A Senate proposal on worker classification is drawing praise from business.
The bill from Sen. John Thune (R-SD) would provide a new safe harbor based on three criteria that, if met, would qualify workers as independent contractors:
You won’t automatically be audited for having above-average deductions; however, if your write-offs are excessively large, your audit risk can go up because that is a key factor in the Revenue Service’s return selection process.
Here’s an example where taking large charitable deductions raised a red flag with the agency. A couple was audited after they claimed total charitable write-offs of $142,250 for property donations to Goodwill. Because they couldn’t prove the value of the items donated, the Tax Court disallowed all but $250 of their deduction and slapped them with the 20% penalty for negligence (Ohde, TC Memo. 2017-137).
Charitable deductions can sometimes be lost if conditions are attached by the donor. In this case, the owner of a run-down movie theater wanted to transfer it in a bargain sale to an unrelated, newly formed nonprofit. Since the transferee hadn’t yet received its tax exemption, the building’s owner arranged a bargain sale with another charity but agreed that it could direct a subsequent conveyance to the ultimate transferee. This transfer restriction included in the contract of sale caused the Tax Court to rule that the owner didn’t relinquish dominion and control over the building and that no charitable gift was made (Fakiris, TC Memo. 2017-126).
Worker classification remains a priority. The Internal Revenue Service continues to seek back taxes and penalties from firms that wrongly treat workers as contractors. Unreported or underreported employment taxes make up a big chunk of the overall federal tax gap. The Labor and Justice Departments, along with Individual States also have vital roles to play in ensuring that workers are properly classified by the businesses they work for.
The stakes have always been high, lost taxes for federal and state governments and fewer benefits for workers who are improperly treated as contractors. The importance is magnified with the growth of freelance service gigs. Freelance gigs such as Uber, Rover, Grubhub and Fiverr are making up a growing portion of the part time economy.
To classify workers, the IRS uses three tests, each made up of multiple factors.
The Behavioral Test focuses on whether the company controls or has the right to control what the worker does and how to do the job. Key factors for employee status include instructions about performing the work, evaluation criteria and training.
The Financial Test looks at who controls the economics of the worker’s job. Being able to work for multiple firms and providing your own tools needed for the job are indicative of independent contractor status. Some factors favoring employee status are eligibility for reimbursement of travel costs and payment based on hours worked.
The Type-of-Relationship Test examines how the parties perceive each other. Providing paid vacation and retirement benefits indicates a worker is an employee, as does hiring to provide services indefinitely rather than for a specific time. Written language stating the worker is an independent contractor isn’t determinative.
Aberdare Business Solutions offers a variety of Lunch & Learn Seminars or on-site seminars regarding the above topics. Additionally, we include information pertaining to the Department of Labor and the Texas Workforce Commission. If you are interested in attending a seminar or having us speak at your company or association please contact our office at 281.599.3380 or email@example.com
The cost to become a dog groomer doesn’t qualify for an education tax break through The American Opportunity Tax Credit. The couple in the case has a daughter who after taking one class at a local community college, decided on a different track and enrolled in a dog grooming program with a company aptly named Canine Clippers.
Only tuition paid to accredited postsecondary institutions is eligible for the AOTC, and the parents provided no evidence that Canine Clippers met that standard or that their daughter attended at least half-time (Martin, TC Summ. Op. 2017-73).
IRS is on the prowl for filers who claim large charitable deductions, as a big-game hunter found out after he took a $1.45 million write-off for animal hides, skulls, horns, and other hunting specimens he donated to charity. He claimed the items he gave were of museum quality, with no market comparables, and should be valued at their estimated replacement cost.
The Tax Court disagreed, saying the specimens were commodities, not collectibles, and that fair market value is based on market prices of similar items. The Court allowed a $163,000 deduction, the figure determined by the Service’s appraiser (Gardner, TC Memo. 2017-165).
Reporting Schedule C losses and a high wage income can be an audit red flag. This is especially true if the loss activity sounds like a hobby.
Here’s a prime example: A taxpayer with $250,000 in wages also marketed film festivals in his spare time. He began the activity in 2013 and deducted $32,000 of Schedule C losses that year. He had losses in later years as well, but they weren’t as large. He had no business plan, kept sloppy records, and lacked practical experience. The Tax Court nixed his losses, saying he didn’t have the requisite profit motive. (Zudak, TC Summ. OP. 2017-41).
|Reproduced from The Tax Book Newsletter|
Post Date: 8/16/2017
|Last Updated: 8/16/2017|
| Cross References
- TIGTA Ref. No. 2017-40-038, July 26, 2017
A recent report issued by the Treasury Inspector General for Tax Administration (TIGTA) stated that the IRS case selection processes result in billions of dollars in potential employer underreported tax not being addressed.
