Legal Thought’s – Episode 3 of Dealing with IRS Exams (Worker Misclassification)

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published August 14, 2023

Attorney introduction:

Welcome to Legal Thoughts! My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation, and immigration law firm based in Dallas, Texas.

In addition to myself, we have Leiliane Godeiro – Litigation Legal Assistant, and our administration staff Ernesto Munoz and Michelle Gutierrez.

On today’s “Legal Thoughts” podcast, our Litigation Legal Assistant, Leiliane Godeiro will be interviewing me in our continuing federal tax series entitled, “ Dealing with the IRS”.  In todays Legal Thoughts podcast the attorney will be talking about misclassification of a workers as an independent contractor when the worker should be classified as an employee of the employer.  This is Episode 3 in our Podcast series entitled Dealing with the IRS.  Here its dealing with the IRS examination division

Interviewer Introduction to the Audience:

Hi everyone, my name is Leiliane Godeiro and I am a Litigation Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas, 75206.

Good afternoon Attorney; thank you for being here with me to today as I interview you in our continuing podcast series entitled; “Dealing with the IRS”.

In this third episode in our law firm’s Legal Thoughts Podcast Dealing with the IRS series,  the focus today will be employer misclassification of workers.

 Attorney, let’s get started.

QUESTION 1: Attorney, please explain, why the classification of a worker is of any concern to the IRS to begin with?

 

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 1

Good afternoon Leiliane;

Definitely for sure the Internal Revenue Service is very much interested in how workers are classified for tax purposes for all the reasons I am going to explain in a few minutes. But let me point out at the outset that how a worker is classified is not simply the concern of the IRS, workers themselves should be very concerned how they are classified; the Texas Work Force Commission also cares about how Texas workers are classified for labor law and tax law purposes; and the U.S. Department of Labor and other federal, state and local governmental agencies are also concerned about how workers are classified for all sought of societal reasons.

Now let me turn to the law that imposes this duty to care about worker classification squarely on the shoulders of the Internal Revenue Service which is the federal agency tasked with the responsibility to enforce the nations federal tax laws.

In this particular podcast; we are limiting our discussion of worker classification to federal tax matters. So, let me answer your question from – why should the IRS care about worker classification?

First, United States Code Chapter 26 gives the United States Treasury and the Internal Revenue Service which is the enforcing agency of the Treasury to oversee the application of the United States federal tax statutes.  26 U.S.C. is commonly referred to as the Internal Revenue Code.

Second, the Internal Revenue Service (the IRS) is the agency tasks with enforcing the Internal Revenue Code.

Third, the Internal Revenue Code, courts and the IRS has established rules for determining whether a worker is classified as an employee, a statutory employee, statutory nonemployee or independent contractor.

Fourth, there are significant tax consequences of worker classification for those who hired the worker and for the worker as well.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

Interviewer Comment:  Attorney, this sounds like it could be complicated!

QUESTION 2: Attorney can you explain in clear language what these different classifications of worker mean?

 

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 2

Okay let me try to explain these terms:

First, the term employee is the common law 20 factor test characteristics established by the United States Supreme Court in a case decided around 1954. This is a common law test that contain 20 keep factors devised by the Court basically turns on the degree of control the employer of that particular worker has over the means, method, and results of the workers activities. The Texas Labor Code uses this same type of language when defining the term ‘employee’.  Workers performing under this degree of control ( or right of control by the person who hires them) are called  “Common Law Employee”. Most people refer to the ‘common law employee’ as simply ‘employee’.

Second, the term Independent Contractor applies to workers in the first category who do not meet the definition of common law employee. Independent Contractors excise control and independents not only over their results, but, their methods and means of carrying out their task. Independent Contractors  can experience monetary loss as the results of their work; whereas, employees typically receive their same salary or compensation whether the project or assignment generates a profit or loss.

