TaxProf Blog

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

Saturday, February 20, 2010

David Cay Johnston on the Tax Provision Cited by the Austin Pilot

Following up on yesterday's post, More on the Austin Pilot's Tax Dispute With the IRSDavid Cay Johnston wrote about Section 1706 of the Tax Reform Act of 1986, which Joseph Stack blamed for his tax troubles, in the New York Times in 1998, How a Tax Law Helps Insure a Scarcity of Programmers:

The Senate holds hearings this week on complaints of taxpayer abuse by the Internal Revenue Service, but the agenda does not include the role of Congress itself in creating taxpayer woes, particularly for tens of thousands of computer programmers.

But just ask Midge Johnson, a would-be programming entrepreneur, about a long-standing tax law that is pointed specifically at software professionals and prevents many of them from setting up freelance businesses. Lately, the I.R.S. has been aggressively enforcing that law -- even as computer programmers are in such short supply that the Clinton Administration is pouring millions of dollars into Federal initiatives to train more of them.

It appears to be public policy in conflict with itself and it is making work life difficult for a category of citizens crucial to the digital economy. ...

Mrs. Johnson and thousands of other computer programmers who want to work for themselves instead of being employees have run afoul of a 1986 law in which Congress decreed that most individual programmers cannot be entrepreneurs.

The law generally excludes programmers from statutes giving employers some flexibility to use independent contractors. Critics say that the I.R.S. has recently stepped up its enforcement of the law in a way that effectively kills start-up programming businesses if their only employee is the founder.

The law, which was introduced by Senator Daniel Patrick Moynihan, Democrat of New York, was estimated to raise $60 million over five years, a figure based on a belief by a staff member of the Congressional Joint Committee on Taxation that employees cheat less on their taxes than independent contractors do. That was enough money to pay for a tax break, approved with Mr. Moynihan's support, that was sought by I.B.M. for its overseas operations. Under the Gramm-Rudman deficit control act of the previous year, Congress was required to pay for any tax cuts with comparable revenue increases or spending cuts

''Why does Congress say that I can't go out and pursue the American dream and give my kids and grandkids things I couldn't have?'' asked Mrs. Johnson, who did not find out about the law until two years ago, after quitting her job with the consulting firm of Booz Allen & Hamilton in hopes of starting her own software programming business. ''And why,'' she asked, ''is the I.R.S. so busy enforcing this law that keeps me from being an independent contractor?''

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