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Interest-free adjustments for employment taxes.

One of the hottest issues being raised by the IRS is the reclassification of workers as employees. Assessments of back taxes along with interest and penalties can place an overwhelming financial burden on the taxpayer.

Many practitioners are aware of the relief provisions of Section 530 of the Revenue Act of 1978. Under certain circumstances, taxpayers may be relieved from employment tax liability. Even if Section 530 relief is not applicable, there may be another way to reduce the total amount paid to the Service. Sec. 6205(a}(1} and Regs. Sec. 31.6205-1{a1 allow the IRS to assess additional employer and employee FICA and income tax withholding against a taxpayer without interest, if the liability is found to exist after the return for the period giving rise to the liability is flied. The underpayment of tax must be reported to the Service on a return or supplemental return on or before the last day on which the return is required to be filed for the period in which the error was ascertained.

In Rev. Rul. 75-464, the IRS explained when an error was "ascertained." It held that no interest was due when the taxes covered by Sec. 6205 are paid

--promptly following an agreement with the examining officer;

--following an agreement with the IRS Appeals Office, or

--before IRS notice and demand following unsuccessful negotiations with the Appeals Office, even though the payment was made with the intention of filing a claim for refund and litigating the matter.

This provision may save taxpayers a lot of money. However, in order to qualify, a taxpayer must have flied his Form 941 for the period in question on a timely basis. In addition, the taxpayer will have to pay the assessed tax either with the Revenue Agent's Report or on or before the last day of the quarter in which the assessment is agreed to.

This provision does not apply to unemployment taxes. Further, the Service will not allow an interestfree adjustment if the taxpayer's returns for prior years were audited and additional tax was found to be due with respect to the same issue involved in the current audit, or in cases in which the taxpayer knowingly underreported the employment tax liability after having been informed of a worker's employee status.

The interest-free adjustment aspect should be clearly delineated, 512 since not all IRS employees are aware of this entitlement. The revenue agent should be requested to show that the "taxpayer is entitled to an interest-free assessment under Rev. Rul. 75-464" on the face of his report before the taxpayer agrees to the assessment. Also, the Service Centers sometimes issue notices erroneously showing interest due on employment taxes. When this occurs, the Service should be promptly notified of the correct treatment. From Joe Marchbein, CPA, Rubin, Brown, Gornstein & Co., St. Louis, Mo.
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Author:Marchbein, Joe
Publication:The Tax Adviser
Date:Aug 1, 1992
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