Third, the term Statutory Employee is created by and defined in 26 USC (IRC Section 31201(d(3)) as workers performing services in four principal occupational areas: (a) certain drivers who distribute certain beverages, food-products and other goods or products, (b) workers from their home who are like fabricators, (c) traveling sales people who distribute merchandise for resale, and (d) life insurance sales persons.

Fourth, Statutory Non-Employees is created by and defined in 26 USC (IRC Sections 3506 and 3508) as certain real estate agents, direct sellers and certain placement service workers.

I left out some of the complexities of these Internal Revenue Code Sections.  The most important thing for our audience to know is that statutory workers are “employees”.  They are not independent contractors.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

Interviewer Comment: That sure came through loud and clear.  The main thing is whether the worker is properly classified as an independent contractor or whether they should be classified as an employee.  That much you have made clear! Now that you have made what these worker classifications mean is clear to us

QUESTION 3: What are the significant tax consequences of all this worker classification stuff?

 

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER– QUESTION 3

The tax consequences to the various worker classifications that we have been discussing are these—

First, those who hire a ‘common law employee’ are required under the Internal Revenue Code to withhold federal income taxes, withhold federal insurance contributions act taxes and pay federal unemployment taxes on wages and compensation paid to an employee. Employers must give employees Form W-2, they must send W-2 to the Social Security Administration.  Employers are also required to compete Form I-9 on every employee and maintain I-9 files on each employee hired within days of the new hire.  Employers are also required to file quarterly returns to the IRS (Form 941) and annual reports as well (Form 940).

As for reporting requirements and filing requires, there is no distinction between a worker classified as a common law employee and those classified as statutory employee.

Second point I like to make is this one. Those who hire independent contractors are not typically required to make any withholdings from the workers pay check. But there can be instances where federal withholding laws impose a duty on the payor to withhold certain percentages from the payees pay check.  But there is never a fica or futa tax withholding or payment requirement on the payor of an independent contractor.  Independent Contractor compensation is typically reported on Forms 1099- Miscellaneous and 1099-NEC as appropriate depending upon the reason for the payment.  No reports are sent to the Social Security Administration on payments to independent contractors.  The only report filed with the IRS by those who employ an independent contractor is the Forms 1099 just mentioned.

Finally, as for those workers who are precluded from being classified as employees under the Internal Revenue Code Sections that I mentioned earlier, the reporting for statutory non-employees must be handled very similar to those of the independent contractor, which I will explain in detail next. No withholding requirements apply under normal situations; but, remember under some circumstances up to 30% mandatory withhold rules apply to payments to certain types of individuals under the United States tax law. Those who hire statutory non-employee workers are required to give them Forms 1099- Miscellaneous and 1099-NEC as appropriate and file appropriate copies with the IRS.

Keep in mind, I have left out all of the requirements imposed by State Law on those who hire workers. I left any discussion of this out because this podcast is limited to federal tax requirements and consequences for misclassification of workers.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

Interviewee’s Comment:  Absolutely attorney; this is only about federal tax law; but, if anyone in our audience want to hear a podcast about Texas tax laws as to how they apply to employers, employees or independent contractors, feel free to write us, call us or email us your request.

QUESTION 4:
Attorney to wrap this up.  My fourth question is this:  What happens if IRS exam determines that a worker is  misclassified?  I mean is anyone in big trouble?

 

Interviewee: Coleman Jackson, Lawyer

ATTORNEY ANSWER – QUESTION 4

Not necessarily. It just depends upon why the worker is misclassified. It will mater whether it is by mistake or whether the workers are misclassified intentionally.  There are things the employer can do to correct the situation; and, in fact there are things a worker can do to find out whether they are properly classified.  Let me start first with things a worker can do:

The worker can file IRS form SS-8 with the Internal Revenue Service to ask for a determination based on the facts and circumstances of their employment.

Now as for those who hired the worker; the IRS has several voluntary disclosure programs for employers who may have misclassified their workers. These programs can be used even while under audit examination:

1. The Voluntary Classification Settlement Program (VCSP) permits qualifying taxpayers to reclassify workers as employees for employment tax purposes and receive a reduced penalty. The VCSP has strict guidelines as to who can qualify to use this amnesty type program;

2. The second relief valve for employers who misclassified workers as independent contractors when they are not, is referred to as the Section 530 relief program. This program under created under the Revenue Act of 1978 can be relied on by taxpayers even while under IRS examination.

