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Home Employee Misclassification IRS Tax Documents Assist Decision In Classification Case

IRS Tax Documents Assist Decision In Classification Case

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by Robert Sheen
Are Your Workers Misclassified? You Might be Able to Check Their Tax Return Records

With misclassification suits becoming more and more frequent, the latest case suggests that tax returns might be subject to mandatory disclosure in resolving classification issues. In a recent case, Mescalero Apache Tribe v. Commissioner, 148 T.C. 11 (2017), to refute the IRS determination that certain Tribe workers were employees and not independent contractors and after being unable to track down some of the Tribe workers to respond to whether they viewed themselves as employees or independent contractors, the IRS was required to produce tax return records of those Tribe workers as a means of determining employee status. If the tax returns showed that the workers had filed W-2 forms and not 1099 forms, that fact would tend to show that those workers viewed themselves as employees and not independent contractors.

Typically this information is confidential, a point argued by the IRS in this case. The IRS cited Internal Revenue Code (IRC) Section 6103, where the tax records are deemed confidential and the burden of proof does not shift to the IRS. However, the Tax Court disagreed, finding an exception to that rule where the tax return “directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding.”

It is unclear whether the Mescalero decision is unique to its facts and in particular regarding a dispute with the IRS about how workers viewed themselves as employees or independent contractors, the reasoning behind that decision suggests that the confidentiality of tax returns may not be as sacrosanct as generally viewed. Under certain circumstances, the IRS could be required to furnish tax documents in the interest of determining worker classification.

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IRS Tax Documents Assist Decision In Classification Case
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IRS Tax Documents Assist Decision In Classification Case
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With employee misclassification cases running rampant, a new case hints of the potential to require IRS disclosure of workers tax returns.
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The ACA Times
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