New IRS procedures for worker classification disputes.

• Author: Stein, Ronald A.

Recently enacted Sec. 7436 authorizes review of IRS worker classification determinations by the Tax Court, effective for determinations made after Aug. 5, 1997. In Notice 98-43, the Service has described the issues subject to review, the parties eligible to seek review and the formal prerequisites for review.

Background

Many employment tax disputes center on whether a particular worker is an independent contractor or a common-law employee of the service recipient. Typically, the relevant inquiry is fact-intensive, focusing on a spectrum of factors relating to the kind and degree of control exercised by the service recipient over the worker.

Another common employment tax issue is whether the service recipient (even if technically a common-law employer) qualifies for relief under Section 530 of the Revenue Act of 1978. That law, in general terms, prohibits the IRS from reclassifying a worker as an employee for employment tax purposes if the service recipient satisfies several criteria, such as treating workers occupying similar positions of responsibility in a similar fashion for tax purposes and having a reasonable basis for the tax treatment of the worker in question.

Traditionally, refund litigation in Federal district court or the Court of Claims (and its successors) was the sole means of challenging an IRS worker reclassification or a denial of Section 530 relief. Sec. 7436, however, now vests the Tax Court with prepayment jurisdiction over such challenges. It also permits taxpayers to elect small-case procedures, similar to those that apply in income tax cases; these procedures apply when the amount of employment tax in dispute is $50,000 or less for each calendar quarter involved.

Notice 98-43

Issues. The Tax Court's jurisdiction under Sec. 7436 is strictly limited; the Tax Court may not decide the amount of any employment tax liability or penalties. It may not decide employment-related issues not arising under the employment tax laws (e.g., the classification of individuals as employees for qualified plan purposes). It may decide only worker classification and Section 530 issues resulting from an examination. Thus, for example, worker classification determinations made as part of the letter ruling process are not subject to Tax Court review.

Parties. Neither a worker nor a third party that has not been determined by the Service to be an employer may seek review under Sec. 7436.

Prerequisites to review. Sec. 7436(a) requires a...