IRS TO AUDIT TAX PREPARER’S DUE DILIGENCE · products; beverages (other than milk); or laundry or...

IRS TO AUDIT TAX PREPARER’S DUE DILIGENCE

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These audits will be conducted via correspondence due to concerns with COVID-19.

• According to NATP’s contact at the Internal Revenue Service, before the filing season begins, IRS employees will initiate due diligence audits based on the prior year returns. The audits will be for compliance with due diligence for certain tax benefits such as:

• Earned Income Tax Credit (EITC)• Child Tax Credit (CTC)• Additional Child Tax Credit (ACTC)• Credit for Other Dependents (ODC)• American Opportunity Tax Credit (AOTC) • Head of Household (HOH) filing status.

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The IRS will contact certain tax preparers with Letter 6222-A,

Correspondence Due Diligence IDR, to initiate a due diligence visit. The

letter will ask the preparer to send information and schedule a telephone

interview If you receive this letter, you will need to call the examiner listed by

the date noted. The examiner will give you more information and talk to you

about the next steps.

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Form 14815 (April 2019)

Supporting Documents to Prove the Child Tax Credit (CTC) and Credit for Other Dependents (ODC) for 2018-2025

An Example of When to Call TAS

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Example of When to call TAS• A: Before calling the Taxpayer Advocate Service, try to get the issue

resolved at the lowest level.• B: Sometimes there’s a disconnect between what’s really allowed and

how the tax return is processed• C: Gambling Wins and Losses are typically reported as follows. The

Wins are reported as Other Income on Schedule 1, Line 8• D: Losses are reported on Schedule A, not to exceed the reported wins.• This is the usual scenario. The Automated Under Reporter (AUR) unit

will look to match the reported Wins on Forms W-2G with Schedule 1, Line 8. If there is less reported on Schedule 1 than reported on the total of Forms W-2G, the taxpayer will receive a CP-2000.

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An Example of When to Contact TAS• AM2008-011 is an opinion of the Associate Chief Counsel that discusses

the concept of Session Gambling. In Session Gambling, the wins and losses may be netted for reporting on Schedule 1, Line 8. Losses may not exceed wins. The taxpayer needs to have excellent records proving his/her gambling.

• The AUR unit might not recognize this as a legitimate method to match losses and wins. In some cases AUR will agree. In some cases there is an assessment based on the Schedule A method of matching Wins and Losses.

• If you have excellent records from your taxpayer. TAS can help you get your taxpayer’s problem resolved.

• Always try to get your problem resolved at the lowest level. Use TAS when confronted with an obstacle.

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T A S Information• The National Taxpayer Advocate Case Intake Line is

877-777-4778• When you call be prepared with your POA and all

documentation related to the case.

Q U E S T I O N S ?

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EMPLOYEECLASSIFICATION

ITEMS

A Quick Overview

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South Jersey Working Together

Worker Classification

Extended

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New Jersey Working Together

Relationship Types Employer-Employee Independent Contractor Statutory Employee Non-statutory Employee

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Employer-Employee An employer-employee relationship generally exists when the persons

(or businesses) for whom the services are being performed: have a right to control and direct the individual who performs the

services, not only as to the result to be accomplished by the work but also as to

the details and means by which that result is accomplished Rev. Rul. 87-41

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Independent Contractor An independent contractor relationship

may exist where a worker follows an “independent trade, business or profession in which they offer their services to the public.”

20 Factors Test Rev. Ruling 87-41

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Independent contractors cannot receive employee benefits or protections including: – workers’ compensation – unemployment insurance (Form 940) – minimum wage and overtime pay – workplace discrimination law protections (Age

Discrimination in Employment Act, Civil Rights Act, etc.) – collective bargaining rights – temporary disability/Americans with Disabilities Act – Occupational Safety and Health Act – Fringe benefits such as health insurance and family and

medical leave

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Statutory Employee Officers of corporations, as well as superintendents,managers, and other supervisory personnel are generally considered employees unless the officer performs few to no services for the corporation and is not paid (or entitled) to be paid.

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Statutory Employee Drivers engaged in distributing meat, vegetable, fruit, or bakery

products; beverages (other than milk); or laundry or dry-cleaning services

Fulltime life insurance salesmen People who perform work from home according to the service

consumer’s specifications, using materials or goods furnished by the service consumer that are required to be returned

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Statutory Employee Fulltime traveling or city salespersons engaged insolicitation and transmission to the service consumer of orders of wholesalers, retailers, contractors, or operators of hotels, restaurants, or other establishments for merchandise for resale or supplies for use in their business operations

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Non-Statutory Employee Licensed real estate agents for whom a substantial part of their income is paid

on commission under a contract specifying that they are not an employee for tax purposes

“Direct sellers” (i.e., those who sell consumer products in a place other than a permanent retail establishment, are engaged in selling consumer products to any buyer on a buy-sell basis, deposit-commission basis, or any similar basis for resale, or are engaged in newspaper or shopping news delivery)

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Non-Statutory Employee Companion sitters (i.e., babysitters or careworkers for the

elderly or disabled) who are not employees of a companion-sitting placement service.

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Audit Red Flags IRS likely to discover misclassification through audit.

Misclassification suspicions are raised if: Businesses employing large numbers of independent

contractors Businesses issuing Forms 1099-MISC with large sums

reported in Box 7 (“Nonemployee compensation”) Workers have only one IRS Form 1099-MISC Forms 1099 with a missing or wrong TIN (highest audit

potential)

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IRS Form SS-8 divides the “control test” into three categories:

• Behavioral Control• Financial Control• Relationship of Worker and Firm

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Misclassified workers who have already filed returns for the year should file amended returns under IRS Form 1040X with the recomputed tax.

