Document Number
21-81
Tax Type
Withholding Taxes
Description
Administration : Audits - VEC Information
Topic
Appeals
Date Issued
07-06-2021

July 6, 2021

Re:  § 58.1-1821 Application:  Withholding Tax

Dear *****:

This will respond to your letter in which you seek correction of the withholding tax assessments issued to your client ***** (the “Taxpayer”), for the taxable periods January 2017 through December 2018.

FACTS

Under audit, the Taxpayer was assessed for failure to withhold taxes from employee wages during the taxable periods at issue. The Taxpayer appeals, contending the workers were independent contractors, not employees. 

DETERMINATION

Virginia Code § 58.1-460 defines “employee” as “an individual, whether a resident or a nonresident of the Commonwealth, who performs or performed any service in the Commonwealth for wages . . . .”  The Code of Virginia does not define “independent contractor” for income tax withholding purposes. Under Title 23 of the Virginia Administrative Code (VAC) 10-140-10, the relationship between an employer and employee or independent contractor is determined in accordance with the test set forth in Treas. Reg. § 31.3401(c)-1. In Public Document (P.D.) 96-280 (10/10/1996), the Tax Commissioner found that the factors enumerated in Treas. Reg. § 31.3121(d)-1 should be used as a guideline for determining whether a worker is an employee or an independent contractor.

In its appeal, the Taxpayer refers to the twenty factors cited above and asserts that nearly every such factor in its case supports its position that the workers were independent contractors. Previously, the IRS set forth twenty factors to help differentiate between employees and independent contractors. See Rev. Rul. 87-41. The Internal Revenue Manual (IRM) § 4.23.5.7.1 now states that although the 20 factor test may still be used for reference purposes, the primary method is to consider every piece of information in a case that helps decide the extent to which the taxpayer does or does not retain the right to control the worker. This evidence tends to fall into three categories: behavioral control, financial control, and the type of relationship of the parties. See also IRS Publication 15-A, Employer’s Supplemental Tax Guide (2020). It is important to note that not all factors have to exist on one side or the other. It is also important to note that every factor might not be relevant in each case, and depending on the specific circumstances of the case, some factors may be more relevant than others. Typically, an employee relationship will exist when the worker is subject to the will and control of the employer not only as to what will be done but how it will be done. On the other hand, an independent contractor is normally only subject to the control and direction of another as to the result of the work, but not as to the means and methods of accomplishing it. See Treas. Reg. § 31.3121(d)-1. 

In accordance with Virginia Code § 58.1-3 C, the Department received information concerning the Taxpayer’s workers’ classifications as employees from the VEC. The Department allowed adjustments to reflect Virginia individual income tax return information filed by the Taxpayer’s workers as provided under Virginia Code § 58.1-467. The Department’s auditor, however, does not appear to have made an independent analysis as to whether the workers were employees or independent contractors.

CONCLUSION

Under the provisions of Virginia Code § 58.1-205, an assessment of a tax by the Department is deemed prima facie correct. As such, the burden of proof is on the Taxpayer to show the Department’s assessment is incorrect. The Department’s regulations, however, require an evaluation of an employer’s records to determine if its workers are employees or independent contractors pursuant to the factors enumerated in Treas. Reg. § 31.3121(d)-1 and as further described in Rev. Rul. 87-41 and more recently in IRS Publication 15-A. See also P.D. 18-107 (6/6/2018) and P.D. 21-56 (5/4/2021). The Department’s audit staff, therefore, must give taxpayers a full opportunity to present information and evidence concerning their relationships with workers. Such evidence may take the form of written documentation, including, but not limited to, any contracts that existed between the taxpayer and the individuals in question. The evidence may also include, but again not be limited to, written or oral testimonials from individuals with knowledge of the relationships, including members of management or the individuals themselves whom the Department is trying to determine were employees or independent contractors. Once a taxpayer has had a full opportunity to present such information, the audit staff should undertake a complete evaluation of such evidence and fully document its analysis in reaching its audit conclusions.

Accordingly, the case will be returned to the audit staff to conduct a complete examination of the relationships at issue in accordance with the procedures outlined above. The Taxpayer, in turn, must provide sufficient information to support its contention that its workers were independent contractors during the tax periods at issue. In particular, the Taxpayer and the audit staff should review IRS Publication 15-A for a discussion of the different categories of factors at issue. Once the examination is completed, the audit staff is directed to prepare a revised audit report and communicate the result of the examination to the Taxpayer in writing. The report should fully analyze any information the Taxpayer is able to provide concerning the factors described above. Should the Taxpayer wish to appeal the result of the revised audit, it will have 90 days from the date the audit staff communicates the audit result in writing in which to appeal.

The Code of Virginia sections, regulation and public documents cited are available on-line at www.tax.virginia.gov in the Laws, Rules & Decisions section of the Department’s web site. If you have any questions regarding this determination, you may contact ***** in the Office of Tax Policy, Appeals and Rulings, at *****.

Sincerely,

 

Craig M. Burns
Tax Commissioner

                    

AR/3449.M

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Last Updated 09/16/2021 13:11