This is the most important article I have written in 17 years.  Please read it- all of it- carefully.  I hope you enjoy it.

Today is a glorious day. Yessiree, folks this is a great day.  I’m going to tell you about a brand new  decision by the U.S. Tax Court that just came out which benefits so many members of our community.

Here’s the story:

  1. Law

Businesses have two kinds of workers.  The first is simply an employee.  Each payday the employer withholds money for the employee and sends it to the IRS.  At the end of the year the employee gets a form W-2 containing their salary and the withheld taxes.

The second kind of worker is an independent contractor.  These are people who typically get paid by the job.  They are all kinds of worker such as carpenters, painters, truckers, etc. At the end of the year the worker receives a form 1099 reflecting all of the income paid and no withholding.

The IRS is focusing heavily on reclassifying these independent contractors to employee status.  This allows the IRS to collect from one employer rather than dozens of workers.  When the IRS does this reclassification, the employer can get stuck paying all of those worker payroll taxes for the last 3 years.   And then the IRS adds penalties and interest.

There are few defenses and they are difficult to use and expensive to undertake. One of the defenses is for the employer to try to locate the often times itinerant workers of perhaps 3 years ago and try to get them to sign a sworn statement to the IRS that they reported this income on their return and paid the taxes on it- an almost impossible burden for an employer.

So the point of all this is the IRS is collecting the same taxes twice- once from the worker and then again from the employer.  That’s right folks, the IRS is collecting the same money twice.

  1. Facts

The Mescalero Apache Tribe has a number of employees and also has a number of independent contractors.  The IRS tried to reclassify these independent workers as employees and impose huge back taxes, penalties and interest on the Tribe.

The Tribe argued that the IRS should not be allowed to collect the same taxes twice.   The IRS should be ordered to look into its computer files and remove those workers who had already filed and paid their  taxes.

Last week the United States Tax Court, all 16 judges, agreed.  In an unprecedented action, it issued a joint opinion stating this was a case of first impression and then ordered  the IRS to change fundamentally  the way it collects payroll taxes.

In the future, the IRS is directed to search its own files to determine whether or not those reclassified independent contractors filed their own tax returns and reported that income. If so, the employer cannot be made responsible for paying  payroll taxes on those reclassified workers.

I want to say that again for emphasis. The Internal Revenue Service is collecting taxes twice, once from the  independent contractor and then again from the employer. This new tax court decision eliminates that second tax. It means that the employer, even if those workers or reclassified, is not responsible for all those back taxes which have already been paid by the worker.

This was a very important case that was handled by some of the tax top tax lawyers in the IRS and was carefully monitored by its national office. The IRS lost and the taxpayers won.

The impact of this case cannot be overstated The IRS undertakes literally thousands of payroll tax audits each year that involve this very issue. This opinion will save employers an incredible amount of money, time, and worry. Employers that used to get hit with these kinds of bills frequently were unable to pay and may go out of business and their workers lose their livelihood. This hardship  is over. There is justice in this world.

Folks, the sun is shining and it’s a glorious day.

David Leeper is a Board Certified federal tax attorney with 38 years experience .  He can be reached at 915-581-8748 or by email at