The IRS has the power to make a number of important determinations, including determining the employment status of workers for purposes of employment taxes.
This type of determination can have a significant impact on a worker’s ability to receive unemployment benefits, participate in retirement plans, and more.
The IRS often determines that workers are employees, as this results in more tax due, which can lead to unexpected tax liabilities for employers. The liabilities can be signficant.
The dispute in the McBratne v. Commissioner, Case No. 21-12264 (E.D. Mich. 2023) case is an example of this, as the employer requested an IRS determination but was dissatisfied with the result. The employer then sought a review of the determination in U.S. Tax Court and, dissatisfied with the result, sued the tax court judge and IRS and its employees in district court.
Facts & Procedural History
This case involves a medical staffing company. The company operated as a single-member LLC.
The owner filed a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS for one of its workers. The staffing company had treated the worker as an independent contractor and not an employee.
The court case does not say why the company made this request, but it was likely due to a pending IRS employment tax audit or an unemployment claim filed by the worker.
Regardless, the IRS responded to the SS-8 by concluding that the worker was an employee. The taxpayer filed suit in U.S. Tax Court asking the court to review the determination. The U.S. Tax Court dismissed the case and the taxpayer sued the U.S. Tax Court and the IRS and its employees in district court.
To understand the dispute, we need to have some background on who is an employee for tax purposes, what is the Form SS-8 and when is it used, and what involvement does the U.S. Tax Court have in all of this.
Who is an Employee
Let’s start with who is an employee. For employment tax purposes, who is and who is not an employee is defined in Section 3121(d).
The determination is supposed to be based on several factors, including the level of control and independence the individual has in performing their job duties:
- Behavioral control: Does the employer control how the work is performed or just what work needs to be done?
- Financial control: Does the employer control the financial aspects of the worker’s job, such as reimbursement of expenses, equipment, or tools?
- Type of relationship: Are there written contracts or employee benefits such as insurance, pension plans, or paid time off?
- Dependency: Is the worker dependent on the employer for a significant portion of their income?
The factors are more varied and nuanced than this, as this is just a summary. This short summary should suffice for purposes of this article. If you have a live employment tax dispute or question, you can find more detailed analysis of this in the hundreds and hundreds of court cases that go through these factors.
About the Form SS-8
This SS-8 form is used when there is a dispute between an employer and the IRS over whether an individual is an employee or an independent contractor.
Form SS-8, also known as the “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding,” is a form used by the IRS to make a determination of an individual’s employment status for tax purposes.
The employer, the individual, or the IRS can request a determination by filing Form SS-8. In most cases, the employer is submitting the form in advance of employing a contractor. Or they may do so in advance of a state level unemployment claim filed by the worker.
Once the form is submitted, the IRS employee will review the facts and render a decision. The decision will be binding on the IRS if there is no change in the facts or law and the decision will be sent to the employer and a copy to the worker. If a determination letter is not issued, an information or courtesy letter may be issued by the IRS.
Suffice it to say that the determination made on Form SS-8 has an impact on the employer’s tax liability for employment taxes and the individual’s eligibility for certain tax benefits.
About Section 7436 Determinations
Section 7436 provides a remedy for individuals or entities regarding employment status for purposes of employment taxes. This statute brings the U.S. Tax Court into these types of disputes.
This statute just says that the U.S. Tax Court may redetermine the IRS’s determination of whether one or more workers are employees and the proper amount of employment tax under such determination. The statute was added to the tax code in 1997 and, since then, there have been quite a lot of these cases brought in the U.S. Tax Court.
The would-be employer has to start these court cases. They do so by filing a petition with the U.S. Tax Court under Section 7436. This has to be filed wihtin 90 days of receipt of notice of the employment determination from the IRS. The U.S. Tax Court can then hear and decide the case and the decisions entered in these proceedings are final and cannot be reviewed in any other court.
U.S. Tax Court Review of SS-8 Determinations
That brings us back to this case. The taxpayer asked the U.S. Tax Court to review the IRS’s determination made on its Form SS-8 submission.
The court concluded that it did not have the authority to hear the dispute. The tax court is not a court of general jurisdiction. It cannot just hear any and all tax cases. The cases it can hear have to be set out in the tax code and the tax code has to specifically say that the court can hear the case.
The court notes in this case that the operative statute, Section 7436, only applies to IRS employment determinations that arise in connection with an IRS audit. The Form SS-8 that the taxpayer submitted was not part of an IRS audit. The tax court dismissed the case and the district court dismissed the suit against the tax court and IRS employees.
This case shows how important it is to carefully consider whether to seek an IRS determination using Form SS-8. The employer who submits this form may not like the IRS’s decision and, as noted in this case, there is no review available by the U.S. Tax Court. Employers have to be careful what they ask for when it comes to the IRS. This case also serves as a reminder for employers to properly classify their workers and for taxpayers to be aware of the potential consequences of an IRS employment status determination.