1099 | Caraker Law Firm, P.C.

IRC 6702(a)

The Tax Court ruled in Srbislav B. Stanojevich, 160 T.C. No. 7, filed April 10, 2023 that the Petitioner, in his capacity as trustee of a grantor-type trust, filed frivolous income tax returns for four tax periods. As such, he was held liable for penalties because the law provides at IRC 6702(a) that a penalty is imposed on a “person [who] files what purports to be a return of the tax imposed by this title,” and Petitioner’s filing of the frivolous returns on behalf of the trust falls within the meaning of that provision. The IRS assessed a $5,000 per return penalty in this case. In January of 2013, Petitioner submitted a request to the IRS for an employer tax identification number for the Source Financial Trust (SFT) and represented that the trust was a grantor-type trust and that he was the trustee. Petitioner later filed a Form 1041, U.S. Income Tax Return for Estates and Trusts for each relevant year. The total taxable income on each return was from interest income. Each return also reported that SFT had federal income tax withheld in an amount equal to the amount of interest/total taxable income reported on the return. The total tax on each return was then put at zero and an overpayment equal to the amount of tax withheld was claimed. Forms 1099 were attached reflecting income paid to SFT. Some of the 1099s reflected tax withholdings. The IRS determined the 1099s were false. The IRS deemed the returns to be frivolous and assessed the Petitioner with the penalty referenced above. The Petitioner argued that he should not be assessed the penalty because these were not his personal returns. This was the issue the Court decided – could a taxpayer be assessed a section 6702(a) penalty for filing a frivolous return that is not his personal return? The Court indicated that it was appropriate for the IRS to make this assessment. The Court saw nothing in the statute that prevented its application in this instance and cited IRC section 6102(b)(4) as further support because it has a mandate that the return of a trust “shall be made by the fiduciary thereof.” So, its trustee. The Court explained that the fact that Congress placed on the trustee the duties and responsibilities associated with the filing of the trust’s income tax return supports its conclusion that Congress considered it appropriate to impose section 6702(a) liability on a trustee who files a frivolous income tax return on behalf of a trust.

Texas Receives “High Performance Bonus” Under Federal Worker Misclassification Initiative:

The U.S. Department of Labor (DOL) recently awarded $10.2 million in grants to 19 states as part of the Department’s Misclassification Initiative. The Misclassification Initiative was created in 2011, as part of a Memorandum of Understanding (MOU) signed between the DOL and IRS. The MOU formed an agreement between the two agencies to work together to reduce the incidence of worker misclassification, by sharing information and coordinating enforcement efforts.

A worker misclassification occurs when an employer or business owner classifies a worker on their tax returns as something other than an employee (such as an independent contractor), when they should be classified as an employee. Generally, the distinction between an employee and independent contractor is in how much control the person paying for the service has over (1) what work will be done and (2) how that work will be done. The more control the person paying has over the work being done, the more likely it is that the person providing the service should be classified as an employee.

From the worker’s perspective, misclassification can mean denial from benefits and programs such as family medical leave, overtime, minimum wage, and unemployment insurance. From the government’s perspective, misclassification leads to a substantial loss to the Treasury by way of lost Social Security, Medicare, unemployment insurance, and worker’s compensation funds.

While the Misclassification Initiative was started in 2011, this year is the first year that individual states were eligible to receive grant funding for their efforts to decrease worker misclassification. Although several states already had existing programs designed to reduce misclassification, under the federal Misclassification Initiative individual grants up to $500,000 were awarded to 19 states under a competitive award process.

The Misclassification Initiative also offers additional grant funding to states through its “High Performance Bonus” program. This bonus program is based off the Federal Supplemental Nutrition Assistance Program (SNAP), formerly called the food stamp program, which also provides bonuses for high performing states. So far, four states (Maryland, New Jersey, Texas, and Utah) have received such bonuses. Of those states, Texas has received $775,529 in bonuses, which is almost $300,000 more than the next highest recipient, New Jersey. According to the DOL the bonuses are awarded to the states that are most successful in detecting and prosecuting employers that fail to pay taxes due to misclassification. The bonus program is designed to give states both an extra incentive to carry out enforcement actions and additional funds to upgrade their misclassification enforcement programs.

If you’re unsure how your workers should be classified and would like assistance, please contact our office.