Circular 230 Disclosure - Independent Contractor

[Zee]

I'm wondering...given the new disclosure requirements what happens when a client is being treated erroneously as an independent contractor by his employer. Do we refuse to prepare his return without disclosure? Or, how about the company that has treated employee's as independent contractors?

[Donald Rihn, EA]

Circular 230

I'm wondering...given the new disclosure requirements what happens when a client is being treated erroneously as an independent contractor by his employer. Do we refuse to prepare his return without disclosure? Or, how about the company that has treated employee's as independent contractors?

Interesting question.

[dtlee]

This worries me...

I'm wondering...given the new disclosure requirements what happens when a client is being treated erroneously as an independent contractor by his employer. Do we refuse to prepare his return without disclosure? Or, how about the company that has treated employee's as independent contractors?

Not this specific question, but the fact that I feel clueless in even beginning a response.

In IRS Notice 2008-13 released on December 31, 2007, there is a list (in Exhibit 3) of "Forms That Would Not Subject a Tax Return Preparer to the Section 6694(a) Penalty Unless Prepared Willfully in any Manner to Understate the Liability of Tax on a Return for Claim for Refund or in Reckless or Intentional Disregard of Rules or Regulations"

Form 8919 is on this list (surprisingly), so I would think if you have grounds for treating the taxpayer as an employee, you would not need disclosure. If the taxpayer is submitting an SS-8 and you review it and it says he has no set hours and gets paid for completing each project based on set rates, I might think otherwise.

In short, as Don so eloquently put it:

Quote:
Originally Posted by Zee
I'm wondering...given the new disclosure requirements what happens when a client is being treated erroneously as an independent contractor by his employer. Do we refuse to prepare his return without disclosure? Or, how about the company that has treated employee's as independent contractors?

Interesting question.

[taxmandan]

Who says the treatment is erroneous?

You are not a Revenue Agent and making the decision as to the treatment of workers is not your responsibility, it belongs to the TP. Advise your client, preferably in writing, of the issues considered to determine employment vs. IC status for workers. The new disclosure laws do not mean you have to refuse service to your client unless they conform to your opinion of the treatment of workers. This issue is not a black & white area of tax law, at least on the federal side.

[dtlee]

You are not a Revenue Agent and making the decision as to the treatment of workers is not your responsibility, it belongs to the TP. Advise your client, preferably in writing, of the issues considered to determine employment vs. IC status for workers. The new disclosure laws do not mean you have to refuse service to your client unless they conform to your opinion of the treatment of workers. This issue is not a black & white area of tax law, at least on the federal side.

Not sure that my statement was clear. I did not say that I am a Revenue Agent nor that the treatment of workers is my responsibility. However, I disagree that the treatment of workers is the responsibility of the taxpayer (if I am properly interpreting "TP"). This determination is made by the IRS via SS-8 and other rules for identifying independent contractors versus employees, not by the taxpayer.

I was not suggesting that anyone refuse service to a client. I was suggesting that "if you have grounds for treating the taxpayer as an employee, you would not need disclosure." If a person is clearly an independent contractor trying to get around the tax rules by using the great new form he heard about, I would think differently.

[taxmandan]

Not sure that my statement was clear. I did not say that I am a Revenue Agent nor that the treatment of workers is my responsibility. However, I disagree that the treatment of workers is the responsibility of the taxpayer (if I am properly interpreting "TP"). This determination is made by the IRS via SS-8 and other rules for identifying independent contractors versus employees, not by the taxpayer.

No, the IRS only gets involved in the determination of status if the issue comes up in audit or someone submits an SS-8. It's the business owners decision to classify the workers, with guidance from the tax code, regs. and hopefully advice from their tax professional or lawyer. There is no requirement for every business to submit an SS-8 for determine the classification of workers.

In our state, the determination is based on state law, which is much stricter than federal rules for ICs and often means the cart is pushing the horse, so to speak.

[dtlee]

TaxManDan,

I agree that There is no requirement for every business to submit an SS-8 for determine the classification of workers.

I think we are not talking about that...we are talking about the 8919 form which in a number of cases will require an SS-8 to have been filed. In my practice, I have never submitted a "marked up" 4137 without an SS-8 somewhere (either already determined by the IRS or submitted by the taxpayer who is claiming to be an employee),

Since the SS-8 documents the client's perspective, I am just being cautionary about clients who want to cut their Social Security contributions in half without having any basis for it.

[ChEAr$]

form 8819

TaxManDan,

I agree that There is no requirement for every business to submit an SS-8 for determine the classification of workers.

I think we are not talking about that...we are talking about the 8919 form which in a number of cases will require an SS-8 to have been filed. In my practice, I have never submitted a "marked up" 4137 without an SS-8 somewhere (either already determined by the IRS or submitted by the taxpayer who is claiming to be an employee),

Since the SS-8 documents the client's perspective, I am just being cautionary about clients who want to cut their Social Security contributions in half without having any basis for it.

As I understand it, the new form allows the "employee" to find a way to consider
himself an employee. Filing or not filing an SS8 is just one of the options and not
necessary in any case. Just one of the options.

[Zee]

You are not a Revenue Agent and making the decision as to the treatment of workers is not your responsibility, it belongs to the TP. Advise your client, preferably in writing, of the issues considered to determine employment vs. IC status for workers. The new disclosure laws do not mean you have to refuse service to your client unless they conform to your opinion of the treatment of workers. This issue is not a black & white area of tax law, at least on the federal side.