3. The IRS also have other tax position disclosure programs that might work in this misclassification of worker space.

4. Any employer who is not sure how there workers should be classified can ask the IRS by filing an SS-8.

INTERVIEWER WRAP-UP: Leiliane Godeiro, Litigation Legal Assistant

Attorney, thank you for being here today with us, this information about dealing with an IRS when worker classification is a problem. Hopefully our audience finds it informative and helps them to know their rights as taxpayers; know how to protect their rights in the unfortunate event that they or their business has an IRS examination involving misclassification of their work force as independent contractors when they ought to be classified as employees. Likewise workers who are misclassified also suffer from this misclassification whether it was done intentionally or by accident, Attorney.

Our listeners who want to hear more podcasts like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, contracts, litigation and immigration Legal Thoughts from Coleman Jackson, Professional Corporation, located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers: 214-599-0431 | Spanish callers: 214-599-0432 |Portuguese callers: 214-272-3100

 

ATTORNEY’S CLOSING REMARKS:

This is the end of “LEGAL THOUGHTS” for now

Thank you for giving us your valuable time this morning and listening to our law firm’s Legal Thoughts Podcast. This has been the first episode in our new podcast series entitled dealing with the IRS. Hope you enjoyed Episode Three: “ Dealing with an IRS Exam regarding misclassification of workers”.

If you want to see or hear more taxation, contracts, litigation, and immigration LEGAL THOUGHTS from Coleman Jackson, Professional Corporation. Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify, or wherever you listen to your podcast.

Stay tuned! We are here in Dallas, Texas, and want to inform, educate and encourage our communities on topics dealing with taxation, litigation, and immigration. Until next time, take care.

Legal Thought’s – Episode 2 of Dealing with IRS Liens

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published July 31, 2023

Attorney introduction: Welcome to Legal Thoughts! My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation, and immigration law firm based in Dallas, Texas.

In addition to myself, we have Leiliane Godeiro – Litigation Legal Assistant, and our administration staff Ernesto Munoz and Michelle Gutierrez.

On today’s “Legal Thoughts” podcast, our Litigation Legal Assistant, Leiliane Godeiro will be interviewing me in our continuing federal tax series entitled, “ Dealing with the IRS”. In todays Legal Thoughts podcast the attorney will be talking about IRS liens and the taxpayers’ options in dealing with them. This is Episode 2: “Dealing with IRS Liens”.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

Hi everyone, my name is Leiliane Godeiro and I am a Litigation Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas, 75206.

Good afternoon Attorney; thank you for being here with me to today as I interview you in our continuing podcast series entitled; “Dealing with the IRS”.

In this second episode in this Legal Thoughts Podcast series,  our topic today is  “Dealing with IRS Liens”.

Attorney, let’s get started.

QUESTION 1: Attorney, please explain, what is an IRS lien?

ATTORNEY ANSWER – QUESTION 1:

Good afternoon Leiliane;

The Federal Tax Line Act of that was enacted into law in 1966 created Internal Revenue Code Sections 6321 through 6326. These sections 26 United States Code, provides that “if any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, additions to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.”

Leiliane, what all this means in plain English is that the following facts have been established:

1.The IRS has made a tax assessment against the taxpayer (tax assessment simply means the IRS has put on the taxpayers’ tax account that the taxpayer owes the United States government due to taxable income tax, gift tax, estate tax or some other form of lawful taxes, penalties or interest; and

2.The IRS has followed all lawful procedures and notified you that you owe the outstanding taxes, penalties and interest; and

3.You the taxpayer has ignored the IRS notices to you or you otherwise has not made arrangements to satisfy the outstanding tax debt.

