This week, Joe Kristan (CPA & Shareholder, Roth & Company (Des Moines, Iowa); Editor, Tax Update Blog) discusses a recent Tax Court case holding that an employer of a independent contractor reclassified as an employee is not liable for failing to withhold taxes if the employee pays the taxes on her own.
The Coyote Bags the Roadrunner.
Battles over whether a given worker is an employee or an independent contractor have been going on since before the Coyote and the Road Runner began their epic conflict, with the IRS usually playing the winning Road Runner role. Yesterday the anvil landed on the Road Runner.
The IRS prefers that workers be treated as employees because that makes it easier to collect their taxes. Employers have to collect half of the Social Security and Medicare taxes on employee wages, and they have to withhold and remit income taxes. Independent contractors have to pay all of these on their own when they file their schedule Cs and Schedule SEs. While businesses have to send 1099s to independent contractors, the IRS likes having employers do most of the collecting. It’s becoming a big issue in the “gig economy.”
When the IRS forces a taxpayer to reclassify payments from independent contractor payments to wages, it gets to assess back employment taxes and withholding on the employer. The problem is that at least in theory, the employees should have already paid their taxes on their own 1040s. Tax Court Judge Holmes explains:
An employer can get hit with a big tax bill if it misclassifies its employees as independent contractors because it would not have collected and paid over this withholding tax. But what if the employee actually paid the tax on his income even though it wasn’t withheld? The answer is that the employer is off the hook — section 3402(d) provides:
If the employer, in violation of the provisions of this chapter, fails to deduct and withhold the tax under this chapter, and thereafter the tax against which such tax may be credited is paid, the tax so required to be deducted and withheld shall not be collected from the employer * * *.
The Tribe wants to take advantage of section 3402(d) in this case. But how?
How, indeed. The “Tribe” here is the Mescalero Apache Tribe, which ran a casino that treated its workers as independent contractors. When the IRS said they were employees, they took steps to find out how much tax has been paid. Judge Holmes explains (citation omitted):
One way to do this would be for the Tribe to ask each worker to complete Form 4669, Statement of Payments Received. The Tribe tried to do just that, but it was only partly successful because many of the Tribe’s former workers have moved, and some live in hard-to-reach areas where they lack cell-phone service and even basic utilities. The Tribe was in the end unable to find 70 of these workers and thus could not secure executed Forms 4669 from them.
An alert reader might observe that this is stupid. The IRS already has records on whether these people paid their tax. Why should they get to keep it a secret to make the employer pay the tax again? That’s exactly what this case is about. Again, Judge Holmes:
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 inIsn’t that what discovery is for? the IRS’s records.
The Moral? The battle over worker classification will go on, and on. Now, though, employers who lose the classification battle may be able to win the payment war. Assuming the decision isn’t reversed on appeal, the IRS won’t be able to collect employee taxes a second time when it knows that they’ve already been paid once.
Cite: Mescalero Apache Tribe v. Commissioner, 148 T.C. No. 11 (Apr. 5, 2017)
Monday, April 3, 2017
Annette Nellen, Keep mailing letters to IRS despite the modern era. “Why do we still have tax practices that require 20th century tools?”
Career Corner. Is Your Job Making You Happy—Or Is It Time for a Change? (Marsha Leest, Going Concern). Come on. Happiness is overrated.
Daniel Hemel, David Herzig, The Strategic Case Against the Democratic Filibuster of Neil Gorsuch (Surly Subgroup)
Dylan Grundman, All Is Peachy in Georgia, for Now (Tax Justice Blog). “Georgia lawmakers ended their legislative session Thursday by enacting a few tax credits and smartly choosing not to pass a major income tax cut that had been working its way through the legislature.” So they made things worse.
Jack Townsend, Interesting Offshore Account Malpractice Opinion Denying Summary Judgment. “This case is a good object lesson here for preparers. I do not prepare these forms (income tax, FBAR or any other) for clients. But, I think that a good practice would be for the preparer to insist upon a fully completed Organizer.”
Jim Maule, And Now It’s California Facing the Road Funding Tax Issues. “If anyone in California has suggested the mileage-based road fee as a source of funding, it hasn’t become public.”
Kay Bell, Cyber crooks are looking to make tax fools out of us all. “This is also the time of year when taxpayers may see scam emails purporting to come from their tax software provider asking them to update online accounts. The fake phishing messages also are sent as if from familiar organizations such as banks, credit card companies and even the IRS.”
