Worker Classification: Getting It Right The 1 st Time
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Worker Classification: Getting It Right The 1st Time
•All audio is streamed through your computer speakers.
•There were several attendance verification questions presented during the LIVE webinar to qualify for CPE of the LIVE event only.
•For the archived/recorded version of this webinar, the link at the end of this presentation will be to final exam on the topics and learning objectives covered during this webinar plus there are also 3 online review questions to answer per hour.
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Worker Classification
Getting It Right The 1st TimePart 2
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Learning ObjectivesUpon completion of this webinar you will be able to:•Properly classify workers.•List 3 categories of classification and the various classes of workers. •Identify and address penalties for misclassification. •Differentiate between federal vs. state law.•List industries with classification issues.•Recognize what to expect during an employment examination•Use safe-harbor provisions to protect your clients during an employment exam.•Define what is willful.•List three factors to define direct sellers. •Test for statutory employees.•Differentiate between cases excluded cases qualifying for the IRS Classification Settlement Program (CSP).•Recognize what triggers an IRS worker classification examination.
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Independent Contractor or Employee
Which one should it be?
How do you determine proper classification?
What affect does improper classification have on employer and worker?
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So How Do You Get It Right? Do you know how to properly classify workers?
How do you determine if your workers are employees, or independent contractors?
What factors should you use to make the proper classification?
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3 Categories For Classification
Worker classification facts are based on three main categories
1)Behavioral Control
2)Financial Control
3)Relationship of the Parties
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3 Categories For Classification
Must consider all facts in the case
Each case has different facts and circumstances
No single fact provides the answer
Misclassification can have major ramifications on employer and worker if you get it wrong
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Behavioral Control
These facts show if there is a right to direct or control how the worker performs the work
A worker is an employee when the business has the right to direct and control the worker
Business doesn’t have to control the way work is done – can direct and control the work
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Financial Control These facts show whether there is a right to direct and
control the business segment of the work
Does the business or the worker control financial elements such as expenses?
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Relationship of The Parties
These facts show how the business and the worker perceive their relationship
Does the business perceive the worker as an independent contractor?
Does the worker think he/she is an employee?
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So Where Do We Go From Here?
The worker perceives employee status,
The business perceives independent contractor status
Who is right and who is wrong?
How do you proceed now?
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Employees Under Common Law
A worker is usually an employee if the business can control what will be done and how it will be done
If business has ability to control the details of how the services are performed it indicates an employee-employer relationship
Workers in business for themselves are not employees
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Who Are Independent Contractors?
Accountants
Doctors
Lawyers
Veterinarians
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Who Are Employees?
Food servers
Bartenders
Receptionists
Office managers
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Statutory Employees
A Statutory Employee is a worker who cannot be classified as an employee under the Common Law rules
But is an employee for payroll tax purposes due to specific statutory requirements (Social Security and Medicare)
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Who Are Statutory Employees?
An Agent or Commission Driver (Food and beverage delivery driver – “No Milk”)
Full-Time Life Insurance Salesperson (Sells primarily for one company)
Homeworker (Works from home using materials furnished by business)
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Who Are Statutory Employees?
Traveling or City Salesperson (Full-Time – Works for One company taking customer orders)
Corporate Officers (One who provides No services or Minor services and is not entitled to receive payment)
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Who Are Statutory Employees?
Statutory Employees must have Social Security and Medicare taxes withheld if the Three Tests are met
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3 Test For Statutory Employees
1) Service contract states or implies that almost all services will be performed personally by employee
2) The employee has little or no investment in the equipment and property used to perform the services
3) Services are performed on a continuing basis for the same company
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Statutory Non-Employees
Two Categories of Statutory Non-Employees
If worker falls into either category they can be classified as Independent Contractors
Statutory Non-Employees are responsible for federal income taxes, and self-employment taxes
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Who Are Statutory Non-Employees?
Direct Sellers - (Must meet Three Factors to qualify)
Real Estate Agents – (No property managers)
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Direct Sellers 3 Factors
1) Salesperson sells consumer goods in the home, or at a place of business other than a permanent retail establishment
2) Sells consumer products to any buyer on a buy-sell basis, deposit commission basis, or any similar prescribed by the regulations
3) Substantially all of payment made to direct seller must be directly related to sales output, or performance or service output (Can’t Be Paid For Hours Worked)
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Direct Seller Requirements
To obtain direct seller’s exemption there must be a
Written contract between direct seller and company
Stating that direct seller will not be treated as an employee for federal tax purposes
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So Who Are Direct Sellers? Door-to-door salespersons
Home demonstration persons
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Statutory Non-Employees
Real Estate Agents
Need to be a qualified and licensed agent
Output should be based on sales and not on hours worked
Written contract stating they are not an employee for federal tax purposes
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Real Estate Agents
Provide services such as
Advertising
Showing real estate property
Acquisition of a lease to real property
Recruitment, training, and supervision of other real estate persons
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Real Estate Agents Property Management services are NOT included
Property Managers are not classified in the real estate agent category
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Statutory Non-Employees Statutory Non-Employees are not employees for
federal tax purposes, but
Can be an employee for other purposes such as state worker’s compensation, and tort liability
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Penalties of Misclassification
Employers are required to collect withholding taxes
Can ask for abatement of liability for employee portion of taxes if employee has paid the taxes
Use Form 4670 to request relief of tax liability
Employee’s statement submitted using Form 4669
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Failure to File Return Penalty
5% of balance due for each delinquent month
Maximum penalty – 25%
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Failure To Collect Tax Penalty
Business that “Willfully” fails to collect and pay trust fund taxes will be assessed
100% penalty of tax due
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What Are Trust Fund Taxes?
