Dear Assistant Secretary Solomon:
The Coalition to Preserve Independent Contractor Status (the “Coalition”) is a national organization dedicated to the preservation of an individual’s right to offer his or her services as a self-employed individual. The Coalition encourages all self-employed individuals to fully comply with their federal, state and local tax obligations and supports efforts aimed at improving such compliance, but it opposes efforts that seek to improve tax compliance by eliminating an individual’s right to operate as an independent contractor. The Coalition’s members consist of individuals, businesses and industry trade associations.
We are writing to express our concern about the recent announcements by the Internal Revenue Service (“IRS”) in IR-2007-1841 and FS-2007-252 to pursue a “collaborative, nationwide program” – with the National Association of State Workforce Agencies, the U.S. Department of Labor, the Federation of Tax Administrators and the state workforce agencies for 29 states – to focus on Questionable Employment Tax Practices (”QETP”).
I. Our Concerns
The specific objectives of the QETP collaboration that the announcements identify include the following:
The IRS and the states will strive to be consistent with their examination results, reducing the chances that states might classify a worker as an employee while the IRS classifies the worker as an independent contractor, or vice versa….
[E]nsure that businesses are all operating on a competitive level playing field by ensuring that everyone pays their proper share of employment taxes….
The team will draft and promote legislative changes in an effort to achieve nationwide standardization and to create a level playing field for all employers.
Our principal concerns with this program are twofold, namely:
- the goal of “reducing the chances that states might classify a worker as an employee while the IRS classifies the worker as an independent contractor, or vice versa” is incompatible with the very significant differences that exist between the definitions given the term “employee” by the Internal Revenue Code of 1986, as amended (the “Code”), and by state statutes, and
- the goals of seeking a “nationwide standardization” and “creating a level playing field” among such businesses, are inappropriate for a government agency whose statutory responsibility is to administer the Code and collect the taxes owed thereunder.
II. The Goal of Seeking Consistent Results from Inconsistent Statutes Is Misguided
The goal of seeking consistent classifications of workers, as employees or independent contractors, for purposes of federal employment taxes and state unemployment taxes is misguided because the statutory definition given the term “employee” for each purpose is materially different.
While “employee” status for purposes of federal taxes is determined under the “common-law test,” most states define “employee” more broadly and treat as employees virtually any individual who performs services for wages unless it can be demonstrated that the individual satisfies a three-factor “ABC” test.3 The “ABC” test requires that each of the following conjunctive factors be satisfied, namely,
(A) Such individual has been and will continue to be free from control or direction over the performance of such services, both under the individual's contract of service and in fact;
(B) Such service is outside the usual course of the business for which such service is performed or such service is performed outside of all the places of business of the enterprise for which such service is performed; and
(C) Such individual is customarily engaged in an independently established trade, occupation, profession, or business.
The “common-law” test that applies for federal tax purposes is essentially the “A” factor of the “ABC” test. It follows that the stated goal of seeking consistent determinations for federal and state purposes is illogical, as it would require that states ignore the “B” and “C” factors of their “ABC” test, or that IRS augment the “common-law” test with the “B” and “C” factors of an “ABC” test. There is no statutory or judicial basis that would support either approach.
We submit that the portion of the QETP that is devoted to seeking consistent results in worker-classification determinations made by IRS and state agencies should be promptly terminated and publicly rescinded.
III. The Internal Revenue Services Lacks Authority to Pursue a “Level Playing Field”
The stated goals of pursuing a “nationwide standardization” and creating a “level playing field” are economic concepts that are not appropriate objectives for the IRS.
Code section 7801 defines the powers and duties of the Treasury Department as “the administration and enforcement of this title,” namely, Title 26, which is the Internal Revenue Code. Moreover, Code section 7803(a)(2)(A) and (B) define the duties of the Commissioner of Internal Revenue as to “administer, manage, conduct, direct, and supervise the execution and application of the internal revenue laws or related statutes and tax conventions to which the United States is a party; and recommend to the President a candidate for appointment as Chief Counsel for the Internal Revenue Service when a vacancy occurs, and recommend to the President the removal of such Chief Counsel.”4
As was recently recognized in, Kuntz v. Internal Revenue Service, 2007 U.S. Dist. LEXIS 12144; 99 A.F.T.R.2d (RIA) 1146 (2007), the:
Internal Revenue Service is a bureau of the United States Department of the Treasury, created under the authority of 26 U.S.C. § 7801. It administers and supervises the execution and application of the internal revenue laws. 26 U.S.C. § 7803.
Similarly, the U.S. Supreme Court acknowledged in Donaldson v. United States, 400 U.S. 517, 534 (1971), that “We bear in mind that the Internal Revenue Service is organized to carry out the broad responsibilities of the Secretary of the Treasury under §7801(a) of the 1954 Code for the administration and enforcement of the internal revenue laws.”