Kristine Tidgren, Out-of-State Parent Company Excluded from Iowa Consolidated Return (Ag Docket):
Last week, the Iowa Supreme Court considered its first case challenging an Iowa Department of Revenue’s (IDOR) assessment of corporate income tax since 2010.[i] In both cases, the taxpayers lost, but this time it was because the taxpayer did not have a taxable nexus in Iowa. The question before the Court in 2017 was whether the parent company of an affiliated group had properly joined a consolidated Iowa return. IDOR determined that the consolidated group was improper and assessed $2,558,989 in tax, plus interest and penalties. The Court agreed, finding that the parent company could not join the consolidated return because it had no taxable Iowa income.
Welcoming new corporate investment in Iowa, good and hard.
Leslie Book, Some Weekend Reading and Listening (Procedurally Taxing). “IRS released its annual data book; it is full of useful statistics, including a robust discussion of enforcement actions, a less robust discussion of service and a breakdown of refunds issued, returns filed and the kinds of stuff that can keep tax nerds entertained for hours.” Because we have lots of free time to kill right now.
Lew Taishoff, WORK PAPERS. “This is a dispute about producing the documents an expert witness reviewed in arriving at his appraisal, before exchange of experts’ reports.”
Michael Devereux, Alan Auerbach, EU Wrong To Challenge Destination Based Cash Flow Tax (guest posting for Janet Novack)
Paul Neiffer, Ag Groups Did Not Go Far Enough! “32 Farm Groups jointly sent a letter to the House Ways and Means Committee dated March 29, 2017. This letter asked for Congress to repeal the estate tax AND keep basis step-up for farm families.”
Stephen Entin, The Effect of the House GOP Blueprint for Tax Reform on the Exchange Rate of the Dollar (Tax Policy Blog):
The DBCFT would impose a tax on goods and services sold in the United States, including the full cost of imports, but it would exclude tax on exports. This arrangement is called “border adjustment.” The cost of imported goods would not be allowed as a deduction, and would thus be subject to the tax. In its operation, it would resemble a sales tax. Importers fear that the tax, which is larger than their profit margins, would wipe out their earnings and/or force a price hike. Some observers have written that this would push up living costs for low-income consumers.
Most economists would expect a different outcome. The tax would initially tend to increase export sales and discourage import purchases, which would increase the demand for the dollar and reduce demand for foreign currencies. These demand shifts would raise the value of the dollar relative to foreign currencies by roughly the amount of the tax rate. Imports would become cheaper in dollar terms, before tax, and cost about the same after tax as they do now. Importers would not need to raise prices charged to U.S. consumers, and would see no profit squeeze.
The future of the House tax reform blueprint depends on whether enough lawmakers share Mr. Entin’s confidence.
TaxGrrrl, Taxes From A To Z (2017): O Is For Over-The-Counter Medicines. Deductible as medical expense, or not?
TaxProf, The IRS Scandal, Day 1424: Conservatives Demand IRS Commissioner’s Head In White House Meeting.
Tuesday, April 4, 2017
Jack Townsend, IRS Criminal Tax Statistics. He summarizes from IRS statistics:
IRS statistics, compiled by Jack Townsend.
Once you get indicted, the odds are not in your favor.
Jason Dinesen, Glossary: Qualifying Widow(er). “The ‘qualifying widow(er)’ filing status is for a person whose spouse has died and the surviving spouse is still raising kids.”
Kay Bell, April brings spring showers and tax moves to make now!
Keith Fogg, A Botched CDP Notice Leads to a Timely 6404 Interest Abatement Petition (Procedurally Taxing). “The order follows the Tax Court’s longstanding practice of finding jurisdiction in those situations in which the petitioner comes to the Court within the established time frames in the applicable statutes.”
Kyle Pomerleau, How a Destination-Based Tax System Reduces Tax Avoidance (Tax Policy Blog). “An important aspect of the border adjustment that has been largely ignored is how it would eliminate the type of tax avoidance that exists under the current corporate income tax. It would also greatly simplify the tax code by eliminating the need for complex anti-avoidance rules that usually accompany territorial tax systems.”
