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Government crackdown on 1099 temps April 12, 2012

Posted by Louis F. Provenzano Jr. in Uncategorized.
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Looks likes this also applies to the everyone registered to do business in the State of California.

This is a very serious law.  And companies not following this will be penalized severely.

Government crackdown on 1099 temps.

Rethinking the ‘Responsible Person’ Penalty #sensherrodbrown #senatorkharkin #irsnews September 11, 2011

Posted by Louis F. Provenzano Jr. in Uncategorized.
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Rethinking the ‘Responsible Person’ Penalty.

The penalties for not paying taxes as a “responsible” party are draconian.  Even if your firms goes bankrupt the IRS will look to “responsible” parties to collect the unpaid payroll taxes.

Fascinating law.  When the penalties start getting assessed, I’ll write you a note and ask you if you think in retrospect it was worth cheating the Federal Government and avoiding your duties as a “responsible party”.

Pay your Federal Taxes and Stop Cheating Our Government.

Tax Evasion is a Federal Crime.

IRS Narrows Independent Contractor Relief #whitehouse #irsnews #sensherrodbrown August 17, 2011

Posted by Louis F. Provenzano Jr. in Misclassification / Tax Evasion.
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IRS Narrows Independent Contractor Relief





If you treat workers as independent contractors who are really employees and fail to withhold payroll taxes the IRS can reclassify them and assess potentially crippling retroactive penalties.  For many, a key way out of this mess is Section 530, a tax relief provision that can let you keep even an erroneous classification.  Under this provision, a business can treat an individual as an independent contractor if:

  1. It never treats the person as an employee;
  2. It does not treat any other person with a substantially similar position as an employee;
  3. All required federal tax returns and Forms 1099 show the worker as an independent contractor; and
  4. The business had a “reasonable basis” not to treat the person as an employee.

One can satisfy the fourth requirement by reasonably relying upon:

  • Judicial precedent or IRS rulings;
  • A past IRS audit; or
  • A long-standing practice of a significant segment of the relevant industry.

Plus, if you cannot meet any of these three you can still show a reasonable basis some other way.  It is no secret that the IRS finds this a frustrating provision that allows some businesses to go on misclassifying workers forever.  Congress has several times considered repealing Section 530 altogether.

In the meantime, the IRS is considering timing and whether the business was actually relying on one of the permitted items at the time it made its worker status decision.  In Program Manager’s Technical Advice, “Section 530: Reasonable Reliance Safe Harbor,” the IRS considers whether an employer must show it relied on the safe harbor before it engaged a worker to provide services.

Section 530 relief would seem to be available only if you established you had in fact relied, but when?  At the time you classified your workers, suppose you had little money and knew you could not afford to pay payroll taxes so intentionally flaunted the rules, knowing all the time the workers were entirely subject to your control and therefore employees.

Later, it turns out that judicial precedents, an industry practice or some other basis arguably brings you within Section 530 relief.  Must you show that you did not initiate your reliance too late?  A key question is whether the taxpayer must demonstrate that it reasonably relied on a safe harbor before engaging the worker to perform services.

One case raising this issue is Peno Trucking v. Commissioner, where the Tax Court held that the company failed to show it actually relied on relevant judicial precedent.  Reversing the Tax Court, the appellate court found the trucking company could have relied on an Ohio ruling when it made its employee versus contractor decision because the Ohio ruling was rendered before the tax years in question.  The timing issue satisfied, the Sixth Circuit went on to rule that Ohio had used the same 20-factor common law test.

The IRS doesn’t like this “could have” approach.  In the recent Program Manager’s Technical Advice, the IRS stated that an employer must demonstrate actual and reasonable reliance before the employment decisions were made.  Moreover, the IRS says that employers must demonstrate reliance in fact.

In the case of an industry practice, the taxpayer would have to show it was aware of the practice before making the decision to treat the workers in question as independent contractors.  In addition, the taxpayer would need to show the industry practice was in fact the basis of the decision and that relying upon it was reasonable.

Bottom line?  Some business won’t meat these tough standards.  Expect more worker status controversies.

