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Employment Tax Audit — Independent Contractor VS Employee
Yesterday I attended the live broadcast of a legal education program put on by the American Bar Association discussing the IRS Employment Tax National Research Project. As part of this project, the IRS intends to audit 6,000 businesses, both small and large, per year between 2010 and 2013. Part of what the IRS will be examining in these audits is the classification of employees; namely, whether they are classified as employees or independent contractors. If the IRS determines that a business is misclassifying an employee, tax liabilities and penalties can be severe.
To avoid controversy, an employer must take the steps to determine whether their workers fall into the category of an independent contractor or an employee. This process is often very complex and involves analysis of work procedures and corporate organization, along with examination of banking records and other criteria. While such a distinction is often case-specific, the general guideline is that a worker is considered an employee if the employer has the right to control the worker regarding what job is performed and how it is performed. Whether this right is exercised is irrelevant.
If you operate under the assumption that you are working with independent contractors rather than employees, and therefore do not have to withhold federal income and payroll taxes, it is important to remember to send a Form 1099 for the contractor to file. If the IRS does audit your business and determines that you are working with employees rather than independent contractors, filing Form 1099s could mean your company is entitled to the statutory safe harbor provided by section 530 of the Revenue Act of 1978.
Now that the IRS is enacting its Employment Tax National Research Project, it is more important than ever to make sure your company is up to date with the filing status of its workers. Failure to remain up to date with stricter IRS policy could result in tax liabilities.
If you are notified of an IRS audit or you want to discuss your employment practices, please don’t hesitate to contact me for further information:
Bill Lowrance, (703) 506-1600, lowrancelaw@gmail.com
Spouse Not Report Income — Innocent Spouse Relief
There are of course benefits to filing a joint tax return with your spouse: eligibility for tax deductions and lower tax rates come to mind. However, there can be severe repercussions that come from filing jointly, and those occur when items are improperly reported on or when income is even omitted from the tax return. If the IRS determines there are erroneous items in your return, such as unreported income or incorrect deductions, and you and your spouse have filed jointly, then both of you will be held responsible for the liabilities.
However, situations arise where one spouse may not have known about the erroneous items, or may have been coerced into signing for them. To combat such situations, the IRS created Innocent Spouse Relief. Provided you meet the qualifications, Innocent Spouse Relief allows you to be relieved of the consequences arising from a fraudulent return.
Qualifications:
1. You and your spouse filed jointly
2. On the return, there is an erroneous item that is your spouse’s fault
3. You can prove that when you signed the return, you held no knowledge of the erroneous item
4. The circumstance shows it would be unfair to hold you accountable
On the IRS website there is a tool for determining if you are eligible for Innocent Spouse Relief. It can be found here.
If your spouse has embezzled their income, or attempted to defraud the IRS without your knowledge in any other way, even if you signed a joint tax return together, you can avoid the penalties. Provided you meet the qualifications of Innocent Spouse Relief, by filing Form 8857 you will begin the process of detaching yourself from the liabilities. Keep in mind that the IRS requires this form to be filed within two years after they attempt to collect the tax.
Contact me for more information on your options:
Bill Lowrance. (703) 506-1600. LowranceLaw.com
Still Time To Report UBS — Foreign Bank Accounts
There are many reports in the news media about the latest Swiss efforts to turn over formeraly “secret” Swiss UBS bank account to the IRS. The Boston Globe:
“Swiss lawmakers yesterday ended a standoff and approved the bank’s settlement with the United States, clearing the way for the names to be transmitted to tax authorities as early as this week. Lawyers said Americans who ignored an IRS offer last year to reduce penalties in exchange for voluntary disclosures now are flooding their offices with calls seeking advice on how to avoid possible sanctions that could include prison sentences.” See http://tinyurl.com/24jpfa9.
The Swiss Parliment approved the agreement to allow UBS to turn over thousands of bank accounts held by US citizents. The Washington Post:
“The Swiss parliament approved a deal Thursday to help the Internal Revenue Service obtain the names of Americans with secret accounts at Switzerland’s largest bank.
The approval averted a renewed conflict between the U.S. and Swiss governments over bank secrecy. If the deal had collapsed, Swiss banking giant UBS faced the threat of potentially crippling U.S. legal action.
