There's also a class-action lawsuit in federal court over this issue that was recently granted class certification by the trial judge.
From the news article, it sounds like the United States may not be involved in this proceeding either. That said, the substantive point I was making there was that collateral rulings outside of the tax context are not always usable by you against the IRS in tax proceedings.
I'm sure you're technically correct, as always. If you were hauled in front of a tax court and accused of representing yourself as a contractor when there's some reason to believe you might actually be an employee, you would have to present evidence that you're actually a contractor.
However in the real world the IRS would have little reason to initiate such proceedings. If the company files 1099s and you file the relevant self-employment tax returns, why would they bother with trying to challenge that? Everyone is acting in good faith, the numbers on the tax returns pass the computer checks, everyone's happy.
I'm sorry if it came across that I was engaging in pedantry. However, I was making a real, significant point. I just didn't really spell it out. Let me spell it out now.
The problem I have with the above quoted message is that it is basically inviting forum members to engage in fraud. But let's back up a bit to see why that is.
Back in reply #49
, user "googily" asked a question about an exception to the 10% additional tax for certain distributions from a qualified retirement plan. This is a question about a statute and as such, the answer should begin by looking at the statute. The statute tells us that the 10% additional tax does not apply to "distributions which are ... made to an employee after separation from service after attainment of age 55". 26 USC § 72(t)(2)(A)(v). User "googily" asks whether he or she can satisfy this requirement by (i) dummying up some paperwork that says
that she or he has separated from service, (ii) taking some distributions without paying the 10% additional tax, and then (iii) actually continuing to work for the company presumably in the same capacity as before, supposedly as a "contractor".
The problem here is that the statute is concerned with whether "googily" actually
separated from service, not with whether the employer has dummied up some paperwork that says she or he separated from service. This is a question of mixed fact and law but it is going to turn on whether "googily" substantively, really, actually separated from service. The fact that he or she has some paperwork that says she or he separated from service, when in fact he or she actually did not separate from service, is not going to be decisive.
It's bad advice to say that compliance with the statute is governed chiefly by what the paperwork says, because that is wrong. But of course, that's not exactly what you said; rather, you said you should just take your chances because the IRS probably won't audit it. First of all, I'm not sure what you are basing that on. I don't have any special access to what flags trigger an IRS audit, so I'm only speculating, but it wouldn't be hard to detect something suspicious if a company was filing Forms W-2 for an employee and then suddenly they start filing Forms 1099 instead and the employee is also taking distributions from a qualified retirement plan in apparent reliance on 26 USC § 72(t)(2)(A)(v). I don't know whether the IRS has a trigger for that in their audit algorithms, but it wouldn't be difficult to have one.
But let's suppose the IRS is actually unlikely to audit it. We still shouldn't be telling people to take advantage of that, because it's like saying "go ahead and engage in fraud -- you probably won't be caught!". What matters is whether the position has merit, not whether the person is likely to be caught. Taking dubious positions because you won't be caught is just leaving the rest of the US taxpayers to make up the slack for you. If you have a problem with US tax law, the solution is to persuade Congress to amend the statute, not to take rogue tax positions assuming that you won't be caught.