Note that the lien is created as a matter of law; if the above facts one through three are true, there is a tax lien created against you (the taxpayer) in favor of the United States government.  The lien creation does not require any court involvement or any further actions by you, the IRS or anyone else.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

Interviewee Comment:  Attorney what a IRS tax lien is now absolutely clear to me now!

QUESTION 2: Now that the IRS has a tax lien against the taxpayer, what now?

ATTORNEY ANSWER – QUESTION 2

Well it means that the IRS tax lien attaches to all of the delinquent taxpayer’s real and personal property regardless of where it is located. Now this IRS tax lien attaches to the delinquent taxpayers property that is in existence on the date of the lien as well as any property in the future that the taxpayer has a legal interest in directly on indirectly. For example, putting property in a trust is ineffective in defeating an IRS lien because the lien attaches to all property that the delinquent taxpayer has any beneficiary interest in as well as any real and personal property acquired during the existence of the lien that the taxpayer has legal title.  The IRS tax lien is not defeated at death of the delinquent taxpayer either because the lien attaches to the decedent’s property both real property and personal property owned by the delinquent taxpayer.

The legal term “attaches” simply means that the IRS lien by law connects to the taxpayers property like glue to two pieces of paper; they are glued together and you cannot separate the two.

And Leliane, these are not all the ramifications for the delinquent taxpayer; there are potentially broad family and financial consequences as well resulting from the IRS tax lien.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

QUESTION 3: Attorney, what are some of those other ramifications of have an IRS tax lien?

ATTORNEY ANSWER – QUESTION 3

Okay; the ramifications are very expansive. The two pieces of paper glued together tend to tell the story regarding the reach and strength of a IRS lien. Take for example these ramifications or effects of the tax lien on the delinquent taxpayer:

Credit – most people from time to time want to access a credit instrument to buy real estate, buy a car, investment in equipment, and all other kinds of activities that require money and the delinquent taxpayer cannot pay for in full with cash;

Employment – most people from time to time want to work or be employed to earn a living for themselves and their families. Employers may not want to hire someone who, perhaps, cannot handle their financial affairs in responsible way;

Family relations– most people from time to time want to be in a steady, stable and supportive family. Family members and potential family members could be reluctant to enter into or maintain relations under the stressful situation of dealing with bill collectors and the threat of financial ruin;

Responsible leadership positions– in their church, in their community, in their local, state and federal government. Some people will see the delinquent taxpayer as possibly irresponsible and dishonest.

Travel Restrictions— when a delinquent taxpayer owes more than $50,000, the IRS has the authority in U.S. tax law to refer the delinquent taxpayer to the U.S. Department of State for the purpose of restricting their U.S. passport or revoking it all together. This would not impact domestic travel; but, it most certainly will hinder travel to most international destinations which require valid passports to travel into the country.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

Interviewee’s Comment: I can see how all those negative consequences to occur when a taxpayer is under an IRS tax lien.

QUESTION 4: Attorney is there any possible way to legally get rid of an IRS tax lien?

ATTORNEY ANSWER – QUESTION 4

• Yes, indeed. There are several possible ways to get rid of an IRS lien:
• First of all you need to test the validity of the lien to begin with; and
• Assuming the lien is valid, consider getting rid of the lien by

1.Borrowing the money or earning the money to pay the tax debt in full.  You need to first check with the IRS Lien Operations to get the lien pay off balance.  Now this balance likely to be higher than any recent correspondence that you might have received from the IRS or any annual statements that you might have received from them;

2.Second, you can send an official request to the IRS to release or discharge the lien on certain pieces of property, to say, facilitate a real estate sells transaction.  This lien discharge procedure typically agreed to by the IRS to collect part or all of the outstanding debt from the real property transfer or sale.  The IRS tax is typically paid out of the escrow from the real property transaction;

3.Third, you can request that the IRS to withdraw the lien when the ten year statute of collection has expired;

4.Fourth, you can in some circumstances seek a release of the lien upon agreeing to an installment agreement with the IRS for monthly payments of the outstanding tax debt.

