4.23.18  Coordinating Worker Classification Determinations Between SS-8 Program and Exam.

Manual Transmittal

October 05, 2012

Purpose

(1) This transmits new IRM 4.23.18, Employment Tax, Coordinating Worker Classification Determinations Between SS-8 Program and Exam.

Material Changes

(1) This new IRM section contains information on procedures for examiners coordinating worker classification issues between the SS-8 Program and Examination.

Effect on Other Documents

None.

Audience

This section contains instructions and guidelines for SS-8 Program employees in Campus and for LB&I, TE/GE, and SB/SE employees dealing with employment tax issues.

Effective Date

(10-05-2012)

John H. Imhoff, Jr.
Director, Specialty Programs
Small Business/ Self-Employed Division

4.23.18.1  (10-05-2012)
Overview

  1. The SS-8 Program issues determination letters to workers and businesses on the proper classification of workers performing services for the business (i.e. employee or independent contractor). See IRM 4.23.2.6, SS-8 Program. The issue of worker classification is often addressed as part of an employment tax examination of a business. Some employment tax examinations are based on referrals from the SS-8 Program after it issues a determination letter. The following procedures are intended to coordinate worker classification issues between the SS-8 Program and Examination.

4.23.18.2  (10-05-2012)
Form SS-8 Received by the SS-8 Program When One of the Parties (Worker or Firm) is Currently Under Examination

  1. Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, can be filed by either a worker or a firm to request a determination on whether a worker (or a specific class of workers) is an employee or independent contractor. In order to ensure consistency and coordinate the determination with different areas of the IRS, the SS-8 Unit must research the Integrated Data Retrieval System (IDRS) to determine whether the worker or the firm is currently under examination before issuing a determination letter. The appropriate action will depend on which party is under examination, the type of examination, and the status of the examination.

4.23.18.2.1  (10-05-2012)
Firm Under Employment Tax Examination (Forms 940, 941, 943, 944, or 945) in Status 12

  1. The SS-8 Technician should contact the Examination Group Manager and notify the group manager that a Form SS-8 was filed regarding a worker performing services for the firm (taxpayer) under examination.

  2. A copy of filed Form SS-8 and any related information should be forwarded to the group manager to be associated with the examination case file.

  3. The SS-8 Technician should notify the taxpayer who submitted Form SS-8 (in most cases this will be the worker) that no determination can be issued at this time due to a related tax matter; the SS-8 request should be held in suspense.

  4. The examiner must address the worker classification issue from the Form SS-8 as part of the examination unless one of the exceptions "a" or "b" below is applicable. The examiner will follow normal procedures for examining worker classification issues including addressing section 530 first. See IRM 4.23.5.2.1, Section 530 Relief. The examiner should consider contacting the worker, and other workers in the same class, to confirm the facts presented on Form SS-8 and obtain any additional information. This would constitute third party contact. See IRM 4.23.10.10, Supplemental Procedures When Contacting Workers. The examiner should not disclose to the worker that the firm is under examination. Exceptions:

    1. The case under examination has a short statute.

    2. The case under examination is near completion.

  5. The examiner must provide the SS-8 Technician with a quarterly update on the status of the examination to allow the SS-8 Technician to notify the person that filed the Form SS-8 about the status of the SS-8 request.

  6. Upon completion of the examination, the examiner will provide the SS-8 Technician with the results of the worker classification examination.

  7. If section 530 relief was granted by the examiner, the examiner will not make the worker classification determination since examination procedures prohibit the examiner from continuing with the worker classification examination when section 530 relief is granted. See IRM 4.23.5.2.2(6), Establishing Section 530 Relief. The SS-8 Technician will make the determination whether the worker is an employee or independent contractor and issue the determination letter. The examiner must provide the SS-8 Technician with any information determined during the examination that would assist the SS-8 Technician with making the worker classification determination.

