The IRS argued that even if the workers’ payment information could be disclosed, it was not discoverable because (1) the employer has the burden of proving its defense under IRC § 3402(d) and (2) allowing discovery would violate the rule that each party in civil litigation generally must bear the burden of financing his or her own suit. However, the IRS resisted the Tribe’s discovery request on other grounds.
Helping employers show they are not liable for withholding taxes by doing a search of the IRS’s records would further their rights to quality service, to a fair and just tax system, which includes the right to expect the IRS “to consider facts and circumstances that might affect their underlying liabilities,” and to pay no more than the correct amount of tax. After all, Section 1002 of the Internal Revenue Service Restructuring and Reform Act of 1998 directed the IRS to “restate its mission to place a greater emphasis on serving the public and meeting taxpayers’ needs.” Today, its mission is to “rovide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities…” In addition, the IRS adopted my proposal to adopt a Taxpayer Bill of Rights in 2014, and Congress codified it in 2016.
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Moreover, the IRS’s job is to “help” the Tribe and other employers to the full extent permitted by IRC § 6103. This approach might eliminate costly litigation. Thus, in these types of cases the IRS could help employers by providing their worker’s tax payment information in examinations or appeals, at least to the extent the information would help resolve the cases. Notably, IRC § 6103(h)(4)(C) permits disclosure in both “judicial” and “administrative” proceedings. The Tax Court concluded that: (1) the Tribe and its workers had a transactional relationship, (2) the worker’s tax payment information directly related to the relationship and (3) the information would directly affect resolution of the case. IRC § 6103(h)(4)(C) permits disclosure in “judicial or administrative” proceedings pertaining to tax administration if: the return information “directly relates” to a “transactional relationship” between a person who is a party to the proceeding and the taxpayer, and “directly affects” the resolution of an issue in the proceeding. It said the information was confidential “return information” protected by IRC § 6103. However, the IRS raised a number of objections.įirst, the IRS argued it was barred from disclosing the workers’ payment information. Commissioner, the Tribe sought discovery of the IRS’s records to help establish that its workers had paid their taxes. To take advantage of this exception, the Tribe obtained statements from many (but not all) of its workers on IRS Form 4669, Statement of Payments Received, affirming that they paid their taxes. Because the Tribe did not withhold on payments to the workers it classified as independent contractors, the IRS concluded that it was liable for their income tax withholding under IRC § 3403.Įven if an employer fails to withhold, however, IRC § 3402(d) provides that the IRS “shall not collect” the withholding tax liability from the employer (but can collect penalties) if the workers have paid their income taxes.
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Under Internal Revenue Code (IRC) § 3402(a), an employer must withhold income taxes on the wages it pays to employees. Yet the IRS’s interpretation of the statutory language at issue in this case would, as a practical matter, render it virtually meaningless.Īfter an audit of the Mescalero Apache Tribe (the Tribe), the IRS asserted that some of its workers were misclassified as independent contractors. It is a basic canon of statutory construction that statutory language enacted by Congress is presumed to have meaning.
There are always one or two cases I have missed over the year that leap out at me during the editing process. Editing these drafts is one of my favorite tasks, because I get to review in a concentrated fashion a significant swath of tax litigation. About this time every year, my wonderful staff of attorney-advisors presents me with early drafts of the discussion of the ten most litigated issues in federal courts that are ultimately published in the National Taxpayer Advocate’s Annual Report to Congress.
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