INTERVIEWER WRAP-UP: Leiliane Godeiro, Litigation Legal Assistant

Attorney, thank you for being here today with us, this information about dealing with an IRS lien. Hopefully our audience finds it informative and helps them to know their rights as taxpayers; know how to protect their rights in the unfortunate event that they or their business has an IRS tax lien; and hopefully our audience knows now how to preserve their legal rights under the federal tax code if they are unfortunately have a tax lien on their attached to their real and personal property.

Our listeners who want to hear more podcasts like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, contracts, litigation and immigration Legal Thoughts from Coleman Jackson, Professional Corporation, located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers: 214-599-0431 | Spanish callers: 214-599-0432 |Portuguese callers: 214-272-3100

ATTORNEY’S CLOSING REMARKS

This is the end of “LEGAL THOUGHTS” for now.

Thank you for giving us your valuable time this morning and listening to our law firm’s Legal Thought Podcast. This has been the first episode in our new podcast series entitled dealing with the IRS. Hope you enjoyed Episode One: “ Dealing with an IRS Lien”.

If you want to see or hear more taxation, contracts, litigation, and immigration LEGAL THOUGHTS from Coleman Jackson, Professional Corporation. Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify, or wherever you listen to your podcast.

Stay tuned! We are here in Dallas, Texas, and want to inform, educate and encourage our communities on topics dealing with taxation, litigation, and immigration. Until next time, take care.

Legal Thought’s – Episode 1 of Dealing with IRS Penalties

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published July 17, 2023

 

Attorney introduction: Welcome to Legal Thoughts! My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation, and immigration law firm based in Dallas, Texas.

In addition to myself, we have Leiliane Godeiro – Litigation Legal Assistant, and our administration staff Ernesto Munoz and Michelle Gutierrez.

On today’s “Legal Thoughts” podcast, our Litigation Legal Assistant, Leiliane Godeiro will be interviewing me in our federal tax series entitled, “ Dealing with the IRS”. In todays Legal Thoughts podcast the attorney will be talking about IRS penalties and the taxpayers’ options in dealing with them. This is Episode 1: “Dealing with IRS Penalties”.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

Hi everyone, my name is Leiliane Godeiro and I am a Litigation Legal Assistant at the tax, litigation, and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good Morning Attorney; thank you for being here with me today as I interview you in our brand new federal tax series, “Dealing with the IRS”.

In this first episode in this new Legal Thoughts Podcast series,  our topic is “Dealing with IRS Penalties”.

Attorney, let’s get started.

Question 1: Why does the IRS charge penalties?

Attorney Answer – Question 1:

Leiliane; the federal tax code which is codified in 26 United States Code gives the Department of the United States Treasury the authority and mandate to administer and enforce the countries federal tax laws. The agency within the Department of United States Treasury with specific responsibility to maintain the integrity of the federal tax system and ensure compliance with federal tax laws and consistent treatment of taxpayers under the tax code is the Internal Revenue Service, (the, IRS).

So the broad answer to your question as to why the IRS imposes penalties for violations or noncompliance with the Internal Revenue Code is that the IRS is carrying out its function to protect the integrity of the federal tax system and ensure voluntary compliance with the federal tax laws. These IRS penalties are imposed on violators of the federal tax laws..

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

Interviewee Comment:  Oh, I see.

QUESTION 2: What kind of penalties does the IRS impose for violation of the Internal Revenue Code?

ATTORNEY ANSWER – QUESTION 2:

That question is broad; for sure, because the IRS imposes penalties for all kinds of violations of the Internal Revenue Code. Let me just mention a few broad areas and behaviors that could trigger IRS penalties:

1.Filing related penalties can be imposed by the IRS when a taxpayer has a duty to file a tax return and files it late or not at all.  These filing related penalties can be imposed by the IRS on all kinds or taxpayers for all manner of filing violations.

