FinanceRegs.com » Employee classification error? How to prove you deserve tax relief

Employee classification error? How to prove you deserve tax relief

October 27, 2008 by Carol Katarsky
Posted in: 1099s, Best practices, Hiring & training staff, In this week's e-newsletter, Latest news & views, Tax compliance

A company getting mercy from IRS over back employment taxes isn’t an urban legend. Here’s proof: It can happen to even the most careful company — an audit uncovers a classified employee — and now you owe back employment taxes. But if you made a good faith effort to make the right call in the first place, you can probably qualify for IRS’ Sec. 530 relief.

That’s what happened when Peno Trucking discovered that despite its best efforts, it had improperly misclassified several employees as independent contractors (ICs).

Peno applied for tax relief, and it was granted by the U.S. Tax Court for a few key reasons. The company had:

  • a reasonable basis for classifying the workers as ICs
  • consistently treated the workers as ICs
  • filed all appropriate 1099s, and 
  • otherwise lived by the letter of the tax law. 

As such, the mistake was seen as just that — a mistake, and not a deliberate tax dodge.

Note: If you’re faced with a problem like this, IRS has very specific requirements. Peno also pointed out that the Ohio Industrial Commission and the Board of Workers’ Compensation had both ruled that the workers were ICs. Although it accepted Peno’s other arguments, the court rejected that as a reason for relief because those organizations use different standards than IRS.

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