  8. If section 530 relief was not granted, the examiner completes the worker classification determination. See IRM 4.23.5.3, Independent Contractor or Employee. The examiner will forward a copy of the examination workpapers to the SS-8 Technician outlining the facts of the case, the determination of whether the worker is an employee or independent contractor, whether the taxpayer agreed to the adjustment, and whether a CSP agreement was executed.

  9. If the worker classification examination adjustment was agreed (either a worker classification adjustment was made or the worker was determined to be an independent contractor), the SS-8 Technician will issue a determination letter to the worker based on the examiner’s findings.

  10. If the worker classification examination adjustment was unagreed, no determination letter should be issued until the case is resolved in Appeals or any subsequent litigation.

4.23.18.2.2  (10-05-2012)
Firm Under Employment Tax Examination (Forms 940, 941, 943, 944, or 945) in Status 10

  1. Cases in status 10 can be either in the examination group manager’s inventory waiting to be assigned or in an examiner’s inventory waiting to be started.

  2. The SS-8 Technician will contact the examination group manager to determine the status of the case (whether waiting to be assigned or assigned but not started).

  3. If the case is unassigned, the SS-8 Technician will request permission from the examination group manager to work the SS-8 and issue a determination.

    1. If the case is to be assigned, the examination group manager may request that the SS-8 Technician not issue a determination letter until the examination is completed (following the above instructions for a case in status 12).

    2. If the examination group manager grants permission to the SS-8 Technician to issue a determination letter, the SS-8 Technician should forward a copy of the determination letter and related case file documents to the examination group manager upon completion.

  4. If the case is assigned to an examiner, the group manager will provide the name of the examiner to the SS-8 Technician to contact for the status of the examination.

    1. If the examination has been started or is about to be started, the SS-8 Technician will follow the instructions above for cases in status 12.

    2. If the examination is not started, the SS-8 Technician will follow the instructions for cases in status 10 that are unassigned (see step 3), except request permission from the examiner.

  5. TAS: The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal procedures, or who believe that an IRS system or procedure is not working as it should. Pub 1546, Taxpayer Advocate Service - Your Voice at the IRS, provides contact and additional information. The program is designed to alleviate taxpayer hardships that arise from systemic problems or the application of the Internal Revenue Code. In addition, see the TAS website at:http://tas.web.irs.gov.

4.23.18.2.3  (10-05-2012)
Firm Under Income Tax or Other Examination (Form 1040 Schedule C, Form 1120, Form 1120S, Form 1065, or Other Returns)

  1. If the case is in status 10 or 12, the SS-8 Technician will contact the Examination Group Manager to determine if the examination is being expanded to the employment tax returns or whether a worker classification issue would affect the examination.

  2. If the examination is not being expanded to the employment tax returns and the worker classification issue would not affect the examination, the SS-8 Technician will work the SS-8 case using normal procedures and issue a determination letter. The SS-8 Technician will notify the examiner that the technician will proceed with making a determination.

  3. If the examination is being expanded to the employment tax returns or the worker classification issue would affect the examination, the SS-8 Technician and examiner should follow the procedures above for cases where the firm is under an employment tax examination.

4.23.18.2.4  (10-05-2012)
Worker Under Examination (Form 1040)

  1. The SS-8 Technician will contact the Examination Group Manager and notify the group manager that a Form SS-8 was filed by the worker (taxpayer).

  2. The group manager will notify the SS-8 Technician whether the determination will have a tax affect on the workers’s Form 1040. The determination of whether the worker’s status will impact the Form 1040 depends on whether the worker is an employee or independent contractor and how he/she treated the income on Form 1040. In most cases, the proper classification of the worker will have a tax effect on Form 1040.

  3. If the worker is determined to be an independent contractor, then the worker may deduct properly substantiated business expenses on Schedule C against the income. The worker is generally subject to self-employment tax on the net income on Schedule C. The worker may deduct the deductible part of the self-employment tax from gross income in determining adjusted gross income.