2.Accuracy related penalties ranges from taxpayers’ negligent mistakes and errors,  to their reckless and frivolous tax positions all the way to willful understatement of assets, overvaluations of assets, over and under statement of liabilities and erroneous equity position valuations.  These accuracy related penalties can be assessed against individuals, businesses, trusts, estates, and other entities.

3.Preparer liability related penalties are assessed by the IRS on professional tax return preparers  for failure to  comply with various due diligence requirements, or on return preparers who advise their tax clients to take frivolous tax positions, or reckless positions or tax positions on their returns that are simply not unfounded in law tax or facts.

The story that I am attempting to tell here is that there are all kinds of reasons and all kinds of individuals, businesses, entities who might be assessed IRS penalties for all kinds of tax violations.  Also their tax preparers likewise are subject to certain types of IRS penalties.  The IRS penalties are assessed to encourage compliance with federal tax laws.  Human beings are curious and ingenious in coming up with new ways and even schemes to avoid what they don’t want to do.  Probably not too many people like paying taxes… so penalties are assessed to help the curious, ingenious and schemer alike to comply with federal law.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

QUESTION 3: Attorney, what is the amount of money we are talking about in terms of IRS penalties?

Attorney Answer – Question 3:

IRS penalties can vary depending upon the type of tax violation. These penalties can be very substantial and they often continue to run until the underlying tax violation has been resolved. So that is the general answer to the question you asked.  Violators simply need to know that tax penalties in some instances can exceed the amount of the tax liability owed to begin with.

But let me deal with your question more specifically by naming a few IRS penalty rates:

1.Filing-Related Penalties Rates range all over the place depending upon the type of tax return involved; on your typical return, such as, the Form 1040, Form 1120, and Form 1065 the failure to file penalty begins at 20% of the net-amount due on the date the return was due not including any extensions of filing

2.Accuracy-Related Penalty Rates ranges from 5% to 20% based on the net-tax amount on the return due date not including any extensions of filing.  The quantum of the penalty is determined numerous factors that I am not going to go into right now.  In some instances, such as substantial valuation overstatements the penalty is 30% of the tax that should have been paid had the correct valuation or basis been used to begin with.  I am intentionally leaving out the specific Internal Revenue Code sections because it would be really getting into the weeds of federal tax law; and most of our podcast audience are not tax practitioners.  We don’t want to unnecessarily bombard them with tax law.  Just know, tax law is complex.

3.Information Reporting Penalties are imposed on employers for various violations for information reporting requirements in the tax code involving Form W-2, Form 1099, and so forth and can range from $50 per return if corrected within 30 days of the due date or $250 per return if its not corrected in 30 days.  Employers should know that information return penalties hand be brutal.

4.Penalties imposed on tax return preparers can range from $250 per return on returns taking unsustainable legal positions to the penalty regime designed to encourage tax return preparers to perform proper due diligence before taking certain tax positions, such as, earned income credit, head of household, and like tax positions.  The Code has imposed more-and-more due diligence requirements on return preparers over the years designed to encourage preparers to know the taxpayers for whom they prepare returns.

This is just the surface.  Like I said earlier I do not want to overwhelm our lay podcast audience by going too deep into the tax weeds.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

Question 4: How long does the IRS have to charge a taxpayer these penalties you’ve been talking about Attorney?

Attorney Answer – Question 4:

Okay, Let me see whether I can keep this simple and straight forward:

1.If a taxpayer has a legal obligation under the Internal Revenue Code to file a tax return for a particular tax period but never filed the return, the IRS has forever to charge any applicable tax penalties, such as, failure to file penalties, accuracy penalties and any other penalties that can be lawfully charged based on the facts and circumstances.  Also the IRS has forever to audit the return and make tax adjustments and assessments.  This is so because the ‘three year statute of assessment’ never begins to run until the tax return is filed with the IRS.

2.If a taxpayer has a duty under the Internal Revenue Code to file a tax return and does file the return on or before the returns due date, the IRS has three years after the return was filed or its due date to assess any of the penalties that I previously mentioned.

3.Now let’s say the tax return was filed late.  With respect to late returns the IRS can assess the penalties beginning one day after the return is actually filed.