For more, see:

Independent Contractor or Employee? The 100-Year War

Some Control Won’t Convert Independent Contractors To Employees

Ten Mistakes to Avoid Over Independent Contractors

Independent Contractor Versus Employee Issues: Bad, Ugly, and Uglier

White House On Contractor vs. Employee: There Will Be Blood

Miranda-Like Warnings To Independent Contractors?



How Do You Report Suspected Tax Fraud Activity? August 10, 2011

Posted by Louis F. Provenzano Jr. in Misclassification / Tax Evasion.
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For information from the Internal Revenue Service on How to Report Suspected Tax Fraud click here

Want To Be An IRS Whistleblower? Be Patient July 29, 2011

Posted by Louis F. Provenzano Jr. in Misclassification / Tax Evasion.
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From Forbes:

To access Forbe’s Article:  click here

Want To Be An IRS Whistleblower? Be Patient

Jul. 28 2011 – 8:30 am | 257 views | 1 recommendation | 1 comment

It is no secret that the IRS needs money.  It’s also no secret that the IRS is paying for information.  The IRS’s Whistleblower Office has released its fiscal year 2010 annual report to Congress, and its an eye opener.  How big is this topic?

The entire Swiss banking industry was brought to its knees because of a whistleblower.  That individual still expects to receive a nice chunk of change for the tax dollars his actions are bringing into Treasury Department coffers.  See Tax Informants Are On The Loose.  Looking beyond the foreign banking controversy, there will be many big tax collections traceable to the actions of whistleblowers.

We may think of this as a new development, but IRS whistleblowing incentives started in 1867!  Big changes in 2006 raised the stakes materially, adding new Section 7623(b).  Under it, awards to whistleblowers are no longer discretionary.  Now, the whistleblower “shall” receive 15 to 30 percent of the collected proceeds.

That’s shall, not may.  Procedural safeguards were added too.  The 2006 law added whistleblower appeal rights.  The IRS then created a Whistleblower Office reporting to the IRS Commissioner.  See Whistleblower/Informant Award.  Although there was a long dry spell, the first award was recently paid.  That was good news for many tax whistleblowers becoming tired of IRS delays.

According to the Whistleblower Office fiscal year 2010 annual report to Congress, during fiscal year 2010, the IRS received 431 whistleblower submissions relating to 5,429 taxpayers that appeared to meet the $2 million of tax, penalties, interest, and additions to tax threshold in Section 7623(b).  Here is a tabulation:

One source of frustration among tax whistleblowers is that they often turn over what they think is key information to the IRS about a tax cheat, only to find that the IRS can’t seem to turn it into cash.  Only actual cash in the IRS’s hands will produce an award to the whistleblower.  In fact, in the past, the IRS monitored tax cases to collect proceeds before processing the award claim.

Now the IRS wants to wait to pay claims until the period for filing an appeal has lapsed.  The general rule is that a taxpayer may file a claim for refund within two years of the last payment, unless the taxpayer has waived that right.  Beginning in July 2009, the IRS started monitoring cases for collection and the lapse of the period for filing a claim for refund.  As a result, the IRS did not pay some claims it otherwise would have paid in fiscal year 2009 until fiscal year 2010 or 2011.

For more, see:

IRS To Whistleblowers: “Thanks, But We’re Withholding!”

IRS Paid Fewer Whistleblower Awards Last Year

Robert W. Wood practices law with Wood LLP, in San Francisco.  The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009, Tax Institute), he can be reached at Wood@WoodLLP.com.  This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.


Wayne M. Zell, Esq. – Independent Contractor vs Employee – TV News Channel 8 June 26, 2011

Posted by Louis F. Provenzano Jr. in Misclassification / Tax Evasion.
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Video from Internal Revenue Services on Proper Classification of Workers June 12, 2011

Posted by Louis F. Provenzano Jr. in Misclassification / Tax Evasion.
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To view the IRS video  —-> click here

IRS Crackdown on Misclassified Workers June 12, 2011

Posted by Louis F. Provenzano Jr. in Misclassification / Tax Evasion.
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Interesting news report on Misclassification.