The Combined Annual Wage Reporting (CAWR) Program compares the employee wage and withholding information reported to the IRS on employment tax forms to withholding documents filed with the Social Security Administration. The purpose of the IRS-CAWR Program is to ensure that employers report the proper amount of employment taxes and Federal income tax withholding on their employment tax returns.
The TIGTA conducted an audit to evaluate whether the IRS-CAWR Program's document matching process accurately identified and selected the most productive cases. This audit concluded that billions of dollars of potential employer underreported taxes are not being addressed because most discrepancy cases are not worked by IRS employees. Analysis of 137,272 discrepancy cases for tax year 2013 found that the IRS worked only 23,184 cases (17%). The remaining 114,088 (83%) discrepancy cases that were not worked had a potential underreported tax difference of more than $7 billion.
In addition, discrepancy case selection processes do not ensure that priority is given to working discrepancy cases with the highest potential tax assessment. TIGTA analyzed the 114,088 discrepancy cases that were not worked to identify those 23,184 with the highest potential underreported tax amounts by case type. It turned out that these had total potential underreported tax of more than $6.8 billion.
Further, TIGTAâ€™s analysis of the 114,088 unworked discrepancy cases showed that if the IRS had selected the 23,184 auto-generated cases with a higher average assessment potential to work, it would have selected cases with more than $128 million in assessment potential. In addition to changing its selection methodology to work case types with the highest potential tax assessment, the IRS could further increase its return on investment by including prior year discrepancy cases for the same employer. TIGTAâ€™s analysis found that 3,137 of the discrepancy cases for tax year 2013 also had discrepancy cases for tax year 2012, with potential underreported tax totaling more than $448 million for tax year 2012.
The TIGTA audit recommended that the IRS evaluate the current agreement and workload processes with the Social Security Administration to determine if changes could be made, revise its case selection criteria to include auto-generated cases with the highest potential tax assessment, coordinate with the Information Technology organization to review and prioritize programming enhancements, and take actions necessary to implement the proposed upgrade to include prior year discrepancy cases when current year discrepancy cases are selected for the same employer.
Dear Texas Employer,
As we witness the destruction and suffering caused by Hurricane Harvey, we are united in our concern and determination to support our fellow Texans during this trying time. Hurricane Harvey has brought great devastation to our state, and many of our Texas employers are among the thousands adversely affected by the storm. The Texas Workforce Commission (TWC) is working to provide available resources and services to displaced and other affected Texans, and will continue to monitor the effects of the storm to determine what additional steps we need to take to provide assistance.
Below is a list of resources available for those who have been affected as well as a link to frequently asked questions that will assist you as an employer.
Individuals affected by the recent severe storms in the following counties can apply for benefits online through Unemployment Benefit Services or by calling a TWC Tele-Center Monday through Friday between 8 a.m. and 5 p.m. at 800-939-6631: Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria, and Wharton Counties. Individuals should specify that their applications are related to the damage caused by Hurricane Harvey.
The work search requirement is waived for disaster-related regular unemployment claims and employer tax accounts are protected from any charge for such claims.
TWC is accepting applications for Disaster Unemployment Assistance (DUA) as a result of severe weather due to Hurricane Harvey. Under Presidential Disaster Declaration ( FEMA 4332-DR ) dated August 25, 2017, workers who lost their jobs and self-employed individuals who have been unable to work due to damage sustained from Hurricane Harvey may be eligible for relief. Applications for DUA must be submitted by September 27, 2017. TWC’s website contains more information about Disaster Unemployment Assistance . Individuals can apply for disaster unemployment benefits online through Unemployment Benefit Services or by calling a TWC Tele-Center Monday through Friday between 8 a.m. and 5 p.m. at 800-939-6631.
DUA is available to individuals who:
To receive DUA benefits, all required documentation must be submitted within 21 days from the day the DUA application is filed. Required documentation includes Social Security number, a copy of the most recent federal income tax form or check stubs, or documentation to support that you were working or self-employed when the disaster occurred.
Applicants must mail in or fax all required documentation within 21 days from the date of the DUA application. Send mailed documentation to: Texas Workforce Commission, UI Support Services Department, Attn: DUA, 101 E. 15th St., N. Lamar, Austin, TX, 78778-0001, or fax it to 512-936-3250.
Job seekers may visit local Workforce Solutions offices for access to job-search resources, job postings and training programs, as well as assistance with exploring career options, résumé and application preparation, career development and more. Customers also may connect with potential employers through TWC’s online job-search engine, by visiting WorkinTexas.com .
Frequently Asked Questions From Employers:
individuals and households):
As your Commissioner Representing Employers, I am dedicated to ensuring our state resources and services are provided to impacted employers, individuals, and communities. I know Texans will face this challenge with the same resilience and perseverance that makes us all proud to live in the Lone Star state.
May God bless you and may God forever bless the great State of Texas!