4.Keep in mind certain things that the taxpayer does and does not do can impact these assessment dates; such as, filing of an amended return and agreeing with an IRS representative to extend the statute of limitations for assessing penalties, interest and additional tax.  IRS examination of returns within this statute of limitation period can also impact the assessment of penalties, interest and tax.

INTERVIEWER: Leiliane Godeiro, Litigation Legal Assistant

Interviewee Comment: Attorney, I have one final question regarding this very interest topic: dealing with IRS penalties.

Question 5: What can a taxpayer do to minimize or get rid of IRS penalties?

Attorney Answer – Question 5:

If the penalty is resulting from an IRS audit examination, the taxpayer can ask for a hearing with the field examiner’s supervisor and if that fails to resolve the issues, the taxpayer can seek an audit redetermination where the penalty can be addressed or the taxpayer can seek redress in the IRS Independent Office of Appeals.

Taxpayers can seek penalty relief from an IRS penalty assessment by filing a Penalty Abatement or Refund Request with the field office where the return was filed and go to the IRS Independent Office of Appeals in the event the taxpayer is still unsatisfied with the results.

The taxpayer also have the right to file a petition with the United States Tax Court. It is very important that the tax court petition be timely filed. The taxpayer has 90 days from receipt of the IRS additional tax assessment, penalties and interest to file a complaint with the U.S. Tax Court without having to first pay the tax assessment.

I have summarized briefly the taxpayers options. It is more complex and taxpayers with these types of additional tax, penalty and interest assessments should contact legal counsel immediately upon receipt of any correspondence from the IRS or IRS examinations. For to protect and preserve your rights under the Internal Revenue Code, taxpayers must know their legal rights.

In all of the remedies that might be available to the taxpayer in penalty relief cases; the taxpayer must have acted reasonably and have ‘reasonable cause’ defense. Evidence must be gathered and marshaled to make reasonable cause defense arguments. Relief from IRS additional taxes resulting from examination, penalty and interest assessments cannot be based on thin-air, or groundless arguments; but, based in federal tax law and facts.

INTERVIEWER Wrap-up: Leiliane Godeiro, Litigation Legal Assistant

Attorney, thank you for being here today with us, this information about dealing with the IRS penalty. Hopefully our audience finds it informative and helps them to know their rights as taxpayers; know how to protect their rights in the unfortunate event that they are being examined by the IRS; and hopefully our audience knows now how to preserve their legal rights under the federal tax code if they are unfortunately hit with a IRS tax penalty.

Our listeners who want to hear more podcasts like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Everybody take care! And come back in about two weeks, for more taxation, contracts, litigation and immigration Legal Thoughts from Coleman Jackson, Professional Corporation, located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers: 214-599-0431 | Spanish callers: 214-599-0432 |Portuguese callers: 214-272-3100

Attorney Conclusion:

This is the end of “LEGAL THOUGHTS” for now.

Thank you for giving us your valuable time this afternoon and listening to our law firm’s Legal Thoughts Podcast. This has been the first episode in our new podcast series entitled dealing with the IRS. Hope you enjoyed Episode One: “ Dealing with IRS Penalties”.

If you want to see or hear more taxation, contracts, litigation, and immigration LEGAL THOUGHTS from Coleman Jackson, Professional Corporation. Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify, or wherever you listen to your podcast.

Stay tuned! We are here in Dallas, Texas, and want to inform, educate and encourage our communities on topics dealing with taxation, litigation, and immigration. Until next time, take care.

The Worker:  Employee or Independent Contractor?

Why does it matter legally how workers are classified?

By Coleman Jackson, Attorney, and CPA.

Date: June 14, 2023.

Are your workers employees or independent contractors?    Why does it matter legally how workers are classified?

How should you make the determination as to whether a worker is classified as an employee or as an independent contractor?

How does the Internal Revenue Service make the determination?  How does the Texas Workforce make the determination for employment tax purposes?