Instead, the breakthrough paves the way for the Swiss government to turn over the names and account details of as many as 4,450 U.S. clients of UBS suspected of using undeclared accounts to hide income and evade taxes.” See http://tinyurl.com/2akzgc6.
There is still time for you go to the IRS and voluntarily disclose your “secret” bank account. There is a process and my law firm is actively engaged in handling such disclosure to the IRS. Contact me if you want to explore voluntary disclosure to the IRS or you want more information.
Bill Lowrance
703 506 1600
Special Sales Tax Deduction for Car Purchases 2009
The IRS is reminding everyone that there are special, limited deductions for state and local sales and excise taxes paid on the purchase of new cars, light trucks, motor homes and motorcycles. The deduction is available on new vehicles purchased from Feb. 17, 2009, through Dec. 31, 2009. In states that don’t have a sales tax, the law provides a deduction for other taxes or fees paid. This deduction is available whether or not a taxpayer itemizes deductions on Schedule A.
The deduction is limited to the taxes and fees paid on up to $49,500 of the purchase price of an eligible vehicle. The deduction is reduced for joint filers with modified adjusted gross incomes (MAGI) between $250,000 and $260,000 and other taxpayers with MAGI between $125,000 and $135,000. Taxpayers with higher incomes do not qualify. See IRS information at IRS Announcement
Check the IRS Video on You Tube at http://tinyurl.com/ydg9q69
Bill Lowrance
Lowrance Law LLC
No legal opinion here
IRS To Audit Companies — Employment Tax
The IRS will audit 6,000 U.S. companies to determine whether they pay all their required employment taxes to fund Social Security and Medicare benefits. See Bloomberg News
The IRS said the audits will provide data for its first statistical analysis since 1984 of how often companies misclassify workers to duck tax obligations, fail to pay taxes on fringe benefits such as personal use of company cars, and improperly pay taxes for company executives. The audits will begin in February, and the companies will be randomly chosen.
IRS will be looking at employee classificaitons, meaning “Independent Contractor or Employee.” It is simple. Companies owe taxes for an employee–state and federal withholding, FICA, FUTA, Medicare etc. Many companies will carry workers as independent contractors in order to save money and not withhold taxes. Many independent contractors should really be classified as “employees” because they meet the working conditions tests used by IRS to determine a workers status.
If a company is audited and workers are found to be employees instead of independent contractors, past taxes will be owed by the company and the worker.
It is best to get legal counsel as soon as you get notice of an IRS audit.
Bill Lowrance
IRS Announcement Extra Time Offshore Accounts
WASHINGTON ─ The Internal Revenue Service today announced a one-time extension of the deadline for special voluntary disclosures by taxpayers with unreported income from hidden offshore accounts. These taxpayers now have until Oct. 15, 2009. See http://tinyurl.com/mv9oub and NY Times http://tinyurl.com/nleozr
Under special provisions issued in March, taxpayers with these hidden accounts originally had until Sept. 23, 2009 to come forward. Those taxpayers who do not voluntarily disclose their hidden accounts by the new deadline face much harsher civil penalties, where applicable, and possible criminal prosecution.
IRS officials decided to extend this deadline after receiving repeated requests from tax practitioners and attorneys around the country following an influx of taxpayer requests. By extending the deadline for a short period of time, the IRS is providing relief for those taxpayers who had intended to come forward prior to the deadline, but faced logistical and administrative challenges in meeting it. The extension will allow tax preparers and attorneys the necessary time to interview and advise their backlog of taxpayers with these hidden accounts, and prepare the necessary paperwork to qualify for the special penalty provisions.
The IRS also announced that there will be no further extensions.
No legal opinion here.
Bill Lowrance
U.S. and Switzerland To Change Tax Treaty
The U.S. Treasury Department announced on June 19 (see Treasury Press Releases) that Switzerland will agree to more exchange of financial information for tax enforcement purposes. Treasury Secretary Timothy Geithner said the new accord “will increase our ability to enforce our tax laws and will help bring an end to an era of offshore accounts and investments being used for tax evasion.”
Officials said the protocol would revise the existing US-Switzerland income tax treaty to allow for the exchange of information for income tax purposes “to the full extent permitted by Article 26 of the Organization for Economic Co-operation and Development (OECD) Model Income Tax Convention.”
