PHYSICIANS
TREATED AS INDEPENDENT CONTRACTORS
APPROVED BY THE COURT
In Select Rehab
Inc. v. United States; No. 3:CV-01-1278 (8 Apr 2002) (MD DC Penn)">
PHYSICIANS
TREATED AS INDEPENDENT CONTRACTORS In Select Rehab
Inc. v. United States; No. 3:CV-01-1278 (8 Apr 2002) (MD DC Penn), the
court held that the taxpayer acted reasonably and in good faith in making the
decision to treat physicians as independent contractors. The sole issue in
this case was whether the taxpayer had a reasonable basis to classify the
physicians as independent contractors rather than employees. Taxpayer argued
that long-standing industry practice supported treating such physicians as
independent contractors. In the alternative, the taxpayer argued that it was
entitled to the safe harbor relief of Section 530 of the Revenue Act of 1978. The Court found that
the taxpayer treated all medical and program directors as independent
contractors, filed all required federal tax returns on a basis consistent with
its treatment of the physicians as independent contractors, and the taxpayer
had a reasonable basis for treating the physicians as independent contractors,
acting on good faith, in reliance of the advice of in-house and outside
counsel. It appears that one
thing that persuaded the Court to hold for the taxpayer was the fact that
there were contracts with the physicians and that the attorneys for the
company approved the manner in which the physicians were treated.
IRS OFFSHORE CREDIT CARD INITIATIVE One of
the problems U.S. taxpayers hiding otherwise taxable income offshore in a tax
haven jurisdiction is obtaining the funds for use in the U.S. (a process
referred to as repatriating the funds). Repatriation usually creates a paper
trail of some sort that may alert the IRS as to the offshore account and
hidden taxable income. Responding to the need to avoid a paper trail in the
repatriation process, offshore banks added credit card services for account
holders that would permit the card holder (in this example, the U.S. taxpayer)
to use the funds simply by charging against the account. The credit card
statement would not be sent to the taxpayer in the U.S. but would be held by
the offshore bank and paid from the offshore funds account. So the theory
went, the records linking the charges to the taxpayer would be in the offshore
bank where its country's secrecy laws would insure that the IRS would never
see the records. This seemed like heaven for those otherwise willing to play
the tax game. The Achilles heel is that there are some records available to
the IRS – specifically, the U.S. credit card slips that are processed and
retained (originals or copies) by U.S. credit card clearinghouses. In late
2000, the IRS fired its first salvo in a new initiative to discover U.S.
taxpayers using such foreign accounts. The IRS obtained court approval for
so-called John Doe summonses to the credit card companies to obtain records of
1998 and 1999 transactions with banks of certain tax haven countries (Bahamas,
Bermuda, the Cayman Islands and Barbados). These special purpose summonses are
called John Doe summonses because they are designed to gather information on
unknown taxpayers. The summons obtain the information potentially relevant to
taxpayers and to identify the taxpayers. The process requires that the
Government apply to a federal district court for authority to issue the
summons to a third party having information or documents potentially relevant
to the liability of unknown taxpayers. (For more on the John Doe Summons
process, we enclose on our web site in pdf format the discussion of John Doe
Summonses from Mr. Townsend's book on Tax Procedure, which you may review or
download here.) The John Doe summons is often
used to gather information against tax shelter promoters to obtain the
identities of persons invested in the shelters. The
John Doe summonses in this case obtained the credit card transaction records
maintained by the clearing houses. These included the slips signed by the
credit cardholders. The IRS painstakingly reviewed all transactions for
certain months to identify the credit cardholders from the names on the slips.
For example, the IRS may identify the signature of a person named Jane Smith,
determine the credit card account number and compile into a database all
identified transactions for that account number. (The compiling process may be
easy depending upon the database maintained by the clearinghouse.) The IRS
would then try to identify Jane Smith. For a person named Jane Smith, that
might be hard because the name is common. The IRS will then have to take
further activity, such as identifying patterns that might permit them to go to
specific vendors to further identify the person. For a person named J.
