IRS Provides Procedural Guidance for Employment Tax Determinations Under IRC Section 7436

Last month, we published the blog post, “Worker Classification and the Gig Economy,” which discussed the growing expansion of the gig economy and factors the Internal Revenue Service (IRS) may rely on to determine whether a gig worker is a true independent contractor or an employee. The distinction between the two can lead to a costly worker classification audit by the IRS if extreme care and diligence is not undertaken when establishing an employee-employer relationship.

As a follow-up, the IRS has now released Rev. Proc. 2022-13 with explicit procedural guidance regarding employee status determinations, covering the following issues:

• When and how the IRS will issue a notice of employment tax determination under Section 7436
• How taxpayers can petition the tax court review of that determination

Prior to this guidance, Notice 2002-5 was the governing authority on this issue and provided that the issuance of a Section 7436 notice was a jurisdictional prerequisite for seeking tax court review. The IRS would only issue a Notice after it determined that (1) one or more individuals performing services for the taxpayer were employees and (2) the taxpayer was not entitled to Section 530 relief.

Based on the rulings in SECC Corp., 142 T.C. 225(2014) and American Airlines, Inc., 144 T.C. 24 (2015), the tax court has now expanded its jurisdictional review of worker classification reviews. The tax court will have jurisdiction if these four elements are met:

1. The IRS conducts an examination in connection with an audit
2. As part of the audit, the IRS determines that:
   1. One or more individuals performing services for the person are employees of the person for purposes of subtitle C (Worker Classification) or
   2. The person is not entitled to the relief under Section 530(a) with respect to such an individual
3. There is an “actual controversy” involving the determination as part of an examination
4. The person for whom the services at issue were performed files an appropriate pleading in the tax court.

While this revenue procedure will be effective on February 7, 2022, this change will remove the requirement that a Section 7436 Notice is required as a jurisdictional prerequisite for seeking tax court review – a taxpayer can now petition the court on a worker reclassification or Section 530 relief without a Section 7436 Notice.

If you have additional questions about this tax legislation, please contact your Aprio advisor.