The foregoing confirms that the IRS’s statutory authority is limited to administering and enforcing the Code; it has no authority to “pursue nationwide standardization and to create a level playing field for all employers.” To be sure, if one company determines that it is more efficient to outsource a particular type of service to independent contractors while a competitor chooses instead to perform that service with its own employees, or if one company elects to sell its products with an independent-contractor sales force while a competitor decides to sell its products with an employee sales force, the IRS’s interest in those matters should be limited solely and exclusively to ensuring that each company’s implementation of its business decision complies with applicable tax laws. IRS should not, however, involve itself in matters such as seeking a nationwide standardized practice among businesses or achieving what it deems to be a “level playing field.” IRS has no statutory authority to delve into such economic issues and, more importantly, its efforts to do so can create significant and often ill-advised distortions in the marketplace.
Even IRS revenue rulings acknowledge that the “common-law” test permits similar functions to be performed by employees or independent contractors. For example, Rev. Rul. 74-33, 1974-2 C.B. 328, shows that telephone solicitors can be properly engaged and classified as either employees or independent contractors, and Rev. Rul. 68-625, 1968-2 C.B. 465, and Rev. Rul. 68-626, 1968-2 C.B. 466, show that golf professionals can be properly engaged and classified as either employees or independent contractors.5 Under the logic of the QETP, these revenue rulings should be withdrawn and replaced by two rulings, namely, one that sets forth the nationwide standardized practice for classifying telephone solicitors, and one that sets forth the nationwide standardized practice for classifying golf professionals – so as to ensure that the “playing field” for all competitors is “level.”
It is submitted that IRS’s proposed nationwide standardization and its intended creation of a level playing field represent a departure from the common-law principles that historically have governed the classification of workers as employees or independent contractors for federal tax purposes. Moreover, the IRS lacks that the statutory authority to implement such a policy, as its explicit purpose is to achieve an economic objective, namely, the creation of what the IRS determines to be a level playing field among perceived competitors.
We respectfully urge that the portion of the QETP that is dedicated to the pursuit of nationwide standardization and the creation of a level playing field for all employers be promptly terminated and publicly rescinded.
IV. A Need for Additional Oversight
The elements of the QETP that are discussed herein are very troubling and suggest that the IRS’s apparent zeal to pursue misclassified independent contractors needs to be tempered. We urge that appropriate oversight be directed at ensuring that the IRS’s pursuit of misclassified independent contractors is conducted in accordance with the statutory and judicially developed rules governing the classification of workers.
We also urge that the elements of the QETP that are discussed herein be immediately terminated – both formally and in IRS’s internal training of its personnel – and that the termination of these elements be publicly announced.6
The Coalition will continue to support policies devoted to ensuring that independent contractors pay their fair share of annual taxes, but it will vigorously oppose administrative or legislative efforts that have the effect of creating unintended employment relationships between self-employed individuals and their clients. Thank you very much for your consideration.7
Very truly yours,
Russell A. Hollrah
Executive Director
1. IR-2007-184, IRS and States to Share Employment Tax Examination Results (Nov. 6, 2007).
2. FS-2007-25, Information on the Questionable Employment Tax Practices Memorandum of Understanding (November 2007).
3. States that follow an “ABC” test or a variation thereof include Alaska, Arkansas, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Louisiana, Maine, Maryland, Massachusetts, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia and West Virginia.
4. The IRS’s own website observes that:
Pursuant to section 7801, the Secretary of Treasury has full authority to administer and enforce the internal revenue laws and has the power to create an agency to enforce such laws. Based upon this, the Internal Revenue Service was created. Thus, the Internal Revenue Service is a body established by "positive law" because it was created through a congressionally mandated power. Moreover, section 7803(a) explicitly provides that there shall be a Commissioner of Internal Revenue who shall administer and supervise the execution and application of the internal revenue laws.
http://www.irs.gov/businesses/small/article/0,,id=106508,00.html.
5. Rev. Rul. 68-625 determined a golf professional to be an independent contractor, and Rev. Rul. 68-626 determined a golf professional to be an employee.
6. An unfortunate consequence of the QETP program, in its current form, is that legitimate independent contractors can lose potential business because their prospective clients become apprehensive that IRS will reclassify even legitimate independent-contractor vendors as their employees – in an effort to achieve consistency with state unemployment laws or to “level the playing field.” Ironically, an overzealous regulatory environment creates an un-level playing field that favors large incorporated vendors and disfavors sole proprietors.
7. The Coalition has also communicated these concerns to the Oversight Subcommittees of the Senate Finance Committee and the House Ways and Means Committee.
