Earlier this year we analyzed the Tax Court's decision in Mescalero Apache Tribe v. Commissioner, 148 TC No. 11 (See Taxpayer Can Obtain Information on Payment of Tax By Contractors From the IRS in Employment Tax Dispute). In that case, a taxpayer facing potential liability for failing to withhold taxes from individuals reclassified as employees was able to convince the Tax Court that the IRS needed to provide the taxpayer with information regarding whether individuals they had been unable to located had reported the income on their return. If that was the case, the tribe was not liable for the income taxes it had failed to withhold from those individuals.
The IRS Chief Counsel’s office reacted shortly after the Mescalaro decision in an email (Chief Counsel Email 201723020), indicating that in its view this case does not grant taxpayers facing such liability may not require the IRS to provide worker tax information during the exam. Rather the agency’s position is that the case only holds that such disclosure may be required by the Court during discovery, not that employers facing potential liability have the right to obtain that information directly from the service immediately upon the issue being raised in exam.
The email notes:
In worker classification employment tax examinations where examiners have concluded that the use of a mandatory reduced rate provided in Code section 3509(a) or 3509(b) is not applicable because intentional disregard has occurred, and thus abatement of income tax withholding under Code section 3402(d) may be available, and in employment tax examinations where worker classification is not at issue, the Service should continue to follow the procedures outlined in Internal Revenue Manual section 184.108.40.206.3, Procedures for Relief Under IRC 3402(d) and/or IRC 3102(f)(3) in Examination.These procedures authorize examiners to accept original Forms 4669 (Statement of Payments Received) before an examination is closed and to consider such forms “prima facie” evidence of the reporting and payment of tax. These procedures do not authorize examiners to disclose worker return information to the taxpayer or its representative during an examination.
The email bases this on the facts of the case:
It is important to note that the court’s determination that the workers’ return information was discoverable was based largely on the representation by the Tribe that it has already made a significant effort to locate the workers and that it had failed only with respect to a relatively small number. It is also important to note that IRC 6103(h)(4) authorizes disclosure, but does not require it; thus the court’s determination that the workers’ return information “is disclosable under section 6103(h)(4)(C)” does not create a requirement that the Service disclose the information.
Thus, Mescalero does not stand for the proposition that taxpayers and/or their representatives are entitled to workers’ return information during the conduct of an employment tax audit or at the Appeals consideration level. Instead, the Mescalero decision is limited to discovery requests made by a taxpayer during the pendency of a Tax Court proceeding, where the Tax Court has the ability to determine whether the requested information is disclosable pursuant to IRC 6103(h)(4), AND has balanced the relevancy of the requested information against the burden placed on the Service pursuant to Tax Court Rules 70(b) and 70(c).