– Calculate FICA tax with IRS Form 8919. – Request a refund on the SECA tax so much as the

amount remaining following the FICA tax offset. See IRC § 6521(a).

• No longer entitled to claim self-employment deductions.

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• If the misclassified worker has a deficiency (occasionally, from too many disallowed Schedule A self-employment deductions), he is not relieved of any further taxes orpenalties due to misclassification.– Include IRS Form 4852, unless and until employer provides a corrected Form W-2.

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During an audit, the IRS will– Compare W-2 and 1099 lists to identify workers whose status changed during the year;– Identify workers who received continuing

payments during the year;– Question the status of all individuals who were compensated via 1099.• IRS employment tax agents generally base their findings on written Form SS-8 responses or oral interviews of workers. (Disgruntled workers are often willing to talk.)

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Tax Court has used a seven-factor test to determine classification criteria:

– the degree of control exercised by the principal overthe details of the work;

– which party invests in the facilities used by the worker;– the opportunity of the worker for profit or loss;– whether the principal can discharge the worker;– whether the work is part of the principal's regular business;– the permanency of the relationship;– the relationship the parties believed they were creating.

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New Jersey Working Together Employers whose misclassification was done in good faith

can potentially receive protection under Section 530 of the Revenue Act of 1978.

• Section 530 is a safe harbor from retroactive taxes and penalties due upon reclassification.• Burden on employer to establish prima facie case.• Three requirements:

– Reasonable Basis– Substantive Consistency– Reporting Consistency

Reaso

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New Jersey Working Together Reasonable Basis for treating workers as independent

contractors:– Employer reasonably relied on a relevant court case about

federal taxes, or an IRS ruling;• Other federal and state decisions may constitutereasonable basis if they use the same common law rules.

• Note: Private Letter Ruling or Technical Advice Memorandum issued to an entity’s predecessor does not qualify.

– Employer was audited for employment misclassification issues and the IRS did not reclassify its employees;

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Employer treated the workers as independent contractors based on knowledge that was how a significant segment of the industry treated similar workers; or

– Employer relied on some other reasonable basis, such as the advice of a business lawyer or accountant familiar with the facts of the employer’s business.

• Employer must have reasonably believed in theprofessional’s qualifications, and the advice must have been

rendered when employment classification decision was made. Reasonable basis is construed liberally in favor of the

taxpayer.

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Substantive consistency: Employer must have treated all workers holding substantially similar positions as independent contractors.

– Note that for testing, “substantive consistency”does not apply with respect to services performedafter December 31, 2006, unless the individual (1) isperforming services for a tax-exempt organization,and (2) is not otherwise treated as an employee ofsuch organization for purposes of employment taxes.

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• “Substantially similar positions”– Degree of supervision and control– Managerial responsibilities– Reporting requirements– Job duties– Contractual relationship– Employee benefits

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Reporting consistency: Employer must have filed all required federal tax returns (including IRS Form 1099-MISC for workers treated as independentcontractors and paid at least $600),consistent with treating workers as nonemployees.• Note that if Form 1099-MISC was filed for some periods and not others, employer may pursue Section 530 relief for periods where it was filed.

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New Jersey Working Together Burden on employer to prove that Forms 1099 werefiled and received by IRS.– Best practices: Request confirmation from IRS at time of filing• “Required returns” might include IRS Form 1096, Annual Summary and Transmittal of U.S. Information Returns, but not certain. • Possible that if Forms 1099 were filed late, but beforeinitiation of audit, employer might still qualify for Section 530 relief.

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Employers qualifying under Section 530 relief can continue to avoid paying employment taxes, but such workers are not considered “independent contractors” for income tax purposes, merely “nonemployees,” for employment tax purposes.

– Note that Obamacare could upset such protections under Section 530

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New Jersey Working Together Section 530 does not apply to the hiring of certain

technical workers, such as engineers, designers, drafters, computer programmers, systems analysts, or other similar workers.

The common-law employee/independent contractor tests are determinative here.

Section 530 claims can be filed with IRS Appeals or in U.S. Tax Court, or via the IRS Classification Settlement Program (CSP).

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New Jersey Working Together Incentive for individuals or businesses who voluntarily come

forward and reclassify their workers before the IRS or DoL initiates an audit or discovers misclassified workers.

Tax liabilities are reduced to 10% of the amount due (i.e., just over 1% of all wages paid to reclassified workers) over the most recent tax year. Penalties and interest are abated.

Taxpayers accepted into VCSP will not be audited for potentially unpaid employment taxes from prior years.

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Businesses must have consistently treatedworkers as independent contractors (ornonemployees) for the three years prior.

All IRS Forms 1099 must have been filed for those years.

Businesses cannot currently be under audit by the IRS, DoL, or any state agency.

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To enter VCSP, file IRS Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before plans to reclassify workers as employees.

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VCSP focuses on employer’s tax liability; no similar provision for employees, who might be responsible for the remaining FICA tax that the employer did not pay.

State tax ramifications are not addressed through VCSP; employer may be liable for additional state and local taxes and penalties despite coming forward under VCSP, because few states have corresponding programs

Note that several states do have memoranda of understanding with the DoL

IRS TO AUDIT TAX PREPARER’S DUE DILIGENCE · products; beverages (other than milk); or laundry or...

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