Tax Prophet Newsletter February, 2010

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The Tax Prophet Newsletter

Issue #82 February, 2010

REDUCE TAXES! CHECK OUT THE TAX PROPHET'S Action Guides In This Issue: Introduction Workers Upshot IRS Rationale Conclusion		PILOT CRASHES INTO IRS BUILDING: IS SECTION 1706 TO BLAME? Introduction On February 18th, a deranged taxpayer smashed his airplane into an IRS office in Austin, Texas, killing himself and a long-time IRS employee. While this terrorist ranted against several institutions of authority, including the Catholic Church, his suicide note blamed an obscure tax provision, §1706, for ruining his life. How could this be?

High-Tech Workers		Section 1706 of the Tax Reform Act of 1986 (P.L. 99-514), enacted in 1987, caused a schism between high-tech companies and their self-employed consultants. Prior to §1706, professionals who formed single-owner consulting businesses considered themselves independent contractors, but Congress then singled out high-tech programmers, engineers and analysts and, in essence, reclassified them as employees of the companies receiving their services. Note: Section 1706 is not part of the Internal Revenue Code. It is subsection (d) to Section 530 of the Revenue Act of 1978.
Upshot		After enactment of §1706, large and mid-sized high-tech firms stopped hiring professionals operating as independent companies and forced them to join the payroll as employees. Thus, Congress targeted this particular class of entrepreneurs and crushed their American dream of owning and growing their independent consulting businesses.
IRS Rationale		Section 1706 was supposed to recover revenue allegedly lost through tax cheating by consultants who owned their businesses. In general, IRS asserts employee tax compliance is higher than 99%, but the rate is much lower for self-employed workers. However, later studies concluded that §1706 did not raised revenues and may have cost the government money. In response to these studies, Congress tried, but failed, to repeal the law.
Conclusion		Sometimes, enacting a tax provision produces unintended results. Section 1706 harmed the budding industry of professional consultants owning their companies, including -- according to his suicide note -- the crazed pilot who crashed into the IRS building in Texas. This discriminatory law should be repealed. Ironically, IRS has recently stepped up audits against high-tech consultants in the search for additional revenue and, once again, has been aggressively reclassifying them as employees. Will Congress finally intervene?

All contents copyright Š 2010 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet Ž is a registered trademark of Robert L. Sommers.