New rules for employee - independent contractor controversies.

Tax Court access for worker classification disputes.

For many years, a central issue in the employer-IRS employment tax controversy was the status of some workers. There were questions about whether particular individuals were employees (in which case employment taxes had to be withheld by the recipient of the workers' services [the service recipient]) or whether they functioned as independent contractors (in which case withholding was not required).

Typically, this analysis depends heavily on the facts of the worker's individual situation and focuses on factors relating to the kind and degree of control the service recipient exercises.

Similarly, such a determination also is an issue when a service recipient qualified under section 530 of the Revenue Act of 1978. Under that provision, if the service recipient satisfied several requirements (basically dealing with consistent and reasonable treatment of workers), it could treat workers as independent contractors and the IRS was prohibited from questioning or reclassifying their status.

Traditionally, the sole means of challenging an IRS worker reclassification was to pay the taxes in question and file a suit for refund in either the district court or the Court of Federal Claims. However, the Taxpayer Relief Act of 1997 included a provision that now allows the Tax Court to review IRS determinations of worker status, thereby giving taxpayers another avenue to pursue. In addition, the Tax Court now has prepayment jurisdiction over such challenges, and the taxpayer may elect to have the case tried under the Tax Court's simplified "small-case" procedures if the amount of employment tax in dispute is $50,000 or less for each calendar quarter involved.

NOTICE 98-43

The IRS recently issued notice 98-43, which addresses some of the issues involved and explains the procedures available under this new alternative.

Tax Court jurisdiction. Under this notice, the Tax Court's jurisdiction is somewhat limited; the court may not decide employment-related issues that do not arise under the employment tax laws. For example, the Tax Court may not consider the classification of workers as employees for pension purposes or the proper treatment of individual deductions. It may decide only worker classification and section 530 issues resulting from an IRS examination and not from other service determinations (such as letter rulings).

Eligible taxpayers. Only the person for whom the services are provided may file for a refund in Tax Court. Thus, neither the individual workers nor an indirectly involved third party may seek Tax Court review of the IRS's determinations.

Determination requirement. For the new provision to apply, the IRS must have made a "determination" about the status of a worker or the applicability of section 530 relief. This word is narrowly defined; a statutory notice disallowing a refund claim will not suffice.

As a prerequisite for seeking Tax Court review, a taxpayer must have received a Notice of Determination from the IRS that informs the taxpayer of the opportunity to seek Tax Court review and provides information on how to do so. Attached to this notice is a schedule, showing each kind of tax asserted to be due and the proposed adjustments by calendar quarter. (Such amounts are intended to enable the taxpayer to determine whether it is eligible to elect the small-case Tax Court procedures.)

Unless (or until) a taxpayer has received a Notice of Determination, the Tax Court may not begin review of the IRS's determinations regarding worker classification issues. Once the service mails out a Notice of Determination to a taxpayer, the taxpayer has 90 days in which to file a Tax Court petition.

For a detailed discussion of this and other recent developments, see the Tax Clinic, edited by Joseph Tapajna, Steven Corrick and William Ciesar, in the November 1998 issue of The Tax Adviser.

Nicholas Fiore, editor The Tax Adviser