Article 26 of the OECD Model Income Tax Convention is the “exchange of information” clause that most countries use as their “exchange of information” paragraph in International Tax Treaties. The change in the US–Swiss Tax Treaty means that the Switzerland definition of “tax fraud” will not control the information that may be given to the US authorities under the US - Swiss Tax Treaty. In the past, Switzerland would not give information to the US under a tax treaty request unless the information led to “tax fraud” as defined by the Swiss law. “Tax fraud” under Swiss law is very narrow and does not meet the US standard of “tax evasion” that most US tax treaty requests encompass.
Article 26 of the OECD Model Income Tax Convention states:
“The competent authorities of the Contracting States shall exchange such information as is foreseeably relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States, or of their political subdivisions or local authorities, insofar as the taxation thereunder is not contrary to the Convention.”
Now, the question will become, after the US - Swiss change, what if “foreseeably relevant” in the Switzerland’s opinion. This may be a whole new area for litigation in Switzerland and the US for the collection of financial information from Switzerland.
Hey, no tax opinon here.
Bill Lowrance
More Employment Audits–Independent Contractor vs. Employee
The IRS is planning more employment tax audits and examinations over the next three years. A national research project is underway right now and the IRS has announced that it will conduct detailed employment tax examinations of certain taxpayers. The selection process for taxpayers has begun and the program will last for three years.
The IRS estimates there will be over 3000 examinations and audits. Although the IRS may look at any line on an employment tax return during the examination, it will primarily focus on the following issues: (1) worker classification (employee vs. independent contractor), (2) fringe benefits, (3) officer’s compensation, and (4) reimbursed expenses.
Often the IRS will receive Form SS 8 from a worker who wants a determination of whether he/she is an independent contractor or employee. The IRS will collect information from the worker and from the company involved. The IRS will either conduct a compliance check, make a determination based on the information collected or conduct a detailed employment tax examinations. If the IRS determines the worker is and was an employee, there are serious tax implications for the employer. It could be costly for the employer in terms of back taxes.
There are several ways to challenge the IRS’ decision about whether the worker is an independent contractor or an employee. It is best to consult a tax professional if you have been contacted about an employment tax matter.
Bill Lowrance
Lowrance Law LLC
McLean, VA
703 506 1600
What’s Hot — IRS Hiring Hundreds of Revenue Agents
Okay. Get ready. The IRS is gearing up and has announced jobs for hundreds of critical jobs nationwide. Most of these jobs are for internal revenue agent positions (look for series number 0512). At least 30 hours of college-level accounting coursework is required for revenue agent jobs.
What does this mean? IRS will hire revenue agents to conduct audits and examinations. There will be more tax enforcement. It takes about a year for the IRS to hire and train a revenue agent before the agents start with tax audits. The future?
Read it all at Here
Bill Lowrance
Offshore Accounts–Disclosure to IRS
Here are a couple of the FAQs the IRS published yesterday on its web site regarding offshore accounts:
1. Why did the IRS issue internal guidance regarding offshore activities now?
The IRS has had a voluntary disclosure practice in its Criminal Manual for many years. Once IRS Criminal Investigation has determined preliminary acceptance into the voluntary disclosure program, the case is referred to the civil side of IRS for examination and resolution of taxes and penalties. Recent IRS enforcement efforts in the offshore area have led to an increased number of voluntary disclosures. Additional taxpayers are considering making voluntary disclosures but are reportedly reluctant to come forward because of uncertainty about the amount of their liability for potentially onerous civil penalties. In order to resolve these cases in an organized, coordinated manner and to make exposure to civil penalties more predictable, the IRS has decided to centralize the civil processing of offshore voluntary disclosures and to offer a uniform penalty structure for taxpayers who voluntarily come forward. These steps were taken to ensure thattaxpayers are treated consistently and predictably.
3. Why should I make a voluntary disclosure?
Taxpayers with undisclosed foreign accounts or entities should make a voluntary disclosure because it enables them to become compliant, avoid substantial civil penalties and generally eliminate the risk of criminal prosecution. Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues. Taxpayers who do not submit a voluntary disclosure run the risk of detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties, and an increased risk of criminal prosecution.
Remember the IRS deadline for this voluntary disclosure deal is September 23, 2009.