The Internal Revenue Service has issued a new revenue procedure which amplifies and supercedes Revenue Procedure 81-43 (relating to the employment tax status of independent contractors and employees). The procedure provides instructions for implementing the provisions of Section 530 of the Revenue Act of 1978. In light of the passage of section 3508 of the Code and the effect on direct sellers, of section 530 is offered only as a matter of academic interest. As you know, Section 269, Paragraph (C) of the Tax Equity and Fiscal Responsibility Act of 1982 extended the provisions of Section 530 indefinitely. Section 530, as amended, provides that if, for purposes of employment taxes under Subtitle C of the Internal Revenue Code, a taxpayer did not treat an individual as an employee for any period, then the individual will be deemed not to be an employee for that period, unless the taxpayer had no reasonable basis for such a classification. "Safe Havens" -- Defining a "Reasonable Basis" The Rev. Proc. restates several long established "safe havens" that can be relied upon in determining whether a taxpayer has a "reasonable basis" for not treating an individual as an employee. They are: 1) a judicial precedent or published ruling, technical advice, or letter ruling pertaining to the taxpayer, or 2) a past IRS audit which entailed no assessment to the taxpayer's employment tax regarding an individual holding a position similar to the individual whose status is at issue, or 3) a longstanding and recognized practice of a significant segment of the industry in which the individual was engaged. The taxpayer might even be entitled to relief, should the "safe haven" conditions not be met, if some other "reasonable basis" for not treating the individual as an employee can be demonstrated. However, in any case, to be provided relief for any period after December 31, 1978, the taxpayer must have filed Form 1099 with the Internal Revenue Service, even if the taxpayer fits into a "safe haven". "Treatment" Defined To determine whether or not a taxpayer "treated" an individual as an employee for any period, the Rev. Proc. sets out the following guidelines: 1) If Income or Federal Insurance Contribution Act Taxes are withheld from the individual by the taxpayer, then that is treatment of the individual as an employee. 2) Whether or not tax was actually withheld from an individual, the filing of an employment tax return (including forms 940,941, 942,943, and W2) with respect to any individual is treatment of that individual as an employee. 3) The filing of a delinquent or amended employment tax return for a particular tax period with respect to an individual as a result of an IRS compliance procedure is not "treatment" of the individual as an employee. An IRS notice that advises the taxpayer that no return has been filed and requests further information is not a compliance procedure. 4) A return prepared by the IRS under Section 6020 (b) of the code is not "treatment" of an individual as an employee; nor is the signing of an audit form 2504. (Agreement to assessment and collection of additional tax and acceptance of overassessment) "Inconsistent" Treatment The revenue procedure also deals with whether or not inconsistent treatment of an individual over a period of time will be conclusive in determining the employment status of that individual. Specifically, any individual not treated as an employee after December 31, 1978 will not be considered an independent contractor if any other individual holding a substantially similar position was treated as an employee for any period between December 31, 1977 and December 31, 1978. However, this does not mean that a taxpayer who stops treating an employee as such, and begins to treat him as an independent contractor cannot get relief under Section 530. Rather, this provision is time-specific and only directed against those taxpayers who changed their treatment of employees after 1978, only so as to take advantage of the relief provisions. Previous Determinations of Liability Relief is available to those taxpayers who entered into final closing agreements or compromises under Sections 7121 and 7122 of the Code as long as their liability has not been completely paid. Only unpaid amounts will be relieved. Taxpayers who settled employment status controversies administratively with the IRS or who unsuccessfully litigated such cases, are eligible for relief, provided their claims are not barred by a statute of limitations or res judicata. Res judicata will apply if the same specific matter was previously judicially decided.