IRS heeds CPAs' advice on worker classification.

The Internal Revenue Service said it was considering recommendations made by CPA practitioners as it revised its worker classification training guidelines. Marshall V. Washburn, IRS executive director, specialty taxes, told members attending the American Institute of CPAs spring tax division meeting in Washington, D.C., that his office would likely implement a number of suggestions from practitioners that would make a substantial difference in the way the IRS determines whether an employer-employee relationship exists. The IRS is revising its training guidelines, Revised Internal Revenue Service Worker Classification Training Guide: Employee or Independent Contractor, to improve its handling of worker classification issues.

"We want to assure everybody that we are taking the comments very seriously," said Washburn. Washburn also said the IRS was upgrading its training for service staff on worker classification issues. He said the goal was to have the training complete by the end of the year for all 18,000 revenue agents who deal with such issues.

Treasury Department regulations say an employer-employee relationship generally exists if the person providing the services is subject an employer's will and control about what is to be done and how. The IRS developed a list of 20 factors that may be examined in determining an employer-employee relationship. Many practitioners have criticized the 20-factor test in part because taxpayers attempting to classify workers may in good faith come to a conclusion that is different from the IRS's.

The AICPA sent the IRS recommendations on the training guidelines late in May. In a letter to IRS Commissioner Margaret Richardson, Deborah Walker, tax executive committee chair, said the language in the guide was biased-more often favoring employee over independent contractor status, even when it is the intent of both the employer and the worker that the worker be treated as an independent contractor. She also said the IRS should base its determination on the existence of a contract and on the day-to-day relationship between the employer and the independent contractor rather than 20-factor test. The letter also recommended the IRS delete factors of less importance to prevent ambiguity and confusion for agents trying to apply the training guidelines to the actual situations encountered in taxpayer examinations.

Legislative action this year is not likely

Meanwhile, legislation in both the Senate and the House to remedy to worker classification problems is moving at a very slow pace.

Stanley G. Fendley, tax counsel for the Senate Small Business Committee and staff aid to Senator Dale Bumpers (D-Ark.), told attendees of the Washington tax division meeting he would like to see legislation that would set up a three-pronged test to determine worker classification which was introduced in March by Senator Kit Bond (R-Mo.) and Senator Don Nickles (R-Okla.), to pass as early as this year. However, he said revenue estimates for the bill showed that it would cost the federal government $1.1 billion over a seven-year period. Fendley said the huge revenue loss could be an impediment to the bill's passage.

Fendley is working with Republican members of the Senate Small Business Committee to implement changes to the Bond-Nickles bill. He said the bill defines an independent contractor too broadly and could lead to pressure on lower-skilled employees to sign contracts or lose their jobs.

"If you allow anyone to be classified as an independent contractor, then an employer can put a contract on an employee's desk and say we are hiring only independent contractors from this day forward," said Fendley. He also said he was dissatisfied with some provisions of the bill that would help safeguard independent contractors' Social Security earnings and unemployment insurance.