Perryman Paulin, it might be easier – indeed a search of the IRS's own records
plus a check of the patterns of locations might easily locate the person or
just a few possible persons that it could be. Then it is just a matter of
zeroing in. As a result of the summonses and further identification work, the
IRS is now having local agents begin the process auditing identified
taxpayers. The results will then permit the IRS to determine which of the
many persons identified should be considered for criminal investigation and
possible prosecution. We are aware of a number of audits that have been
initiated to date. Because
of its success in identifying taxpayers and hidden income, the IRS recently
issued new John Doe summonses to MasterCard. This time, the IRS expanded the
targeted banks to banks in 30 countries (rather than just 4 on the earlier
initiative) and bracket the years 1999-2001. Tax practitioners predict that
the Government will criminally prosecute a number of the persons identified in
the earlier initiative and in this current and continuing initiatives. It is
not likely that the Government can prosecute all taxpayers thus identified,
because of a host of prosecutorial discretion reasons, including most
evidently the drain on the Government to investigate criminally and prosecute
all that are identified and the drain on the courts to try all that are
identified.
Taxpayers caught in this initiative need effective representation. The
Government will have to make prosecutorial calls that may in the final
analysis be influenced by subtle considerations. The really egregious tax
evaders will likely be prosecuted when the Government gets them in its sights.
The less egregious taxpayers will be the ones who benefit most from effective
representation. In all events, to know whether there is room for maneuver,
clients need to be adequately advised. For all persons caught or having
clients caught in this trap, get effective legal representation at the
earliest stage. And, of
course, taxpayers having foreign credit cards would be well advised to
reconsider their use on an ongoing basis, because they may be called upon to
explain their use to the IRS. Those with good stories – meaning no tax games –
for using offshore credit cards will have nothing other than the harassment
factor to be concerned about, although that will likely be enough to
discourage continuing use in most cases (why invite the attention of the
IRS?). Those without good stories to tell are well advised to stop and obtain
the best advice as to whether there are any remedial measures to be taken to
mitigate the problem or exposure to the problem.
Townsend & Jones does a general tax controversy practice, including criminal
representation and specifically representation of persons potentially subject
to this IRS initiative. The IRS has released
Publication 556, Examination of Returns, Appeal Rights, and Claims for Refund.
This publication can be found on the IRS website at
http://www.irs.gov/pub/irs_pdf/p556.pdf. Some changes that are
discussed are Fast track mediation. The IRS now offers Fast Track Mediation
services to help taxpayers resolve many disputes resulting from: Examinations
(audits), Offers in compromise, Trust fund recovery penalties, and other
collection actions.
IRS ISSUES NEW INSTALLMENT AGREEMENT MANUAL The IRS has issued a
new installment agreement manual. If you are representing clients who owe
taxes to the IRS, this is a publication that you should read. The manual can
be found on the IRS website. Click on the FOIA link and go to the topic
Additional IRS Products Available on Line and then to Internal Revenue Manual
on Line. The installment agreement manual is 5.14 of Part 5, Collecting
Process.
TAX COURT HOLDS IRS ABUSED ITS DISCRETION IN In Tracy J.
August v. Commissioner, T.C. Memo. 2002-201, No. 10065-00 (12 Aug 2002),
the IRS denied taxpayer relief under Section 6015(f) of the Internal Revenue
Code. The Tax Court has jurisdiction to review such a denial of relief. As directed by
Section 6015(f), the Commissioner prescribed procedures, Rev. Proc. 2000-15,
to be used in determining whether an individual qualifies for relief under
that Section. Section 4.01 of the Revenue Procedure lists seven threshold
conditions that must be satisfied before the Commissioner will consider a
request for relief under section 6015(f). The IRS conceded that taxpayer met
all of the threshold conditions. Where the requesting spouse satisfies the
threshold conditions, Section 4.02(1) of the Revenue Procedure provides
elements under which relief under Section 6015(f) will ordinarily be granted
in a case in which a tax liability reported on a joint return is unpaid. The Court found the
taxpayer to be a credible witness and concluded that the taxpayer had no
knowledge or reason to know that the taxes would not be paid at the time the
returns were signed. The Court also found that the taxpayer would suffer
economic hardship if relief under Section 6015(f) was not granted. The
taxpayer's only income was from public assistance. In its holding, the
Court stated that taking into account all the facts and circumstances, the
taxpayer has satisfied each element under Section 4.02(1) of the Revenue
Procedure, it would be inequitable to hold her liable for the unpaid taxes,
and that the IRS abused its discretion in not granting relief under Section
6015(f).
ARTICLE ON MARRIAGE AND DIVORCE To read
an article on Tax Issues in Marriage and Divorce written by Larry Jones and
Brandy Williams click here Return to Townsend &
Jones, L.L.P. HomePage
APPROVED BY THE COURT
NOT ALLOWING INNOCENT SPOUSE RELIEF