Federal income taxes and FICA taxes required to be withheld from employee’s wages
Trust fund taxes do not include employer’s FICA portion
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Trust Fund Penalty100% Penalty if Two Requirements are Met
1)Must be responsible person
2)Responsible person must have “Willfully” failed to collect or pay the trust fund taxes
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What Is Willful?Willful is defined as
Intentional
Deliberate
Voluntary
Reckless
Knowing
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Case Study 1
Business misclassifies employees as independent contractors and does not withhold federal and FICA taxes
Should responsible be assessed the 100% penalty for failure to collect and pay trust fund taxes?
Is there reasonable basis for not collecting and paying?
Crowd Management Services, Inc. DC Ore, 95-1 USTC
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How Far Back Can IRS Go?
Statute of limitations is based on filing date of Form 941 and 940
3 Years from filing date
If forms are never filed, statute never expires
If fraud is involved, there is NO statute of limitations for reclassifying workers
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Form SS-8 Facts
TIGTA audit statistics on SS-8 program - In 2009 5,324 SS-8 applications were filed
19% (1/5) of employers didn’t comply with IRS determination
65% (2/3) didn’t issue correct forms to workers
Only 17% of employers were in compliance
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Form SS-8
Form SS-8 (Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding)
Can be submitted to IRS by worker
Can be submitted to IRS by employer
Can be requested by IRS examiner
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Form SS-8
SS-8 is a restatement of 20 Common Law questions
It’s an excellent self-audit tool
Business should use it when drafting independent contractor agreement
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Federal vs. State Law
Every state has different laws for determining independent contractor status
Most states base it on “Employment”. Do worker’s services constitute employment?
Employment for state unemployment purposes is defined as “any services performed for remuneration or under contract for hire, written or oral, express or implied”
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Federal vs. State Law
Services for remuneration are considered “employment” unless the ABC Test is met
If ABC Test is met worker is not an employee for state unemployment purposes
Burden of Proof falls on the business
Some states require that only One or Two of the conditions are satisfied
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ABC Test
A. The worker is free from control of direction of the performance of the work
B. The service is either outside the usual course of business for which the service is performed, or it is performed outside of all the places of business of the enterprise for which the service is performed
C. The worker is customarily engaged in an independently established trade, occupation, profession, or business
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ABC Test Some states use ABC Test
Other states use the Common Law IRS 20 Factor Test
Other states use a variation of tests
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States With ABC Test
Alaska Louisiana New Jersey
Arkansas Maine New Mexico
Connecticut Maryland Rhode Island
Delaware Massachusetts Tennessee
Georgia Nebraska Vermont
Hawaii Nevada Washington
Illinois New Hampshire West Virginia
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States Using Common Law 20 Factor Test
Alabama Kentucky North Dakota
Arizona Minnesota South Carolina
California Mississippi Texas
District of Columbia Missouri Utah
Florida New York
Iowa North Carolina
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Variations of State Unemployment Insurance Tests
State Test Colorado ACIdaho ACIndiana A – Part of B – CKansas ABMichigan Economic Reality TestMontana ACOhio A – Part of B – C
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Variations of State Unemployment Insurance Tests
State Test
Oregon AC
Pennsylvania AC
South Dakota AC
Virginia AB or AC
Wisconsin Unique 8 Factor Test
Wyoming AC
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Possible Industries With Worker Classification Issues Building and construction industry
Trucking industry
Computer industry
Automobile industry
Legal industry
Taxicab industry
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Review Questions for Self Study CPE:
Now’s the time to answer the review questions 1-3.Click here:http://www.proprofs.com/quiz-school/story.php?title=NTc2ODc2
*Please leave quiz window open and wait to submit until prompted to complete questions 4-6. Once all questions are complete submit and close quiz window.
