IRS issues procedures for employee status determinations

By Paul Bonner

The IRS issued procedural guidance Wednesday regarding determinations by the Service that a worker is properly classified as an employee of an employer rather than an independent contractor.

The distinction carries significant employment law and tax ramifications. The latter include that a person for whom services are performed must withhold from employees' wages and remit employment taxes (generally, Social Security or Railroad Retirement, Medicare, and unemployment taxes) and income taxes but has no such obligation with respect to individuals who are not considered employees, i.e., independent contractors. Employers must also pay a corresponding contribution on behalf of employees for Social Security and Medicare taxes.

Whether a worker is an employee generally is determined under common law rules for whether the person for whom the services are performed has the right to control and direct the worker in details and means by which the work is performed. An employer who fails to treat workers as employees can be liable for past employment taxes and penalties but may obtain relief in specified circumstances under Section 530 of the Revenue Act of 1978, P.L. 95-600. For more, see "Tax Clinic: Worker Classification and the Evolving Service Delivery Model," The Tax Adviser (July 2016); also "Independent Contractor or Not?" Journal of Accountancy (May 2004).

Wednesday's guidance, in Rev. Proc. 2022-13, covers when and how the IRS will issue a notice of its employment status determination under Sec. 7436 and how the person to whom it is issued may petition the Tax Court to review the determination. It modifies and supersedes Notice 2002-5, which provided that the issuance of a Sec. 7346 notice was a jurisdictional prerequisite for seeking Tax Court review under Sec. 7436. It further provided that the IRS would issue a Sec. 7436 notice only after the IRS determines that (1) one or more individuals performing services for the taxpayer are employees, and (2) the taxpayer is not entitled to Section 530 relief.

The Tax Court subsequently expanded its jurisdiction to review worker classifications in SECC Corp., 142 T.C. 225 (2014), and American Airlines, Inc., 144 T.C. 24 (2015). The Tax Court held that a Sec. 7436 notice is not a jurisdictional requirement, and even in the absence of the issuance of a Sec. 7436 notice, a taxpayer may petition the Tax Court on an IRS worker reclassification or Sec 530 relief determination to the extent that the determination meets the requirements set forth in the Tax Court opinions.

Specifically, following the requirements in the opinions, Rev. Proc. 2022-13 provides that the Tax Court has jurisdiction under Sec. 7436 if: (1) the IRS conducts an examination in connection with an audit; (2) as part of the audit, the Service determines that (a) one or more individuals performing services for the person are employees of the person for purposes of worker reclassification, or (b) the person is not entitled to relief under Section 530(a); (3) there is an "actual controversy" involving the determination as part of an examination; and (4) the person for whom the services at issue were performed files an appropriate pleading in the Tax Court.

The revenue procedure then discusses these four requirements, including defining "worker reclassification determination" and "actual controversy." It details certain procedural requirements and limitations and clarifies Tax Court petition filing deadlines and their tolling.

The revenue procedure is effective on Feb. 7, 2022.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

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