A disturbing trend has developed at the National Office of the IRS which involves the IRS issuing published guidance on which taxpayers and their preparers rely; the IRS then conducts conference calls in which it “clarifies” it’s more widely published guidance. The problem arises because the published guidance disagrees with what is being said on the conference calls and no attempt is made to revise the published guidance in a timely fashion.
The latest version of the IRS changing its position in a conference call involves the HIRE Act’s payroll tax exemption. Frequently Asked Question QE5 (dated 3/20/10) on the IRS website clearly provides that a seasonal employee who is “laid off and then rehired by the same or a related employer after a 60-day period” qualifies for the payroll exemption. However, in the IRS's June 3rd conference call with payroll industry representatives, Ligeia Donis, from IRS's Office of Division Counsel/Associate Chief Counsel, Tax Exempt and Government Entities provided a number of examples that essentially disqualify seasonal employees from qualifying for the exemption. Despite the importance of this issue, QE5 remains unchanged on the IRS website and the examples given in the conference call have not been posted. This is even more disturbing because it is now over 55 days since the June 3rd conference call.
(03/20/10) QE5: Does the payroll tax exemption apply to wages paid to an employee who was previously laid off and then rehired by the same or a related employer after a 60-day period?
A-QE5: Yes, an employer may apply the payroll tax exemption to wages paid to a rehired employee who is otherwise a qualified employee.
Significance of Hire and Termination Dates in Defining Qualified Employee
To review, a qualified employee for purposes of the HIRE Act's payroll tax exemption is an individual who was hired after February 3, 2010 and before January 1, 2011 and who had been unemployed or employed for less than a total of 40 hours during the 60-day period ending on the date such employment began. The 60-day period must be continuous and can span 2009 — 2010. The payroll tax exemption applies to wages paid to qualified employees on and after March 19, 2010. The IRS emphasizes that the date of employment is the date the employer entered into an employment relationship with the employee whether or not wages were paid to the employee during that employment relationship.
Seasonal Employees
Notwithstanding the unequivocal answer provided in QE5 (see above), based on the information provided on the June 3rd conference call, an employer would not be able to claim the payroll tax exemption on the typical seasonal worker.
Examples Mentioned on Conference Call – But not Posted to IRS Website
Q: Is an employee who is seasonal, or otherwise goes on and off the payroll, a "qualified individual" for purposes of the tax relief?
A: It depends on the date of hire and whether the "employment relationship" is maintained while the employee is not performing services. This is illustrated by the below examples. (Remember that to be a qualified individual, one must be hired after February 3, 2010, and must not have been employed for more than 40 hours during the prior 60 days.)
- Example 1: Employee began employment before February 4, was terminated on April 30, and was then rehired by the same employer on August 21. The employer could claim the tax relief on wages paid from August 21 until the end of the year, but not on the wages paid from March 19 to April 30.
- Example 2: Employee was laid off in November 2009, did not work for more than a total of 40 hours during the 60 days preceding rehire, and then was rehired after February 3, 2010, and during the lay off the employer continued the employee's benefits coverage. This employee is not qualified because the employment relationship was continuous from a date prior to February 4.
- Example 3: A teacher completed her 2009-2010 contract on May 15, 2010, received no wages from the school or anyone else during the summer, but is expected to return to work on August 16, 2010. This employee is not qualified because the employment relationship was continuous from a date prior to February 4.
We Called the IRS and They Referred Us to the Website FAQs
On or around June 29, 2010, we called the IRS assistance for business at 1-800-829-4933 and we were directed to the employment and payroll tax department. The IRS associate with whom we spoke indicated that she was not familiar with the issue and informed us that she only had the information available on the IRS website, but also informed us that there was not a better person or place to contract regarding the issue.
When asked whether seasonal employees qualify under the HIRE Act, we were directed to QE5, QE6, and QE7. We were told that seasonal employees qualify as long as the employee has not worked more than 40 hours in the 60 days previous and the employee’s status as seasonal does not alter his or her eligibility.
What Does All This Mean?
First, this clearly shows the IRS does not “play fair.” It posts liberal rules on its website and encourages callers to refer to those rules, waits several months (giving taxpayers plenty of time to rely on the liberal rules) and then holds an obscure conference call where it provides significantly more restrictive interpretations of the rules. The IRS did something very similar last year with respect to reporting for foreign bank accounts.
Second, the right hand of the IRS does not know what the left hand is doing. How it is that 55 days after the June 3rd conference call, the more restrictive examples are not posted to the IRS site. More importantly, why are IRS personal unaware of positions taken by the IRS in its conference call? How can taxpayer’s be expected to comply with the law when the IRS itself its sending mixed signals.
Third, this is going to be an area of tremendous contention because nearly all taxpayers took the IRS FAQs at face value and therefore applied the exemption to rehired seasonal employees. If the IRS applies the rationale espoused in the conference call, these employers may face tax deficiencies.
Fourth, the IRS interpretations announced in an obscure conference call do not constitute “authority.” Although this is the interpretation of an IRS official, the way it was conveyed and the lack of follow-through by the IRS clearly has to impact its validity.
Fifth, the failure by the IRS to clarify this issue despite its significance illustrates the disorganization and possibly bad faith prevalent in today’s IRS.
My personal recommendation is to continue to follow the letter of the FAQs posted on the IRS website and disregard the information provided in the conference call to the extent it disagrees with the clear reading and understanding of what is included in the FAQs. I do not recommend that this position be taken without considerable thought and deliberation and without a full understanding by the taxpayer of the risk involved since it appears to be contrary to IRS thinking on the issue.