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Construction Industry Case Study 2
Facts Jared Jones – Experience tile setter
Oral agreement with corporation to perform full-time services at construction sites
Uses his own tools and performs services in order designated by the corporation
Corporation supplies all materials, makes frequent inspections of work
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Construction Industry Case Study 2 (Cont)
Facts
Jared gets paid on a piecework basis
Company carries workers compensation on him
He doesn’t have a place of business
Performs similar services for other customers
Either party can terminate the services at any time
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Construction Industry Case Study 2 (Cont)
What is Jared Jones?
Employee or
Independent Contractor
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Construction Industry Case Study 3
Facts
Freddy Thomas is an electrician who submitted a job estimate to apartment complex for electrical services
$16 per hour @ 400 hours
He will receive $1,280 every 2 weeks for 10 weeks
Not considered payment by the hour
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Construction Industry Case Study 3 (Cont)
Facts Freddy can work more or less than 400 hours to get job done.
He will receive $6,400 for the job
He performs electrical services for other companies obtained by advertising
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Construction Industry Case Study 3 (Cont)
What is Freddy Thomas?
Employee or
Independent Contractor
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Auto Industry Case Study 4
Facts
Susan Bachman performs auto repair services for auto sales agency using their space
She uses her own tools, equipment, and supplies
She seeks out business from insurance adjusters and other individuals and does all of the work that comes to the sales agency
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Auto Industry Case Study 4 (Cont)Facts Susan hires and discharges her own helpers
Determines her own and her helpers working hours
Quotes prices for repair work, makes all necessary adjustments
Assumes all losses
Receives as compensation for her services, a large percentage of the gross collections from the auto repair shop
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Auto Industry Case Study 4 (Cont)
What is Susan Bachman?
Employee or
Independent Contractor
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Auto Industry Case Study 4 (Cont) What are Susan’s workers?
Employees or
Independent Contractors
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Taxicab Driving Industry Case Study 5
Facts
Dexter Manning rents a cab from Speedy Cab Co for $150 per day
He pays all costs of maintaining and operating the cab
Dexter keeps all fares that he receives from customers
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Taxicab Driving Industry Case Study 5(Cont)
Facts
Dexter uses Speedy Cab’s two-way radio communication equipment
Speedy Cab’s dispatching services
Speedy Cab’s advertising
These items benefit both Speed Cab Co. and Dexter Manning
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Taxicab Driving Industry Case Study 5 (Cont)
What is Dexter Manning?
Employee or
Independent Contractor
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What Triggers An IRS Worker Classification Examination?
The employee (worker) files Form SS-8 requesting a ruling
The business issues an “extraordinarily high number” of 1099-MISC forms
The business issues 1099-MISC forms with “high dollar” amounts
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What Triggers An IRS Worker Classification Examination?
The state unemployment agency conducts an audit and shares information with IRS
IRS performs “project audits” on a certain industry
Informant tips off IRS or DOL and provides audit lead (Be cautious of disgruntled former employees or vengeful competitors)
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2 Types of Worker Classification Audits
Employment tax exams
Income tax exams
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Examination Location
IRS wants to conduct audit at taxpayer’s place of business
Taxpayer’s representative wants it off the business premises
Never allow examiner to conduct exam on business premises! Easy to “misinterpret” events observed/overheard
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Voluntary Worker Classification Settlement Program
VCSP allows employers to voluntarily reclassify workers as employees for future tax periods
Provides partial relief from federal employment taxes
Nearly 1,000 employers have applied as of February 2013
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Who May Qualify for VCSP?
Businesses, tax-exempt organizations, and government entities may qualify
Must currently be treating workers (or a class or group of workers) as independent contractors or other nonemployees
Must have consistently treated workers as independent contractors or other nonemployees
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Who May Qualify for VCSP? Must have filed all required Forms 1099 for workers
the previous three years (temporarily waived thru 6/30/13 – See Announcement 2012-46)
May not currently be under employment tax audit by IRS, or under classification audit by DOL or State agency
Taxpayer previously audited for classification must be in compliance with audit results
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Who May Qualify for VCSP? May not currently be contesting the classification of
workers in court
If you qualify apply using Form 8952, Application for Voluntary Classification Settlement Program (at least 60 days before you want to begin treating workers as employees)
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What Does It Cost for VCSP?
Accepted employers will pay an amount equaling to just over 1% of wages paid to reclassified workers for the past year
No interest or penalties will be due
Employer will not be audited on payroll taxes related to these workers for prior years
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What Does It Cost for VCSP? Employers applying for VCSP under the temporary
relief program (Announcement 2012-45) may qualify even if Forms 1099 were not filed
Will pay a slightly higher amount than 1%, plus some penalties, and must file any unfiled Forms 1099 for workers that will be reclassified
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Section 530 Safe Haven Protection
Section 530 of the Internal Revenue Act of 1978 provides a “safe haven” for companies who use independent contractors
Passed in 1978 – To provide relief for businesses that used independent contractors in good faith
Intended to last only one year until Congress evaluated and passed legislation defining independent contractors. 35 years later Congress is still evaluating the matter!
