The Internal Revenue Service has a tax examination group which only audits employment tax issues. An employer must pay federal employment and unemployment taxes on an employee’s wage income. To avoid the employer employment tax, an employer may classify the worker as an independent contractor, and not an employee. An IRS audit may determine that the employer’s worker classification as an independent contractor was incorrect, and impose federal employment and unemployment tax liabilities. The additional employment tax can be a substantial amount.
A tax controversy attorney may be able to eliminate or reduce the IRS employment tax determination. The proper characterization of a worker as an employee or independent contractor requires a thorough understanding of a 20-factor analysis. If the worker is an employee and therefore subject the employer to potentially substantial employment and unemployment tax liabilities, a tax controversy attorney may be able to successfully argue, pursuant to safe harbor provisions that the original employer classification as an independent contractor is acceptable, and therefore avoid the additional tax liability.
An employer acts as a withholding agent for the U.S. Treasury. The employer is required to withhold and pay the employee’s portion of the employment tax to the U.S. Treasury. Sometimes when an employer has cash flow problems, the employer withholds the employee’s employment tax, but does not pay the withheld tax to the Treasury. While the business may be organized as a corporation or limited liability company, which protects the owner from business liability claims, the federal tax law imposes a personal liability on the business manager who paid only “net wages.” The Internal Revenue Service may impose a trust fund recovery penalty assessment against the business manager and or a non-business owner; this is called a one-hundred percent penalty assessment or responsible officer assessment. A tax controversy attorney may be able to successfully argue that the target of a hundred percent penalty assessment is not personally liable for the employment taxes.
Assessed employment tax liabilities may be the personal liability of the “responsible officer.” Property owned by a husband and wife, as joint tenants by entirety, are generally not subject to a debt of only one spouse. Most married persons feel very comfortable that their marital property (bank accounts, residence, and other property) are exempt from the federal tax lien since it is a separate tax debt due from just one spouse, and not a joint tax liability. Under the Internal Revenue Code, the federal tax lien attaches to all of the taxpayer’s property and rights to property. The U.S. Supreme Court has held that an individual has enough property rights in jointly held property owned as tenants by the entirety, such that the federal tax lien attaches to the jointly owned entirety property. General state law property laws will not protect a separate taxpayer liability from a federal tax lien or levy (seizure). A tax controversy attorney should be consulted to negotiate the merits of the tax liability and IRS collection matters.