  4. If the worker is determined to be an employee, then the income is properly reported as wages on Form 1040, line 7. The worker is subject to employee FICA on Form 8919, Uncollected Social Security and Medicare Tax on Wages. The worker is not entitled to deduct expenses on Schedule C. Any substantiated business expenses would be employee business expenses deductible on Schedule A subject to the 2% AGI limitation. The worker would not be entitled to a deduction for contributions to a KEOGH.

  5. The examiner will keep the examination open until the SS-8 Technician completes the determination.

  6. The SS-8 Technician will follow normal procedures for gathering information necessary to make the determination and for issuing a determination letter. A copy of the determination letter will be provided to the examiner. These determinations will be worked on an expedited basis.

  7. Upon receipt of the determination letter, the examiner can continue the examination and make the appropriate adjustments based on the determination of whether the worker is an employee or independent contractor.

4.23.18.3  (10-05-2012)
Employment Tax Exams Based on SS-8 Referral

  1. Many employment tax cases are selected for examination based on referrals from the SS-8 Unit where determinations were made that workers should be classified as employees. In cases where the examination is not based on referrals from the SS-8 Unit, the examiner may still find that a determination letter was issued to the firm that a particular class of workers was determined to be employees. In either case, the examiner should determine if the firm is in compliance with the determination letter by treating the workers as employees and if so, the date the firm converted the workers from independent contractors to employees.

4.23.18.3.1  (10-05-2012)
Procedures Where the Firm (Taxpayer) is Currently in Compliance with the Determination Letter

  1. If the examiner determines that the taxpayer converted the workers from independent contractors to employees and is currently treating the workers as employees, the examiner may discontinue the examination of the worker classification issue even if the taxpayer treated the workers as independent contractors in the year under examination.

  2. The examiner should continue the examination of any other employment tax issues determined to be worthy of examination. If no other employment tax issues are present, the case may be closed "no change."

4.23.18.3.2  (10-05-2012)
Procedures Where the Firm (Taxpayer) is Not in Compliance with the Determination Letter

  1. Even though a determination letter was issued to the taxpayer, the examiner must make an independent determination whether the taxpayer qualifies for section 530 relief and, if not, whether the workers are employees or independent contractors. The determination letter by itself cannot be used as the basis for denying section 530 relief or proposing additional tax based on a worker classification adjustment.

  2. The examiner should request the information submitted by the taxpayer and worker that was used by the SS-8 Unit to make the determination from the SS-8 Unit.

  3. When using an SS-8 determination as the basis for an examination, the examiner must ascertain whether:

    1. the conclusions stated in the letter ruling are properly reflected in the return,

    2. the representations upon which the letter ruling was based reflect an accurate statement of the controlling facts,

    3. the transaction was carried out substantially as proposed, and

    4. there has been any change in the law that applies to the period during which the transaction or continuing series of transactions were consummated.


    See Rev. Proc. 2012-1, section 11.03.

  4. If the examiner makes the same determination as in the determination letter, the examiner will follow normal procedures for proposing a worker classification adjustment. Classification Settlement Program (CSP) procedures must be followed if the requirements for a CSP are applicable. See IRM 4.23.6, Classification Settlement Program. Failure to comply with a determination letter does not exclude the taxpayer from qualifying for a CSP offer.

  5. The examiner may determine additional or different facts during the examination that lead the examiner to reach a conclusion that differs from the SS-8 determination. If the examiner disagrees with the SS-8 determination, the examiner should follow the procedures below for resolving the discrepancy and possible revocation of the determination letter.

