09/05/2018
This article appears in Tax Notes today - I have many construction and restaurant clients who hire people with ITINs instead of Social Security numbers. An ITIN is an identifying number, but is not a number that allows someone to work as an employee in this country. It is not a replacement for a Social Security number. People with ITINs cannot be treated as employees - they must be treated as independent contractors and have 24% backup withholding taken from their gross checks and deposited with form 945. This article shows how inadvertent mistakes can follow a business owner indefinitely, just like undeposited payroll taxes.
Debtor Can’t Back Out of Backup Withholding
POSTED ON SEP. 5, 2018
Article
By
KRISTEN A. PARILLO
The statute of limitations for withholding liability hasn’t started ticking if a business owner failed to conduct backup withholding on non-employees who didn’t provide their taxpayer identification numbers.
The failure of James Quezada, a Texas resident who ran a masonry business, to file Forms 945 to report payments subject to withholding — and his inability to show he made reasonable attempts to satisfy his tax duties — meant that the general three-year statute of limitations under section 6501(a) didn’t apply, a bankruptcy judge held in an August 31 opinion.
As a result, the IRS could assess Quezada “at any time” under section 6501(c)(3), U.S. Bankruptcy Judge Tony M. Davis said.
Quezada’s $1.2 million debt to the IRS, which includes the withholding liabilities, penalties, and interest for tax years 2005-2008, can’t be discharged under his chapter 11 bankruptcy action because section 523(a)(B)(i) of the Bankruptcy Code excepts from discharge taxes for which a return wasn't filed.
Quezada, who filed for bankruptcy in 2016, had argued that the IRS was barred from collecting the $1.2 million because the 2014 assessment was made more than three years after Quezada filed his forms 1040 and 1099 for 2005-2008.
However, the Forms 1099 didn’t contain TINs for all the independent subcontractors Quezada used to perform the labor for his masonry projects. Under section 3406(a)(1), Quezada was required to withhold taxes from those contractors’ paychecks and pay the taxes to the IRS with Form 945.
IRS Should Have Known
Quezada argued that the fact that he didn’t conduct backup withholding was evident from his Forms 1099 and that the IRS could have assessed liability even if he hadn’t filed Forms 945. Quezada also contended that all the information needed to assess the amount of backup withholding was in his Forms 1040 because he had claimed deductions for payments made to his subcontractors and the Forms 1040 should count as a return under the U.S. Tax Court’s decision in Beard v. Commissioner.
Davis rejected that argument and said the U.S. Supreme Court’s analysis in a 1944 case, Commissioner v. Lane-Wells, was more appropriate for determining what constitutes a return for statute of limitation purposes.
In that case, the taxpayer had filed corporation tax returns on Form 1120 but didn’t file Form 1120H, the return required for personal holding companies, because the taxpayer believed it was unnecessary. The Supreme Court held that because the taxpayer was subject to two liabilities, and thus required to file two separate returns, the statute of limitations didn’t begin to run with the filing of Form 1120.
“So too here,” Davis wrote. “Quezada also faced two liabilities — income taxes and backup withholding — and needed to file two returns, Forms 1040 and 945.”
Because Quezada hadn't conducted backup withholding and filed Forms 945, the statute of limitations for assessing withholding liabilities hadn’t begun running, Davis said.
The IRS wouldn’t be barred from assessing Quezada even under the four-part test set out in the Beard case, Davis said, because Quezada failed to meet two elements: He couldn’t show that the information he provided in the Forms 1099 gave the IRS sufficient data to verify whether the subcontractors paid taxes on earnings from him, and Quezada’s repeated failure to provide TINs — despite notices from the IRS — showed that he didn’t honestly or reasonably seek to satisfy the law.
The debtor in Quezada v. IRS, No. 16-01101 (Bankr. W.D. Tex.), was represented by the Law Office of Michael Baumer.
DOCUMENT ATTRIBUTES
CODE SECTIONSSEC. 6501 LIMITATIONS ON ASSESSMENT AND COLLECTION
JURISDICTIONSUNITED STATES
SUBJECT AREAS / TAX TOPICSWITHHOLDING LITIGATION AND APPEALS
AUTHORSKRISTEN A. PARILLO
INSTITUTIONAL AUTHORSTAX ANALYSTS
TAX ANALYSTS DOCUMENT NUMBERDOC 2018-35712
TAX ANALYSTS ELECTRONIC CITATION2018 TNT 172-7
