additional improvements. Along with these comments and pursuant to an informal request, we developed a “red-lined” version of the current CSP, with each proposed addition or deletion to the CSP clearly marked to reflect the changes suggested by the comments. This “red-lined” version is attached to the comments as Appendix A.

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