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IRS TO RENEW ATTACK ON COMPANIES UTILIZING INDEPENDENT CONTRACTORS

Over the last few months, the IRS has published several releases which make it clear that they are again going to be examining companies which treat workers as independent contractors.

First, the Service created a new form (Form 8919), which allows a worker to notify the IRS if he believes he is an employee but has been treated as an independent contractor by his employer. By filing this form, the worker’s social security and medicare taxes will be credited to his social security record. The instructions to Form 8919 provide that the form is available to a worker:

  • who performs services for a firm;
  • for whom the firm did not withhold the worker’s share of social security and medicare taxes;
  • who feels that his payments from the firm were not for services as an independent contractor; and
  • if one or more of the following seven sets of facts exist:
  1. the worker filed a Form SS-8 requesting clarification of his status as an independent contractor or employee and received a determination letter stating that he is an employee of the firm for whom he provided services;
  2. the worker was designated as a “Section 530 employee” by the employer or by the IRS prior to January 1, 1997;
  3. the worker received other correspondence from the IRS stating that he is an employee;
  4. the worker was previously treated as an employee by the firm and is now performing services in a substantially similar capacity under substantially similar direction and control;
  5. co-workers performing substantially similar services under substantially similar direction and control are treated as employees;
  6. co-workers performing substantially similar services under substantially similar direction and control filed IRS Form SS-8 and received a determination from the IRS that they are employees; and
  7. the worker filed IRS Form SS-8 with the IRS and has not received a reply.

Second, on June 4, 2009, the IRS announced that a new enforcement program for employment taxes is currently under development, and it will begin to conduct detailed employment tax examinations by year-end 2009. The program is intended to last for three years and will entail at least 2,000 employment tax examinations during each year, with one of the focuses being on worker classification.

Third, on July 30, 2009, the IRS announced that it was releasing a new document on its website which provides answers to questions that may arise after the IRS has determined that an individual worker is an employee and not an independent contractor. If a worker has submitted an IRS Form SS-8 requesting clarification of his status as an independent contractor or employee, it is possible that the IRS would have sent a notification to the worker that he is an employee (i) without the company having responded to its information-request regarding the status of the worker, or (ii) the IRS notice may not have considered whether the company qualifies for safe haven relief under Section 530 of the Revenue Act of 1978. The website should address these types of issues.

It is clear that the IRS is going to begin auditing companies that classify workers as independent contractors. Those most likely to be audited are those which have fewer employees than independent contractors or which issue more Forms 1099 than W-2’s. If your or your client’s business fall within those parameters, or if workers are classified as independent contractors on a regular basis, we would be glad to discuss what preventive steps should be taken. Of course, we will be happy to work with you if you or your client’s business is notified of an IRS employment tax audit.


Barry H. Frank is a Partner in our tax group. He has represented more than 160 businesses throughout the United States defending against IRS attacks on the classification of workers providing services as independent contractors. He also advises and consults with companies in order to assure that their method of operation, contracts, policies and procedures will withstand IRS challenge. Mr. Frank has submitted testimony to two Congressional Subcommittees on the topic of independent contractors and has been active in the ABA Section of Taxation Subcommittee dealing with this issue. He has lectured extensively on this topic to business and professional organizations and has authored more than a dozen articles on the topic in various legal, accounting, tax, business and professional journals. Mr. Frank has served as co-counsel for more than 20 businesses in various U.S. District Court proceedings throughout the United States successfully defending their use of independent contractors. He may be reached at 215-246-3103 or bfrank@archerlaw.com.

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