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Section 530 Safe Haven Protection
Section 530 provides the new IRS Classification Settlement Program (CSP)
CSP establishes procedures for early and timely resolution of cases, reducing taxpayer burden
It is “Mandatory” that examiner offer a CSP to taxpayer if they qualify for Section 530 relief
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3 Qualification Requirements For Section 530 Relief
1) Reporting Consistency
2) Substantive Consistency
3) Reasonable Basis
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Reporting Consistency
All federal tax returns and information returns must be filed by the business on a basis consistent with the business’ treatment of the individual worker not being an employee.
Test must be applied to each worker separately since Form 1099-MISC may be filed for one worker in a class, but not another worker in same class. Treat these workers as separate classes.
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Substantive Consistency
Business must have consistently treated similarly situated workers as independent contractors.
If business or predecessor treated a similarly situated worker as an employee, Section 530 relief is not available.
Test must be applied to each class of workers.
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Reasonable Basis Business must have some reasonable basis for not
treating workers as employees
Reasonable basis can consist of reasonable reliance on several items
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Reasonable Basis
Judicial Precedent Published Ruling Private Letter Ruling Technical Advice Memorandum Results of past audits Long standing recognized practice of a significant
segment of the industry
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Are Section 530 Requirements Met?
If business clearly meets the reporting, substantive consistency requirements, and satisfies the reasonable basis test
Section 530 requirements are fully met and business is eligible for “Safe Haven” relief
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Are Section 530 Requirements Met?
If the business does not meet Section 530 relief provisions, the IRS examiner will proceed to determine if workers are independent contractors or employees using the Common Law rules (20 Factor Test)
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When Does CSP Get Offered?
If examiner determines that a reclassification issue does exist, examiner will consider whether or not CSP applies.
If examiners proposal is to reclassify workers as employees and business has timely filed Forms 1099
Examiner should make a CSP offer to taxpayer
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When Does CSP Get Offered?
It is mandatory that examiner present a CSP offer if all requirements are met
Taxpayer can accept or decline offer
Businesses that have not filed the required information returns are not entitled to CSP offer
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Cases Qualifying for CSP
Form 941/940 Non-Filers – Eligible for CSP if Forms 1099-MISC were filed
Statutory Employees – If business timely filed Forms 1099-MISC
Household Employees – If employer timely filed Forms 1099
Corporate Officers – If business treats corporate officer as IC and timely filed Form 1099-MISC
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Cases Excluded From CSP
Cases with Other Issues - CSP only available for worker classification. Not available for dividend or wages issues with S Corp reasonable compensation
Prior Closing Agreement – Taxpayer who has entered into a prior CSP is not eligible
CSP Non-Compliance – Business that isn’t in compliance with existing closing agreement
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Cases Excluded From CSP
Prior Coverage – Not available to a business that incorporated after the closing agreement was signed by principals, owners of the prior business that had worker classification issues.
Three Party Arrangements – No CSP is available if the correct employer can’t be identified
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Cases Excluded From CSP
Information Returns other than Forms 1099 Not available for any returns beside 1099s. Not available for K-1s if workers were treated as partners
Wage Issues – Not available for officer - shareholder compensation issues
Administrative or Judicial Proceeding – If prior year employment tax returns are part of an administrative or judicial proceeding No CSP
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Cases Excluded From CSP
Litigation – No CSP offer available if worker classification issue is resolved through litigation
Criminal Investigation – No CSP if tax return is part of an on-going investigation
Claims – No CSP for settlements available for cases closed prior to CSP implementation
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Cases Excluded From CSP
Government Employers – CSP not available to state and local government employers
Taxpayer No Longer in Business – CSP is only available to taxpayers still in existence. Closed business don’t qualify
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Taxpayer’s Rights To CSP Offers
Taxpayer participation in CSP is voluntary
Taxpayer can accept or reject offer at any time during the examination process
Declining to accept CSP offer allows taxpayer to retain all rights to an administrative appeal and all rights to judicial review
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Review Questions for Self Study CPE:
Now’s the time to answer the review questions 4-6.Click here:http://www.proprofs.com/quiz-school/story.php?title=NTc2ODc2
*Once all questions are complete submit and close quiz window.
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Conclusion
IRS audit process is designed to select returns with a high probability of error for audit
Being selected for audit does not indicate there is a problem
A “No Change” in a worker classification examination is possible
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Thank you for participating in this webinar.
Below is the link to the online survey and CPE quiz :
http://webinars.nsacct.org/postevent.php?id=10799 Use your password for this webinar that is in your email confirmation.
You must complete this survey and the quiz or final exam (for the recorded version) to qualify to receive CPE credit.
National Society of Accountants1010 North Fairfax Street
Alexandria, VA 22314-1574Phone: (800) 966-6679