IRS Addressing Worker Classification Concerns

WASHINGTON - Businesses concerned with the classification of their workers for tax purposes should soon find it easier to work with the Internal Revenue Service to resolve that issue, thanks to several initiatives the IRS is taking. The IRS has developed a new classification settlement program, which will be available for a two-year test period, and a new procedure for early referral of employment tax issues to the IRS Appeals function, which will operate for a one-year test period. Last week the IRS released a draft of new training materials for tax examiners on worker classification issues.

Whether a worker should be classified as an independent contractor or an employee has long been a difficult issue for many businesses, as well as for the IRS. Last summer, small business owners from around the country told IRS Commissioner Margaret Milner Richardson that worker classification was one of their greatest concerns. Commissioner Richardson believes that the IRS should be impartial in reviewing classification of workers as employees or independent contractors and should assure that the classification accurately reflects current law.

Today's initiatives should make it easier for businesses and the IRS to reach agreement when the worker classification issue is raised.

First, the IRS is establishing new procedures under an optional classification settlement program that will allow businesses and tax examiners to resolve worker classification cases earlier in the examination process. The procedures will also ensure that examiners properly apply taxpayer relief provisions under section 530 of the Revenue Act of 1978.

In this program, IRS examiners can offer a business under audit a worker classification settlement using a standard closing agreement developed in the IRS National Office. Generally, under a closing agreement, businesses that filed Form 1099 information returns but failed to meet all the other requirements for relief under section 530 could reclassify their workers prospectively and pay only a specified tax assessment not exceeding one year's liability. The assessment would depend on the extent to which the business has satisfied the requirements of section 530.

Participation by businesses in the new program will be entirely voluntary. A business declining to accept a settlement offer would retain all rights to appeal that exist under the IRS's current procedures.

Second, the IRS has developed a new procedure to allow businesses, at their option, to appeal employment tax issues to the IRS Appeals function even while an examination of other issues is in progress. This procedure, which is part of the series of taxpayer rights initiatives the IRS announced earlier this year, is designed to resolve employment tax issues more quickly through simultaneous--action by the IRS District Office and Appeals.

In addition, the IRS last week released a draft of new training materials for IRS examiners who handle worker classification issues. The IRS will review any comments received on these materials before instituting the training. The goal of the training materials is to give examiners the proper tools to ensure that they make legally correct determinations about whether workers are properly classified as employees or independent contractors. The training materials discuss the control factors under the common law standard and guide examiners in determining which of those factors are relevant. They also are intended to ensure that examiners properly apply section 530.

"For nearly 20 years the IRS has been prohibited by law from issuing any guidance regarding employment tax status," Commissioner Richardson said. "People have complained about the uncertainty that results from worker classification under the common law standard -- essentially a 'facts and circumstances' test -- yet we are prohibited from issuing guidance that is more up to date. I believe that these initiatives we are announcing today will help ease some of the pressures that both the business community and the IRS face."

The new training materials are available for comment by writing to:

Internal Revenue Service
Freedom of Information Office
P.O. Box 795
Ben Franklin Station
Washington, DC 20044

Comments will be made available to the public.

The classification settlement program will begin for a two-year test period on March 5, 1996. The procedure for early referral to Appeals, which is in Announcement 96-13, will begin for a one-year test period on March 18, 1996, the date of its publication in the Internal Revenue Bulletin. Both the settlement program and the Appeals procedure will be evaluated to determine their success. Comments from businesses and their representatives are invited.

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