4.23.18.4  (10-05-2012)
Employment Tax Examination Determinations that Differ from SS-8 Determination Letters

  1. Before completing the examination and closing the case, the examiner must follow the procedures below to resolve the discrepancy between the examiner’s determination and the determination letter issued by the SS-8 Unit. The following procedures are not applicable if the examiner determines that the taxpayer is entitled to relief under section 530. In cases where section 530 is allowed, the examiner would not have made a determination whether the workers are employees or independent contractors. See IRM 4.23.5.2.2(6), Establishing Section 530 Relief. Therefore, the SS-8 determination will stand with respect to the class of workers for which the determination letter was issued.

4.23.18.4.1  (10-05-2012)
Procedures for Examination for Resolving Disagreements with an SS-8 Determination Letter

  1. The examiner will prepare a memorandum to the SS-8 Unit that issued the determination letter explaining that the examiner conducted an audit of the firm (taxpayer) and made a different determination than the SS-8 determination letter. The memorandum should include the following information:

    1. Taxpayer name, address, and employer identification number (EIN).

    2. The reasons for the determination that the workers should be classified differently than the conclusion reached in the SS-8 determination case. Explain the differences in facts determined during the examination that were not considered in the SS-8 determination.

      Note:

      SS-8 will reject memorandum/information back to the examiner if differences are not explained.

    3. A request that the determination letter be revoked.

  2. Attach a copy of the examination workpapers explaining the issue, facts, conclusion, and a copy of the original determination letter.

  3. The SS-8 Unit will review the memorandum and additional information to determine whether it agrees with the examiner’s determination that the SS-8 determination letter should be revoked.

  4. If the SS-8 Unit agrees with the examiner’s determination, the SS-8 Technician will notify the examiner of the concurrence and that the determination letter will be revoked. The examiner may then proceed with the case based on the examination results.

  5. If the SS-8 Technician disagrees with the examiner’s determination, the SS-8 Technician will elevate the case to the SS-8 Program Coordinator for consideration. The SS-8 Program Coordinator will review the file, prepare a memorandum outlining the reasons for disagreement, and provide the examiner with the memorandum via email. If the examiner and his/her manager still disagree with the SS-8 Unit’s result after consideration of the memo, a conference call will be held between the examiner’s group manager, the examiner, and the SS-8 Program Coordinator to attempt to resolve the disagreement.

  6. If the disagreement cannot be resolved, the examiner’s group manager will elevate the issue to the Employment Tax Policy Analyst responsible for worker classification issues.

  7. The Employment Tax Policy Analyst will work with the SS-8 Program Coordinator to resolve the issue and notify the examiner of the final determination. The examiner may then proceed with the case based on the resolution between the Policy Analyst and the SS-8 Program Coordinator.

4.23.18.4.2  (10-05-2012)
Procedures for SS-8 Unit for Resolving Disagreements with an SS-8 Determination Letter

  1. Upon receipt of a request from an examiner for a revocation of an SS-8 determination, the SS-8 Technician will review the recommendation to determine if the technician agrees with the examiner and record in the SS-8 case file the basis for a recommendation to revoke or uphold the SS-8 determination.

  2. The SS-8 Technician will discuss the recommendation with the team manager or lead.

  3. If the SS-8 Technician’s manager or lead agrees that the SS-8 determination should be revoked, the technician will notify the examiner of the concurrence with the recommendation and will provide the examiner with a copy of the revocation letter.

  4. If the SS-8 Technician and manager or lead disagrees with the examiner’s recommendation, they will elevate the file to the SS-8 Program Coordinator for review. The SS-8 Program Coordinator will consider the matter, and if he/she concurs that the SS-8 determination should be upheld, will prepare a memorandum outlining the areas of disagreement, and submit the memorandum to the examiner’s group manager for consideration.

  5. If the examiner’s group manager and examiner still disagree with the SS-8 determination result after consideration of the memorandum, they will request a conference call with the SS-8 Program Coordinator to attempt to resolve the disagreement.

  6. If the disagreement cannot be resolved, the group manager and examiner will elevate the matter to the Employment Tax Policy Analyst responsible for worker classification issues for final resolution.


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