Publication 963 (Rev. October 1997) - Uncle Fed's Tax*Board

Determining Worker Status
NOTES
Dual Status
Some workers perform services in more than one capacity. For example, a bookkeeper
might be separately engaged to design and print educational materials. The fact that the
bookkeeper is treated as an employee with respect to bookkeeping services does not
preclude application of section 530 if it is determined that the bookkeeper is an employee,
and not an independent contractor, with respect to the design and printing of educational
materials.
B) Reasonable Basis Tests
1. Judicial Precedent Safe Haven
2. Prior Audit Safe Haven
3. Industry Practice Safe Haven
4. Other Reasonable Basis
Judicial Precedent Safe Haven Test
This safe haven is established by reasonable reliance on judicial precedent or published
rulings. It may also be established for a particular government entity by reasonable reliance
on a technical advice memorandum, private letter ruling, or a determination letter issued to
that entity.
The term “published rulings” refers to revenue rulings which are intended for general use
by all employers. Neither rulings by state administrative agencies, including agencies which
regulate employment, nor rulings from federal agencies other than the IRS can be used to
support a judicial precedent safe haven.
Prior Audit Safe Haven
This safe haven may be established by reasonable reliance on a prior IRS audit of the
government entity for employment tax purposes. A taxpayer may not rely on an audit
commenced after December 31, 1996 (Small Business Job Protection Act of 1996) for
purposes of this safe haven unless the prior audit included an examination for employment
tax purposes of whether the individual involved (or any individual holding a position
substantially similar to the position held by the individual involved) should be treated as an
employee.
In other words, section 530(e)(2)(A) which was created by the Small Business Job
Protection Act now limits the prior audit safe haven to audits that include an examination
for employment tax purposes of the status of the class of workers at issue or of a substantially
similar class of workers.
An employer may continue to rely on any audit that began before January 1, 1997, even
though the audit was not related to employment tax.
The prior audit safe haven does not apply if the relationship between the government
entity and the workers is substantially different from that which existed at the time of the
audit.
A government entity will be able to claim that it was subject to a prior audit if the IRS
previously inspected its “books and records.” Mere inquiries or correspondence from a
Service Center will not constitute an audit.
3-8 Federal-State Reference Guide (1997 Edition)