Typically, when Internal Revenue Service auditors examine a business for the purpose of determining worker classification, the Service will generally follow the United States Supreme Court’s 1947 decision in a case called, United States vs. Silk.

In the Silk case, the United States Supreme Court said that whether a worker is properly classified as an employee or independent contractor turns on all the facts and circumstances. The Court delineated 20 factors, which if a majority of the factors can be answered yes, then the Internal Revenue Service will more likely than not classify the worker as an employee. These 20 factors are as follows:

1. Is the worker required to comply with instructions about when, where, and how the work is to be done?
2. Is the worker provided training that would enable them to perform the job in a particular way?
3. Must the worker perform the services personally?
4. Is there a continuing relationship between the worker and the entity that hired the worker?
5. Are the services provided by the worker an integral part of the business’ operations?
6. Does the entity hire, supervise or pay assistants to help the worker on the job?
7. Does the recipient of the worker’s services set the work schedules?
8. Is the worker required to devote his or her full time to the person for whom he or she performs services?
9. Are the services performed at the place of business of the entity or at specific places designated by the business?
10. Does the recipient of the services direct the sequence in which the work must be done?
11. Is the method of payment hourly, weekly, or monthly as opposed to commission or by the job?
12. Are business and/or traveling expenses reimbursed by the business to the worker?
13. Are regular oral or written reports required to be submitted by the worker?
14. Does the company furnish computers, work tools, and supplies used by the worker?
15. Has the worker failed to invest in equipment or facilities used to provide services?
16. Does the arrangement put the worker in the position of realizing either a loss or profit on the work?
17. Does the worker perform services exclusively for the entity rather than working for various other entities at the same time?
18. Does the worker make the worker’s services available to the general public?
19. Is the worker subject to dismissal for reasons other than nonperformance of contract specifications?
20. Can the worker terminate the relationship without incurring liability for failure to complete the assigned job?

 Why does it matter how a worker is classified?

1. The cost of misclassification of workers can be tremendous.
2. First and foremost, your employees could be erroneously carrying the burden of self-employment taxes.
3. Misclassification of your workers means that you (the employer) are not paying your fair share of taxes and that may subject you to back taxes, interest, and penalties. The Service wants the taxes to be paid by the proper party.  Noncompliant entities could be eligible for certain safe-harbor provisions of the Internal Revenue Code.
4.  There are also certain State of Texas consequences for failing to properly classify workers.  Therefore, the proper worker classification is a federal and state tax law issue.  There could be civil and criminal consequences for failing to properly classify workers in the State of Texas.
5.  It is important that immigrants pay their fair share of taxes.  It is also fair for immigrants to be properly classified as employees or independent contractors depending upon all the facts and circumstances.

 What about the Texas Work Force Commission?

The Texas Labor Code defines the employee and employer relationship very similar to how this relationship is defined in federal labor law and tax law.  The Texas Workforce Commission, (TWC) is tasked with the duties of enforcing the Texas Labor Code.  Misclassification of workers is typically investigated after the commission receives a complaint or when TWC audit examinations uncover evidence that an establishment has misclassified workers as independent contractors when in reality the workers are employees.  Misclassification of workers has State law and Federal law consequences.  The Internal Revenue Service and Texas Workforce Commission can work together in enforcing labor laws as it relates to tax violations.

Why Risk Being Caught – Act Now!

If you are a worker and don’t know how you should be classified, you should contact a tax attorney to discuss all the facts and circumstances of your particular situation because all the facts and circumstances matter in determining whether a worker is properly classified.

If you are an employer and are in doubt as to whether you have properly classified your workforce you should review all of the facts and circumstances with competent tax counsel today since long stretches of time could elapse before you are audited by TWC or the IRS.  You see the problem is that both the federal and state government may be short-changed if the taxes are not being properly and timely reported.  In 2023 the chances of getting caught for misclassification of workers is higher than in years past because the IRS has been given a lot more money to update its systems, go after tax cheats, and to ensure tax compliance and integrity of the federal tax system.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family, or your business.

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