Worker classification training materials.

On May 3, 1996, Tax Executives Institute submitted the following comments to the Internal Revenue Service concerning the training materials the IRS has developed to aid the classification of workers as independent contractors or employees. The Institute's comments took the form of a letter from TEI President Jack Skinner to Douglas Izard, Dean of the IRS's School of Taxation. They were prepared under the aegis of the Institute's Federal Tax Committee whose chair is David L. Klausman of Westinghouse Electric Corp. Michael J. Nesbitt of Paychex, Inc. was a principal drafter of the comments, and Patrick J. O'Brien of Sears, Roebuck & Co. also contributed to the project.

I am pleased to provide the comments of Tax Executives Institute, Inc. on the Internal Revenue Service's revised training materials for distinguishing between independent contractors and employees ("Worker Classification").

The IRS is to be commended for providing practical guidance on worker classification to revenue agents. The training materials attempt to frame the issues in a real-world context and generally focus on the most relevant and practical factors affecting the business decision about whether to hire employees or independent contractors. As a result, the approach is less cumbersome and more realistic than the application of the 20-factor test. We believe, though, that the materials would be improved by sharpening or softening the focus in certain areas.

Notwithstanding the goal to provide fair guidance, however, we perceive an undertone in the training materials that may well encourage agents to resolve ambiguities in favor of reclassifying independent contractors as employees. We believe that more can and should be done to provide balance to the materials -- to emphasize that using independent contractors is a common, reasonable, and acceptable business practice. Our specific comments highlight areas where we believe that balance is currently lacking.

Background

Tax Executives Institute (TEI) is the principal association of business tax executives in North America. The Institute's approximately 5,000 members represent more than 2,700 of the largest companies in the United States and Canada. TEI represents a cross-section of the business community, and is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and the government alike. As a professional association, TEI is firmly committed to maintaining a tax system that works -- one that is administrable and with which taxpayers can comply.

TEI members are responsible for managing the tax affairs of their companies and must contend daily with the provisions of the tax law relating to the operation of business enterprises. We believe that the diversity and training of our members enable us to bring an important, balanced, and practical perspective to the issues involved in classifying workers as either employees or independent contractors.

Introduction -- Page 1-1

The mission of the Internal Revenue Service is to collect the proper amount of tax. In the context of the examination of worker classification matters, a revenue agent has a duty to review the information provided by a taxpayer to determine whether, based on all the facts and circumstances, the service recipient's classification of the worker is reasonably justified. As a result, this section must emphasize the agent's responsibility to review worker classification issues in a fair, objective, and impartial manner without a preconceived preference for one classification status over another.

Moreover, the IRS should consider adding a statement in the Introduction confirming that, where the worker's status is unclear and sound arguments may be advanced for either classification, the service recipient's classification of the worker should be left undisturbed. Such a statement would clarify that where the classification is a close issue and could properly be either status, a finding in favor of the taxpayer's classification is a reasonable conclusion and not a concession. It would, hence, reduce needless and protracted disputes with taxpayers since agents would be apprised that it is unnecessary to reclassify workers automatically in any case where a colorable argument might be made for employee status.

Chapter 1

1. Control Standard -- Page 1-3

   In many cases, a service recipient will prescribe requirements about how or when work is to be performed. For example, a service recipient may require that work be completed by the end of the day or that a contractor act in a courteous manner when dealing with the recipient's customers and employees. Should the worker not adhere to the prescribed standards or contractual requirements, the service recipient may decide not to offer additional work to a particular worker. These types of minimum standard requirements, we believe, do not rise to the level of "control and direction" envisioned by the control...