Chasing the Independent Contractor

             Round and round we go. Is the worker an employee or an independent contractor? IRS chasing employers, employers dodging IRS. Everyone is doing it or so it seems. But helping to sort out the rules is always welcome, so a recent Senate proposal on worker classification may bear fruit. The law, if passed, would create a safe harbor (we lawyers love that). It would be based on three criteria: the relationship between the respective parties, the existence of a written contract and the location of the services or the means by which the services are provided. You may know that companies like Uber are being characterized as the “gig” economy. Creating “freelance” relationships with what perhaps could be called employees is now the rage. In the old days a worker who described himself as "freelance" meant they were unemployed. As the situation gets more out of hand because of this gig economy legislation in this area is more likely. Included in the proposal will be necessary changes to the form 1099 reporting rules. Passage seems on track and is real.

Tax Reform- Alice and the Rabbit

1)      Boy, $1 trillion just isn’t what it used to be. I was tempted to write that amount down but I wasn’t sure how many zeros I would actually need. But we will soon be finding out. The architects of tax reform are talking about major tax reduction in order to meet the president’s campaign promise. Like everything this president seems to do, he wants things done quickly. If not correctly. So now Republicans are changing their tune with regard to fiscal debt. The federal debt topped $20 trillion earlier this month and is projected to grow by another 10 trillion over the next decade. It seems the tax reform idea and tax cuts are different than the Republican ideal of fiscal responsibility and discipline. That at one time included tax cuts that did not add to the federal deficit. Of course the idea is that economic growth will offset the loss of revenue… said Alice to the Rabbit. 

The SFR and the Tax Return Non Filer

           After more than forty years of experience I can tell you this: lots of people don’t file tax returns. Their excuses run the entire gamut from the simple: “I forgot” to “I didn’t have the money” or “My personal life was a mess.” The IRS is in a continual dance with non-filers. It is no surprise that many individuals and businesses slip through the cracks. In some cases the taxpayers are simply shocked that they never get IRS contact at all. Of course honest taxpayers must bear their undisclosed tax burden. The politics involved doesn’t lend itself to a general amnesty for these nonfilers. Instead Congress has provided and the Internal Revenue Code follows an administrative procedure for creating tax returns for taxpayers who refuse to do it themselves. On the surface this may not be a bad thing. IRS wants those returns, so it goes ahead and creates them itself. Once created by the IRS, the agency is free to begin collection of the dollars that may be due along with interest and penalties. This process is known as SFR, substitute for return. What taxpayers may not know is the difficulties they are about to encounter because of this process. Since no tax returns are filed by the taxpayer the statute of limitations never runs. Also in the calculation used by the IRS any tax information that has been sent to it will be used on the income side but no other deductions or allowances will be given. Thus if a taxpayer is actually entitled to sizable credits or losses and other deductions which would have reduced his tax liability to zero, none of them will be applied. These assessments based on the substitute for returns can result in enforced collection action including federal tax liens and seizures as well. Many clients discover that they had been subject to this SFR procedure only when a collection agent or Notice of Lien or Levy appears at their doorstep. The well advised are told to immediately create their own returns and file them with the IRS. In most cases those actual tax returns will be used for the basis of reducing any prior assessments. In a recent bankruptcy case a taxpayer learned some of the hardships that may be encountered because of this process. In Giacchi, 3^rd Cir. the IRS had created substitute for returns for the taxpayer. The taxpayer later filed his own forms 1040 which resulted in reduced taxes that he still owed. The taxpayer never paid those taxes. After several years the taxpayer filed for bankruptcy and argued that the tax liability should be discharged. The appeals court ruled that his filings after IRS had assessed the taxes were not an honest attempt to comply with the tax law. The court determined that they were not returns for bankruptcy purposes and therefore were not dischargeable. Bankruptcy, it will be remembered, is for honest taxpayers with honest debts. Nonfilers should attempt to obtain IRS transcripts to determine whether or not they have been made subject to the SFR procedure.