OK. But, let's assume the taxpayer understands that his employer should not be treating him as an Independent Contractor (which is often the case), but he's certain he'll lose his job if he forces the issue and reports the situation to the IRS. He isn't understating his liability, so I guess what I'm hearing is "no disclosure is required", is that your opinion.

I recognize the preparer's responsibility isn't that of an auditor for the IRS. The new disclosure requirements and penalties do come much closer to having preparer's function as IRS auditors whether we like it or not. Frankly, I really dislike the new rules.

[dtlee]

As I understand it, the new form allows the "employee" to find a way to consider
himself an employee. Filing or not filing an SS8 is just one of the options and not
necessary in any case. Just one of the options.

You are correct, having the client complete the SS-8 is only one of the reasons for using this form. However, the issue that I think Dan took with me was that I was concerned about the phrase, "Unless Prepared Willfully in any Manner to Understate the Liability of Tax on a Return for Claim for Refund or in Reckless or Intentional Disregard of Rules or Regulations"

I cannot see any possibility for reckless disregard of the rules for A, B, or C. However, D, E, F, and G all require that an SS-8 be filed.

[tpert]

No, the IRS only gets involved in the determination of status if the issue comes up in audit or someone submits an SS-8.

You are wrong in the context of this thread. This thread is a discussion of the 8919. There are 7 conditions listed for using that form. For the first three, the IRS has contacted the taxpayer and told them to pay their share. To me, Zee was not asking if he should refuse to do a return for a client who was instructed to file Form 8919 and pay the employee share.

For the last four, the taxpayer is telling the IRS that they have already asked them for a determination. By submitting the 8919 without first being contacted by the IRS, you are telling them (the IRS) that you (the taxpayer) have submitted the SS-8 form to them. Even if form 8919 is exempt from disclosure rules, why would you not want to review the SS-8 and make sure it has merit before submitting the 8919? Seems like due diligence to me.

You and ChEAr$ can do what you want for your clients, but I do not think it is wise to adivse people to ignore the instructions on the form and just do whatever you feel like doing and not to file an SS-8 when the instructions clearly require it for any situations other than when the taxpayer was contacted first by the IRS.

Just my opinion.

[tpert]

OK. But, let's assume the taxpayer understands that his employer should not be treating him as an Independent Contractor (which is often the case), but he's certain he'll lose his job if he forces the issue and reports the situation to the IRS. He isn't understating his liability, so I guess what I'm hearing is "no disclosure is required", is that your opinion.

I recognize the preparer's responsibility isn't that of an auditor for the IRS. The new disclosure requirements and penalties do come much closer to having preparer's function as IRS auditors whether we like it or not. Frankly, I really dislike the new rules.

In the situation where you suspect a taxpayer may be an employee but he receives a 1099 indicating that he is a subcontractor but does not dispute that, I can't guarantee it (because I also dislike the new rules) but I would think you are not subject to penalties.

I liken it to Example 6 from Notice 2008-13:

Example 6. During an interview conducted by Preparer F, the taxpayer provided
a schedule prepared by another advisor in Preparer F’s firm for use in preparing
the taxpayer’s tax return. The schedule did not appear to be incorrect or
incomplete. On the basis of this information, Preparer F completed the tax
return. It is later determined that there is an understatement of liability for tax
that resulted from incorrect information on the schedule. Preparer F is not
required to audit, examine or review the schedule in order to verify independently
that the information on the schedule met the standard requiring a reasonable
belief that the position would more likely than not sustained on the merits.
Preparer F is not subject to a penalty under section 6694.

The taxpayer believes he is a subcontractor and the company who hired him thinks he is a subcontractor. That kind of relationship can exist legally even when it looks like the person is an employee to the rest of us. The company's accountant has provided a 1099 for preparation of the the taxpayer's return. The taxpayer pays full Social Security and Medicare. If the IRS later determines that the taxpayer and the accountant were incorrect in their assessment of the type of employment relationship that existed, you still have not caused any underpayment of tax by the taxpayer through your actions. It says you were not required ti verify independently the information on the schedule if it did not look wrong or incomlete to you.

That is just my opinion.

[Bees Knees]

You are not a Revenue Agent and making the decision as to the treatment of workers is not your responsibility, it belongs to the TP. Advise your client, preferably in writing, of the issues considered to determine employment vs. IC status for workers. The new disclosure laws do not mean you have to refuse service to your client unless they conform to your opinion of the treatment of workers. This issue is not a black & white area of tax law, at least on the federal side.

I think the new standards DO make us Revenue Agents. Clearly if you suspect your client is treating someone as an IC when he or she should be an employee, and you think there is a greater than 50% chance IRS would re-classify the person as an employee upon audit, the new rules require you to disclose that information on the tax return, or face the $1,000 preparer penalty for failure to do so.

You don't like it, I don't like it. Tell Congress to stop trying to make us Revenue Agents if you don't like the rules. But the reality is, it could happen.

[dyne]

Back many years ago when I was a Revenue Agent with IRS, we used the 20 common law
factors to help us determine whether a taxpayer was an employee or not. In many cases
the factors would come out about even, 10 indicating the taxpayer was an employee,
10 indicating the taxpayer was an independent contractor, etc. So, it would not be appropriate for IRS to penalize us if we did not categarize the taxpayer as an employee or independent contractor but that is not to say IRS may not penalize us anyway.