CCA discusses penalties and backup withholding in a worker-classification case

Number

201224033

Outcome

Advice

Document type

Chief Counsel Advice

IRS subject

Increase in Penalty for Fraudulent Failure to File; Backup Withholding

Topics

Procedure, penalties, and administration Employment taxes

Code sections

§ 6651, § 3406, § 6011

Ruling dated

March 30, 2012

Publicly released

June 15, 2012

Source

View Official PDF

Apply this to your situation

This page covers legal advice the IRS Office of Chief Counsel wrote for IRS staff, issued in 2012, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It is advice from the IRS Office of Chief Counsel to IRS personnel on the facts they presented, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

View official IRS release (PDF)

Plain-English summary

Chief Counsel Advice addresses how the government may protect its interests in a worker-classification case. The advice considers an employer that treated workers as independent contractors and an alternative situation involving backup withholding because worker Social Security numbers were not obtained. The unredacted discussion explains when the failure-to-file penalty under IRC § 6651(a)(1), including the fraudulent-failure-to-file increase under § 6651(f), may apply to Form 945 reporting.

Ruling snapshot

Question: How may the government apply failure-to-file penalties when worker classification or backup withholding is at issue?
Outcome: Advice given
Key authorities: IRC §§ 3406, 6011, 6651(a)(1), and 6651(f); Form 945; IRM 25.1.7

Full text (IRS public release)

ID: CCA_2012033014061816 Number: 201224033
Release Date: 6/15/2012
Office: -------------
UILC: 6651.22-00, 3406.00-00

From: -----------------------
Sent: Friday, March 30, 2012 2:06:25 PM
To: --------------------
Cc: ---------------------------------------
Subject: RE: 3406 Case

This message responds to your questions regarding how to protect the interests of the government in a worker classification case. Exam has determined that an employer is improperly treating workers as independent contractors rather than employees. Alternatively, the employer is responsible for backup withholding because it has failed to obtain the workers’ SSNs.

1) ----------------------------------------------------------------------------------------------------------------

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2) Section 6651(a)(1) imposes a penalty for the failure “to file any return required under authority of subchapter A of chapter 61 (other than part II thereof . . . .” Backup withholding must be reported by a payee on Form 945, Annual Return of Withheld Federal Income Tax. This return is required by section 6011, which is part of subchapter A of chapter 61. Thus, the failure to file penalty under section 6651(a)(1) may apply if an employer fails to file Form 945 and report backup withholding. The penalty amount is 5% of the amount of tax required to be shown per month (or fraction of a month) with a maximum aggregate amount of 25%

Section 6651(f) increases the penalty amount if any failure to file a return is fraudulent. The penalty under section 6651(a)(1) is increased to 15% per month (or fraction of a month) with a maximum aggregate amount of 75%. Section 6651(f) may apply if a payee fraudulently fails to file Form 945 and report backup withholding. See IRM 25.1.7 for more information about the fraudulent failure to file penalty.

Please contact me if you have any further questions. Thank you for your patience.

Have a great day!

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