Lew Taishoff, INSIDE, OUTSIDE – REDIVIVUS. “Read now the sad tale of Estate of James P. Keeter, Deceased, Garry L. Holton, Jr., and Thomas W. Schaefer, Co-Executors and Julie L. Keeter, Docket No. 6771-16, filed 4/3/17.”
Paul Neiffer, Large Corporations Pay the Tax Bill (on Audits). “As you can see, the IRS likely spends their efforts on auditing large corporations since that is where the money is at.”
Peter Reilly, Still Time To Fund A Roth IRA For Your Underemployed Millenial. Peter explains a wonderful and underused tool to help recent graduates build a nest egg.
Robert Goulder, Insuring Against Tax Reform’s Downside Risk (Tax Analysts Blog):
The future direction of U.S. tax policy hangs on a solitary issue: If Congress enacts the GOP House blueprint – including the hotly debated border-adjusted tax — will currency exchange rates adjust? It’s literally a trillion-dollar question, and it’s dominating economic discussions at the highest levels of government from Washington to Brussels to Beijing.
Scads of other nations have border-adjusted taxes that hit imports and relieve exports, as would the one in the House blueprint. But they’re part of VAT regimes, and the proposed destination-based cash flow tax is a slightly different creature. No other country has adopted this particular kind of tax system. It ought to work brilliantly, in theory, but at some level it feels like we’re conducting a social science experiment with the world’s largest economy.
And there would be side effects.
Robert Wood, IRS Polices What Is Tax Planning Or Tax Evasion:
Taxes are complex, and mistakes happen. But the burden is on you to show that you acted reasonably (such as by relying on professional tax advice). If you can’t, you will probably end up with penalties.
The size of penalties varies, but often they are 25%. Higher penalties or even criminal prosecution is possible. The burden can be placed on you to prove you are right or that your mistakes were innocent. If the IRS believes you were trying to cheat, you could face a 75% penalty or even criminal prosecution. Most criminal tax cases start with civil audits. Innocent mistakes can often be forgiven if you can show that you tried to comply and got some advice. But it would be a mistake to assume that just about anything can be called an innocent mistake.
What might seem like a wonderful theory over a beer with your buddies can seem pretty lame when you have to explain it to a revenue agent, or a judge.
Roger McEowen, Is Aesthetic Damage Enough to Make Out a Nuisance Claim? “Odors from large-scale livestock confinement operations are not the only activities on rural property that give rise to nuisance actions. While such activities tend to predominate nuisance actions, especially in the Midwest, the development of large-scale wind turbine operations is also generating a great deal of conflict among rural landowners.”
Rudolph Penner, Washington’s New Definition Of Budget Success (TaxVox). “We are in trouble when we have to define keeping the government open as a major success.” Actually, closing some parts of it would be an inconceivable and wonderful success.
TaxGrrrl, Filing Taxes For The First Time? Here’s What You Need To Know.
TaxProf, David Kautter To Be Named Assistant Secretary For Tax Policy. “Most recently, Kautter served as Ernst & Young’s Director of National Tax, the chief operating executive for the firm’s national tax practices.”
Wednesday, April 5, 2017
Career Corner. As Far As Horrible Bosses Go, The Ex-Fox News Comptroller Is Up There (Caleb Newquist, Going Concern)
Gavin Eakins, March 2017 Model Update Overview (Tax Policy Blog). The Tax Foundation updates its policy analysis tool.
Jack Townsend, Court Authorizes John Doe Summons to American Express Unit for Netherlands Taxpayer Info. “The JDS is issued to American Express Travel Related Services Company and seeks ‘the identities of Dutch residents who have debit or credit cards linked to bank accounts located outside of the Netherlands so the Dutch government can determine if those persons have complied with Dutch tax laws.'”
Jim Maule, The Tax Value of a Name. ” I noticed a story about the Georgia Department of Health refusing to issue a birth certificate for a newborn because the Department did not approve of the name chosen for the child.” That could make the child’s tax life complicated.
Kay Bell, Private tax debt collection begins again this week:
The IRS reminds folks whose tax bills are now in collection agency hands that they will always receive multiple contacts, letters and phone calls.
And the first contact will be from the IRS, not private debt collectors.
First, the IRS will send a letter to the taxpayer and, if applicable, his/her tax representative informing them that their account is being assigned to a private collection agency, or PCA.
