Employers have long had to grapple with the important distinctions between independent contractors and employees. In short, if the IRS reclassifies an independent contractor as an employee, you could be held liable for back taxes and wages, as well as penalties.
In Revenue Procedure 2022-13, the IRS recently issued guidance on when and how it will issue a Notice of Employment Tax Determination. This notice informs an employer that one or more individuals who provide services to the employer should be legally classified as employees. The notice also describes how the employer can petition the U.S. Tax Court for review of the determination.
Tax Court review
Generally, the Tax Court may review two types of IRS employment tax determinations:
Worker reclassification determinations, and
Relief determinations under Internal Revenue Code Section 530.
According to the IRS interpretation of Sec. 7436, the Tax Court may review an IRS employment tax determination only if the IRS has issued a Notice of Employment Tax Determination. And the IRS will issue such a notice only when, after an audit, it has determined that one or more individuals performing services for the employer are employees, and the employer isn’t entitled to relief under Sec. 530.
However, in two opinions, the Tax Court clarified that its review of worker classification determinations didn’t depend on the IRS issuing a Notice of Employment Tax Determination, because the notice wasn’t a jurisdictional requirement. The determination itself gives rise to Tax Court jurisdiction.
Accordingly, even when the IRS doesn’t issue a Notice of Employment Tax Determination, a taxpayer may petition the Tax Court for review of a worker reclassification or Sec. 530 relief determination.
Under Revenue Procedure 2022-13, the IRS has provided detailed guidance on Notice of Employment Tax Determinations, and what an employer needs to do to request a Tax Court review — whether or not it has received a notice. The revenue procedure addresses:
When and how the IRS will issue a Notice of Employment Tax Determination,
What must happen before the Tax Court has jurisdiction to review an IRS employment tax determination,
How a review of an IRS employment tax determination is handled under the Tax Court’s Small Case procedures,
The restrictions on assessment when an employer files a Tax Court petition and its impact on the statute of limitations for collection,
The appeals process following a Tax Court decision, and
Agreed settlements of employment tax disputes.
Revenue Procedure 2022-13 is effective as of February 7, 2022.
Area of focus
Worker classification remains an area of focus for the IRS. So, it’s important for employers to know their rights — including the ability to pursue a Tax Court review of an employment tax determination. Before approaching the IRS or the court, however, contact us for further information and assistance.
HoganTaylor Employee Benefit Plans Practice
If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Employee Benefit Plans practice, please contact Gwen Mazzola, Employee Benefit Plans Practice Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.