Originally published on Passive Activities and Other Oxymorons on December 27, 2010.
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CCA 201049027
If the ‘skeeters don’t get him. then the ‘gators will.
I’m making this a bonus post. One of the things that I worry about a lot is 1099 compliance (I have to take a break from global warming every once in a while). It was the topic of one of my earliest posts. An insidious observation in several IRS audit manuals, including the one for auto body repair shops, is that there might be more money in penalties for failing to file 1099’s and backup withholding then in disallowing deductions. You see if you were supposed to send somebody a 1099, then you were supposed to have asked them for their ID number. Since you didn’t ask they didn’t give it to you. Therefore, you should have withheld from their payment and remitted it. You can get out of the backup withholding by getting them to sign an IRS form that says they reported the income. Good luck.
CCA 201049027 lays out an even more insidious tactic. Suppose the IRS launches an effort to characterize service providers as employees. These things can take a long time. The Cheryl Mayfield decision which I wrote a post about was decide in October 2010. It concerned proposed employment taxes for 2003 and 2004. Well of course if they had really been employees, you wouldn’t be subject to back-up withholding. But let’s say, for the sake of argument, that you win on that issue in Tax Court. Now, after all that time does the Service have the ability to assess back-up withholding if your 1099 compliance has been less than perfect. According to this CCA, they can. On top of that, the Tax Court does not have jurisdiction on the issue of back up withholding.
Issue 1:
The Tax Court does not have jurisdiction under § 7436 to determine the application of backup withholding liability for any workers determined to be independent contractors.
Issue 2: If a Taxpayer filed Forms 945 and thus started the running of the period of limitations on assessment with regard to backup withholding, the issuance of the NDWC may nonetheless suspend the period of limitations with respect to the backup withholding.
I get the sense that they feel they may not be on firm ground with this interpretation :
We recognize the potential incongruity in noting that the Tax Court does not have jurisdiction over § 3406 taxes in a § 7436 proceeding while also asserting that the proper issuance of the NDWC suspends the period of limitations with respect to § 3406 taxes. However, due to the unique nature of employment taxes, there is no perfect analogy in the deficiency arena to apply to the operation of § 6503(a), a provision involving income tax deficiencies, in the employment tax arena. The principles we distill above from §§ 6213 and 6503 are especially apt in light of the uniqueness of the situation where assessing one type of employment tax (e.g., backup withholding on non-employees) is inconsistent with assessing another type of employment tax (e.g., social security and Medicare tax on employees). Furthermore, these principles only apply to situations where the period of limitations for assessment of § 3406 taxes is open at the time the NDWC is issued.
Also they were not anxious to release it.
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I was thinking of giving Ms. Donis a call and make her the blog’s first interview, but I’m passing on it. If this serves as a timely warning thank RIA Checkpoint and the Freedom of Information Act. You can thank me too.