That letter will include the name and contact information for the PCA that will handle their account. It will one of four authorized collection agencies:
- CBE Group of Cedar Falls, Iowa,
- Conserve of Fairport, New York,
- Performant of Livermore, California, and
- Pioneer of Horseheads, New York.
The IRS notification letter also will contain a copy of Publication 4518, What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency.
If you hear from someone claiming to be collecting debt and it’s a surprise, it’s a scam.
Kelvin Adkins-Heljeson, Louisiana Governor Proposes 2017 Legislative Agenda. “The agenda proposes to eliminate the “5th Penny” from the state’s sales tax, which would account for a decrease of $880 million from the state’s revenue.”
Leslie Book, New Report Discusses the Rebirth of Refund Loans (Procedurally Taxing). “In the past it was generally easy to criticize RALs. Now it is not so clear.”
Lew Taishoff, HUH? – REDIVIVUS. “Or, Does Anybody Read These Orders?” Well, besides Lew Taishoff?
Renu Zaretsky, Strange Love: Or, how I learned to stop complaining and like the tax code (TaxVox). Add your own abusive relationship joke here.
Robert Wood, Trump Donates Presidential Pay, Reminding Us IRS Rules Apply To Everyone. “The circumstances in which you can turn down pay to which you are entitled–and have the IRS respect it–are pretty few.”
Shu-yi Oei, Teaching Depreciation with a #DBCFT Lurking. “Therefore, putting aside all of the reasons why cash-flow expensing may not have the effects that one might hope, I will be absolutely heartbroken if we actually end up with a cash-flow tax, because then what am I gonna talk about in tax class?”
Stuart Gibson, Switzerland – Their Lips Say Yes, But Their Eyes Say No. (Tax Analysts Blog). “How does a country go from being the world leader in bank secrecy to a leader in openness and transparency in nine years?”
TaxGrrrl, IRS Will Turn Over Tax Debts To Private Collection Firms This Week: What Could Possibly Go Wrong?. Kelly counts the ways.
Tax Justice Blog, Tax Justice Digest: Offshore Cash, Gas Tax and BAT
TaxProf, FATCA: A Corporate-Welfare Bonanza For Tax-Compliance Firms. Or a malpractice trap. Your mileage may vary.
Thursday, April 6, 2017
Iowa loses a hero. Iowa mourns death of complicated hero from iconic photo. The rescue, captured in a Pulitzer Prize winning photo, was amazing. The way the rescuer dealt with the subsequent attention was epic. RIP, Jason Oglesbee.
Annette Nellen, AICPA and other groups call for improvements to IRS services”
A common lament I hear from tax practitioners is the challenge of having to deal with notices from the IRS. It is difficult to get to talk to someone from the IRS who has the knowledge and file access needed to resolve the issue and you likely need to wait 30 minutes or more to talk to someone.
When something goes wrong with IRS processing of a return, fixing it now takes months.
Jack Townsend, TIGTA Report on Civil Seizures for Structuring
Kay Bell, IRS commissioner talks tax reform, simplification and additional taxpayer digital options. “‘Everyone at the IRS would be delighted if you could make the tax code simpler,’ he said.”
Keith Fogg, Mailing Your Revenue Agent’s Report to a Stranger (Procedurally Taxing). “If you feel the IRS got off too lightly, the remedy may lie in stronger legislation.” They did.
Meg Wiehe, State Rundown 4/5: Focus on Major Tax Bills Intensifies. “This week in state tax news we saw a destructive tax cut effort defeated in Georgia, a state shutdown avoided in New York, and lawmakers hone in on major tax debates in Massachusetts, Nebraska, South Carolina, and West Virginia.”
Morgan Scarboro, How Well Funded Are Pension Plans in Your State? (Tax Policy Blog):
That Iowa, with $5.6 billion in unfunded public pension liabilities, is 13th best tells how bad the public pension funding problem is.
Roberton Williams, What’s Happened to the ACA Penalty Tax? (TaxVox). “The real question is whether the IRS will actually enforce the penalty. The ACA limits the agency’s ability to collect the tax—it can only take payments out of tax refunds of people who don’t voluntarily comply.”
Robert Wood, 91% Of IRS Seizures For ‘Structuring’ Involve Lawful Taxpayers. “One of the reasons why legal source cases were pursued, according to the report, was that the Department of Justice had encouraged task forces to engage in ‘quick hits.'”
