On December 12, 2014 the Office of IRS Chief Counsel published Legal Advice Issued by Field Attorneys (LAFA) 20145001F, concluding that the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), as codified in Sections 6221 through 6324, “does not apply to employment tax examinations or worker classification proceedings for entities that are otherwise subject to TEFRA for income tax purposes. For that reason, there are no special procedures that revenue agents must follow when conducting employment tax examinations of TEFRA partnerships.”
TEFRA provides procedural rules that apply in most partnership audits. An audit of a TEFRA partnership begins with the issuance of a Notice of Beginning of Administrative Proceedings, which must be mailed to the Tax Matters Partner (TMP) and each “notice partner.”[i] All partners have the right to participate in a TEFRA proceeding.[ii] Upon completing the TEFRA partnership audit, the revenue agent must send notice of the Final Partnership Administrative Adjustment (FPAA).[iii] If any partner protests the FPAA, the IRS will transfer the partnership case to the applicable Appeals Office. There are specific procedures applicable to TEFRA Appeals Office proceedings.[iv] If any partner disagrees with the result at Appeals, Appeals will issue an FPAA that commences the ninety-day period in which the TMP may petition the Tax Court, the applicable district court, or the Court of Federal Claims for readjustment of the partnership items in the FPAA.[v]
Section 7436(a) provides the procedures for proceedings to determine employment status:
(a) Creation of Remedy
If, in connection with an audit of any person, there is an actual controversy involving a determination by the Secretary as part of an examination that—
(1) one or more individuals performing services for such person are employees of such person for purposes of subtitle C, or
(2) such person is not entitled to the treatment under subsection (a) of section 530 of the Revenue Act of 1978 with respect to such an individual,
upon the filing of an appropriate pleading, the Tax Court may determine whether such a determination by the Secretary is correct and the proper amount of employment tax under such determination. Any such redetermination by the Tax Court shall have the force and effect of a decision of the Tax Court and shall be reviewable as such.
Several of the deficiency proceeding rules apply in Section 7436(a) employment proceedings. Section 7436(d) states that the principles of sections 6213(a), (b), (c), (d) (restrictions on deficiencies and Tax Court petition rules) and (f) (waivers of deficiencies); 6214(a) (Tax Court jurisdiction to redetermine deficiencies); 6215(a) (assessment of deficiencies found by the Tax Court); 6503(a) (suspension of limitations periods); 6512 (limitations in the case of Tax Court petitions); and section 7481 (date when Tax Court decisions become final) apply to Section 7436(a) proceedings.
The IRS concluded that an LLC is “subject to TEFRA for income tax purposes, but that the TEFRA procedures do not apply to employment tax examinations or to worker classification proceedings.”
In its analysis, the IRS noted that within the sections incorporated in section 7436, “the only references to TEFRA relate to suspending the statute of limitations and to the overpayments relating to partnership items… [and] the TEFRA statutes make no reference to I.R.C. § 7436 or to Subtitle C of the Code (Employment Taxes and Collection of Income Tax).”
The IRS also reasoned that under sections 6221 and 6231(a)(3), the TEFRA partnership procedures are limited to “partnership items,” which are items under Subtitle A of the Code, whereas employment taxes are imposed under Subtitle C of the Code. The IRS also stated that “employment tax liability…does not meet the I.R.C. § 6211(a) definition of ‘deficiency’ to which the TEFRA restriction on assessment under I.R.C. § 6225 could apply…[and therefore] no notice of final partnership administrative adjustment would be required under I.R.C. § 6225 in order to make an employment tax assessment.”
The IRS also cited Chef’s Choice v. Comm’r, 95 T.C. 388 (1990) for its assertion that “the intent of the intent of the TEFRA provisions was merely to aggregate the partners’ income tax deficiency proceedings into a single proceeding insofar as their income tax liability derived from a partnership. Since the partnership does not pay income tax, it is not even a party to the TEFRA proceeding relating to income tax determinations.”
LAFA 20145001F, which concludes that TEFRA does not apply to employment tax examinations, is legal advice prepared by field attorneys in the Office of Chief Counsel and is issued as legal advice to the revenue agent and team manager listed in the LAFA. The LAFA is not to be cited as precedent.
KRISTA HARTWELL – For more information please contact Lacey Strachan at Hartwell@taxlitigator.com. Ms. Hartwell is a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at http://www.taxlitigator.com.
[i] 26 U.S.C. § 6223
[ii] 26 U.S.C. § 6224
[iii] 26 U.S.C. § 6223
[iv] See IRM 8.19
[v] 26 U.S.C. 6226(a)