Committee and IRS Representative Discuss Worker Classification

By James A. Woehlke, CPA

At the November 17 meeting of the NYSSCPA Relations with the Internal Revenue Service Committee, Martin Abrams, IRS Manhattan district employment tax coordinator, and committee members discussed various worker classification issues and audits.

In his opening comments on the aftermath of the IRS Restructuring and Reform Act of 1998, Abrams stated that the agency does not yet know where the employment tax program will be situated on the new organization chart once the restructuring occurs.

Abrams also reported that the IRS is in the process of redesigning Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding, which may become two pages to simplify its completion.

In describing his responsibilities, Abrams said the IRS focuses on large cases, all "egregious" worker misclassifications, and fringe benefit cases. As an example of an egregious case, he outlined an S corporation officer who took no salary but took substantial dividend distributions from the S corporation.

The committee and Abrams also discussed recent legislative changes affecting Section 530, Relief of the Revenue Act of 1978, a safe harbor provision that permits some workers who would be classified as employees using common law analysis to be treated as employees for all purposes except employment taxes. One change clarifies that a taxpayer may not rely on an examination commenced after December 31, 1996, for purposes of the "prior audit" safe harbor unless the examination is actually an employment tax audit. Abrams also reported that there is a new clarification that the industry practice exception might be satisfied if 25 percent of an industry follows the practice. In addition, Abrams emphasized that IRS policy requires revenue agents to notify a taxpayer of his or her Section 530 rights immediately at the start of an audit.

"Taxpayers have a right to learn their Section 530 rights at the earliest possible point in an employment tax audit," he said.

In response to the committee inquiries on the proper conduct of IRS compliance checks, Abrams explained the two types of checks. The first is the classification settlement program (CSP) agreement compliance check, where an employer executed a closing agreement as part of an IRS examination. These checks are performed by the IRS to verify postexamination compliance; an audit will follow if noncompliance questions arise. Another problematic area with CSP agreement compliance checks occurs when the IRS discovers that reclassified workers are paid through accounts payable to other entities. Abrams pointed out that this is an area the IRS will review closely. The second compliance check is a routine review that the taxpayer has prepared and filed Forms 1099 and W-2.

Other areas that Abrams mentioned the IRS is following include Section 218 (Social Security Act) municipality outreach, and analyzing fringe benefits, company cafeterias, overtime meal allowances, and overtime cabs.