The IRS argued before the Tax Court that the Court had no right to determine if the IRS had properly determined that a corporation was not eligible for the voluntary classification settlement program (VCSP) for payroll taxes. In a published decision, Treece Investment Advisory Corp v. Commissioner, 158 TC No. 6,[1] the Tax Court disagreed, holding that the Court did have jurisdiction to review the IRS determination in this area.

Voluntary Classification Settlement Program (VCSP)

The IRS announced the voluntary classification settlement program in Announcement 2012-45, to provide an option for certain employers to voluntarily settle potential liabilities related to individuals who had been improperly classified as independent contractors. Taxpayers qualifying under this program would be able to settle their potential liabilities at a lower amount than would otherwise be true if subjected to an IRS examination, and that examination determined that the individuals in question truly should have been treated as employees.

A taxpayer enters the program by submitting Form 8952, Application for Voluntary Classification Settlement Program (VCSP) to the IRS.  To be eligible for the program, a taxpayer must:

• Have consistently treated the workers as nonemployees;

• Have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years; and

• Not currently be under employment tax audit by the Internal Revenue Service (IRS).[2]

The corporation in this case applied to the IRS to enter the program, but the agency denied the request, stating that the misclassification in question had been uncovered during an IRS employment tax audit.[3]

Can the Tax Court Review This IRS Determination?

As the Tax Court loves to point out, the Court is one of limited jurisdiction, only able to exercise jurisdiction to the extent expressly provided to it by Congress. The IRS argued that their decision regarding whether or not the corporation qualified for this program was not one of the areas that the Court had jurisdiction over. But the Court did not agree.

The opinion begins by pointing out the areas the Court has jurisdiction over related to employment tax cases.

Generally, we have jurisdiction under section 7436(a) to determine: (1) whether an individual providing services to a person is that person’s employee for purposes of subtitle C; (2) whether the person, if an employer, is entitled to relief under section 530 of the Revenue Act of 1978; and (3) the proper amounts of employment taxes which relate to the Commissioner’s determination concerning worker classification.[4]

The Court believes that it is the third category, determining whether the IRS has properly calculated the deficiency in the case in question, that allows the court to review the IRS determination related to qualification to enter this program. As was noted earlier, if the taxpayer qualifies to enter this program the taxpayer’s liability will be lower than if the taxpayer has the liability determined by the IRS in an exam outside the program.

There is a strong presumption that an act of administrative discretion is subject to judicial review. Trimmer, 148 T.C. at 346; Corbalis v. Commissioner, 142 T.C. 46, 56 (2014) (holding that denials of interest suspension under section 6404(h) are subject to judicial review). Under the VCSP, an eligible employer pays a lesser amount of employment tax than would have been due as to certain employees and is not liable for any interest and penalties. See I.R.S. Announcement 2012-45, 2012-51 I.R.B. at 725. In 2000 section 7436(a) was amended to provide the Tax Court jurisdiction to “determine whether such a determination by the Secretary is correct and the proper amount of employment tax under such determination.” See Consolidated Appropriations Act, 2001, Pub. L. No. 106-554, § 314(f), 114 Stat. 2763, 2763A-643 (2000); Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3103, 112 Stat. 685, 731. The U.S. Court of Appeals for the Ninth Circuit held that the amendment in 2000 “indicates that Congress did not intend to limit the Tax Court’s jurisdiction under section 7436 to determining only whether an individual was an employee.” Charlotte’s Office Boutique, Inc. v. Commissioner, 425 F.3d at 1208.[5]

The opinion goes on to conclude that the Tax Court does have jurisdiction to review the IRS’s determination in this case.

Pursuant to statute and caselaw we conclude that this Court has jurisdiction to determine whether the liability is correct in proceedings for determination of employment status. See § 7436(a); see also Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 267–68 (2001). Because the denial of taxpayer eligibility for VCSP directly affects the amounts of tax, the procedures that Congress has establish for judicial review of the Commissioner’s determinations logically contemplate review of such a denial as one element of the determination. See Trimmer, 148 T.C. at 347; Estate of Gardner, 82 T.C. at 996.[6]

But the fact that the Court may have the right to review the IRS’s determination does not mean that the IRS’s decision will not be sustained. The Court notes that fact in denying the taxpayer’s motion for summary judgment that they qualified for this program, which would have immediately reduced the amount of tax due from the corporation.

Petitioner contends that it has met all requirements for participation in the VCSP. Respondent contends that Mr. Treece’s misclassification as a nonemployee was uncovered as the result of an employment tax audit. If respondent’s argument is correct, petitioner does not meet the participation requirements of VCSP. We conclude that whether there was an employment tax audit is a dispute of material fact, and therefore we will deny petitioner’s Motion for Summary Judgment.[7]

[1] Treece Investment Advisory Corp v. Commissioner, 158 TC No. 6, April 19, 2022, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/dismissal%2c-summary-judgment-denied-in-employment-tax-case/7ddgq (retrieved April 20, 2022)

[2] Treece Investment Advisory Corp v. Commissioner, 158 TC No. 6, April 19, 2022

[3] Treece Investment Advisory Corp v. Commissioner, 158 TC No. 6, April 19, 2022

[4] Treece Investment Advisory Corp v. Commissioner, 158 TC No. 6, April 19, 2022

[5] Treece Investment Advisory Corp v. Commissioner, 158 TC No. 6, April 19, 2022

[6] Treece Investment Advisory Corp v. Commissioner, 158 TC No. 6, April 19, 2022

[7] Treece Investment Advisory Corp v. Commissioner, 158 TC No. 6, April 19, 2022