Roger McEowen, Ag Tax Policy The Focus in D.C. “Yesterday the U.S. House Committee on Agriculture Heard Testimony concerning the impact of the tax code on the agricultural industry.”
TaxGrrrl, Taxes From A To Z (2017): P Is For Pease Limitations. “What the Pease limitations do, effectively, is reduce the total amount of deductions you can claim on your return.” But they actually work like a hidden higher tax bracket. Claiming fewer deductions rarely reduces the Pease tax increase.
TaxProf, TIGTA:91% Of Taxpayers Whose Bank Account Assets Were Seized By IRS Had Acquired Their Funds Legally:
The IRS pursued hundreds of cases from 2012 to 2015 on suspicion of structuring, but with no indications of connections to any criminal activity. Simply depositing cash in sums of less than $10,000 was all that it took to arouse agents’ suspicions, leading to the eventual seizure and forfeiture of millions of dollars in cash from people not otherwise suspected of criminal activity.
Remember this next time local law enforcement officials say that civil asset forfeiture is all about going after criminals.
Friday, April 7, 2017
Career Corner. Everyone Suffering from Busy Season Depression: Grab Some Bubble Wrap, Stat. (Caleb Newquist, Going Concern).
Des Moines Register, Aetna to stop selling Iowans individual health insurance plans:
Many of Aetna’s individual Iowa customers were originally on plans sold by the carrier Coventry, which Aetna bought in 2013. The Aetna and Wellmark decisions to leave the individual-insurance market here don’t affect other kinds of insurance plans, such as those sold via employers or those that supplement Medicare plans.
This leaves only one carrier, Medica, in most Iowa counties:
Medica has declined to say if it intends to continue selling such policies here for 2018. “We are currently evaluating the situation and our options,” spokesman Greg Bury said Thursday.
Not very reassuring. This affects plans being sold for 2018. If no policies are offered, we can expect the IRS to waive penalties for not having coverage, assuming the ACA survives.
Jared Walczak, Getting West Virginia Tax Reform Across the Goal Line (Tax Policy Blog). The efforts in West Virginia give a hint at what the process will look like if Iowa makes a serious tax reform push next year.
Jim Maule, So Would YOU Do Any of These Things to Avoid Paying Taxes? “Almost one-third of the respondents would be willing to perform five karaoke songs for their company, an action that the survey’s headline writers tagged as an ’embarrassing stunt.'” I would have no problem with singing karaoke, except for that annoying restraining order.
Kay Bell, 100,000 taxpayer accounts possibly exposed in student aid online tool security breach. “In addition to the overall 100,000 potentially hacked taxpayer accounts connected to the FAFSA tax data, around 8,000 fraudulent refunds actually made it through the IRS processing system.”
Keith Fogg, Seeking Disclosure of Return Information in Tax Court Case (Procedurally Taxing):
This is a big deal for taxpayers who need information from the IRS in order to defend themselves in a tax matter. The decision here will not open the IRS records in every case but it does provide a model for seeking information in Tax Court cases. Because the Tax Court had not previously addressed this issue, it did so here through court conference.
This addresses the Mescalero Apache case we discussed yesterday. It could be a big deal.
Lew Taishoff, TOGETHERNESS. “Where togetherness is, there be dragons.”
Paul Neiffer, CLA Testifies at House Ag Committee. “My colleague Chris Hesse was invited to speak in front of the House Ag Committee yesterday and here is his update from the session.”
Peter Reilly, Florida Man Goes From Multilevel Marketing To Cryptocurrency – What Could Possibly Go Wrong? “We’ll see if the whole enterprise lasts long enough for taxes to be a problem. I do have my doubts.”
Richard Phillips, Two New Bills Would Plug Major Loopholes in Our Offshore Corporate Tax System (Tax Justice Blog). Or make it even worse.
Russ Fox breaks his filing season hiatus with his “Bozo Tax Tips” series. #6 features one of my favorites, Rashia the Facebook Queen of ID theft. Bozo Tax Tips #6: Publicize Your Tax Crimes on Social Media!
TaxGrrrl, Taxes From A To Z (2017): Q Is For Quid Pro Quo. It’s not charity if you’re really buying something.
TaxProf, NY Times: 100,000 Taxpayers Compromised In Hack Of FAFSA Tool At IRS. Good thing Commissioner Koskinen is still on the job.