Contacts on where to Report Tax Evasion and Payroll Fraud June 4, 2011

Posted by Louis F. Provenzano Jr. in Misclassification / Tax Evasion.
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On my blog, I have now added a few new resource sections.

On the right hand side of the links you will note a “Misclassification” and “Tax Fraud” list of contacts.  The links will take you directly to the appropriate site.

The current direct email contacts are :


More links will be added shortly along with automatic email forwarding to report Tax Evasion.

Lastly, I have asked several of the Senators involved in this issue to start posting on this blog.  You’ll see some updates shortly.



And You Thought the IRS was Strict about IC Misclassification? Get ready for the States… June 3, 2011

Posted by Louis F. Provenzano Jr. in Misclassification / Tax Evasion.
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And You Thought the IRS was Strict about IC Misclassification? Get ready for the States…

Posted by Jessica Capuano and Steve Taggart

Full article —> click here

As a company that hires independent contractors (IC), you may be familiarizing yourself with the IRS’s standards for classifying them. In doing so, it comes as a surprise to many organizations that they need to start concerning themselves with their state’s laws as well. States are picking up the pace and starting to pass or alter laws that revolve around what makes an IC and IC.

The major areas of concern are:

  1. Whistleblower protection: Many states have established an anonymous whistleblower website where a person can submit a simple form to report an employer which they feel may be misclassifying employees as ICs. The state will then have a lead and the grounds to initiate an investigation and/or audit. This can have far-reaching consequences, including penalties, fines, debarment, exposure to class-action lawsuits, and significant brand damage. And it is then likely to draw unwanted attention of the IRS.
  2. Debarment: If a company is found to have misclassified ICs, several states have the right to initiate an immediate stop work order that can last for years or, in some cases, become permanent. Unfortunately, for companies that are highly reliant on state contracts, debarment can mean you are up a creek without a paddle.
  3. Class-action lawsuits: What keeps most executives and business owners up at night is having misclassified ICs – along with their more-than-eager lawyers – file a class-action lawsuit. In cases where misclassification has occurred, some states have laws that require their labor agencies to make misclassified workers aware of their right to form a class-action in order to claim lost wages and benefits, such as from unpaid OT, PTO, health benefits, stock options, retirement match contributions, etc. Here’s a more recent addition to businesses’ potential problems: cross-agency data sharing. Multiple state tax and labor agencies can now share your company’s IC compliance history. If you get dinged (or dented) for misclassification by one agency, there is a potential avalanche of additional audits by other agencies, including the IRS, which can continue to haunt you for years.

Charles M. Rice and Sonny Poloche summarize a key reason for state’s beefing up their penalties in their State Regulations Update in Employment Relations Today :

Due to the rising costs associated with high unemployment rates and the need to increase revenues in response to state-budget crises, states have a great incentive to pursue employers that have misclassified workers as independent contractors. Correcting these misclassifications can significantly enhance a state’s tax base for employment-related taxes, and in those states that impose penalties against employers for misclassifying workers, enforcement actions can further contribute funds to the state’s coffers. Employers can therefore expect a heightened degree of state scrutiny aimed at independent contractors.

It is important to note that the companies following the rules are the ones being hurt by the competitors gaming the system. The companies that are keeping costs down by improperly using ICs are likely able to offer lower bids for contracts and projects, as they are not burdened with paying for employee benefits or FICA that regular employees receive. This results in a greater profit for the company and an unfair competitive advantage. In reality, these “ICs” should be employees, as their duties and roles directly match those of employees. To make things more complicated, the rules for determining proper classification are ambiguous, yet it is up to the employer to “prove” that the worker is an independent contractor… so much for innocent until proven guilty.

Each state has different ideas of what makes an IC an IC and varying penalties for misclassification. To give you a more thorough understanding of how states are stepping up to ensure that they are getting every penny of revenue, we will soon post an up-to-date breakdown of recent states’ misclassification laws, legislation, and initiatives. Stay tuned…

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Tags: states, laws, classification, IRS
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