Independent Contractor Disputes

Social Security withholdings are required on all wages up to a certain amount. Employers and employees each pay half the security tax. Currently, both are required to pay 7.65 percent for a total of 15.30 percent on wages. If an employer fails to withhold social security tax, the employer is liable for the tax. If an employer fails to withhold social security tax, the employer is liable for the tax. An employer can also be held accountable for any income tax withholding that should have been timely made. The IRS aggressively pursues employers that fail to pay these employment taxes or incorrectly classifies workers as independent contractors to avoid employment taxes. The Internal Revenue Code authorizes the IRS to assess severe penalties against employers that fail to withhold employment taxes and/or incorrectly classify workers. Given the high stakes associated with these types of cases, it is extremely important to have a competent attorney with significant experience in employment tax matters represent you or your business at the first sign of trouble with the IRS. We have substantial experience representing both small and very large business employment tax cases before the IRS and in federal court.

From the very first meeting, we carefully review the facts and circumstances of each client with employment tax issues. If employment taxes were not made due to an oversight or because of financial difficulties, typically we will attempt to mitigate the penalties that can easily double the original employment tax assessment. We approach employment reclassification cases differently. It is not uncommon for the IRS (or a state tax agency) to aggressively attempt to reclassify contractors as employees, leaving the business owner liable with a massive employment tax liability. This liability can be assessed retroactively essentially putting a business owner out of business. In situations where it may not be possible to classify a worker as an independent contractor, it may be possible to request relief under Section 530 of the Revenue Act. This is a special provision that offers relief to employers that incorrectly classified workers. If certain qualifications are satisfied, a business may not be liable to pay back the vast majority of assessed employment taxes, interest, and penalties assessed by the IRS.

Trust Fund Recovery Penalties

If an employment tax matter cannot be resolved at the business level, the IRS will typically seek to assess a penalty authorized under Section 6672(a) of the Internal Revenue Code.

Internal Revenue Code Section 6672(a) authorizes an assessment of a penalty equal to 100 percent of the employment taxes which a business was obligated to pay the IRS against so-called “responsible persons.” The Internal Revenue Code defines a “responsible officer” as any person who is responsible for the collecting and paying of employment tax to the government. The IRS has broadly defined a “responsible officer” to include corporate officers, directors, shareholders, corporate counsel, shareholders, bookkeepers, and even creditors of a business. The IRS typically takes the position that individuals who have a say in the decisions as to whether or not to pay creditors instead of the IRS may be classified as “responsible officers” for purposes of the trust fund recovery penalty.

Once a trust fund penalty is assessed against a “responsible officer,” the IRS typically aggressively collects the penalty and in many cases prioritizes the collection of a trust fund recovery penalty over the collection of other tax liabilities. If the IRS has classified you as a “responsible officer” or is considering classifying you as a “responsible officer,” you will immediately need the assistance of a qualified tax attorney with substantial experience in this area. The stakes are incredibly high any time the IRS considers classifying an individual as a “responsible officer.” Because the stakes are so great in these types of cases, we aggressively fight the IRS any time there is an allegation that a client is a “responsible officer.” We have represented a substantial number of clients accused by the IRS as being “responsible officers” in audits and before the IRS Appeals Division. We have significant trial experience in contesting the trust fund recovery penalty.