Tax Snitches--a big one revealed

This is a double gotcha moment.  As Tax Prof reported this afternoon, Bloomberg.com reveals that UPS Lobbyist Secretly Spurred Ohio to Demand Taxes from FedEx.  Kenneth Kies, the former chief of staff of the Joint Committee on Taxation, left Congress to become a lobbyist.  One of his clients was UPS. And Ohio has just revealed that Kies was the author of a detailed report delivered to Ohio officials back in December 2006 about FedEx's employment practices--a tricky little matter of several hundred thousand in taxes possibly due on drivers that FedEx classifies as independent contractors (here's its website about independent contractor recruiting), but that may instead be employees. 

FedEx had already been found to have inappropriately classified certain drivers as independent contractors in California, in a Dec 2005 decision.  See this link.  Massachusetts reached a similar decision about FedEx drivers, and there've been other lawsuits by drivers across the country, see this link, as well as the FedEx Watch site that has links on litigation around the country.   Information is also available on the class action lawsuit's website.   Here's a site, Braun Consulting, that contrasts independent contractor status with employee status, comparing FedEx and UPS.

Why would UPS care?  Because UPS treats its drivers as employees, so it is at a competitive disadvantage when FedEx does not, for essentially the same work.  They both apparently wear uniforms, drive trucks with the company's logo on them, deliver packages according to the company's mandates, with routes set by the company.....hard to see how one set could really be employees and the other set drivers, though there may be a number of factual differences that aren't obvious on the surface.  At any rate, Ohio launched its own investigation and concluded that the FedEx drivers are indeed employees.

So there's a "gotcha" for FedEx (assuming that the classification of drivers as employees holds). And if they are employees for state tax purposes, it is quite possible that they should have been treated as employees for federal tax purposes as well.  The IRS has already tentatively determined that they owe several hundred million in back taxes just for 2002 due to the classification of some drivers, and is investigating the company's classification of about 13,000 drivers in 2004-2006.  See this Trading Markets.com story.  So double "gotcha."

But there's also a "gotcha" for Kies.  In the letter turning the report over to Ohio, Kies asked for confidentiality.  Guess he didn't want to get a reputation as being willing to snitch to tax authorities.  But Ohio released the letter.   So Kies has been outed.

When I was practicing, I heard at various ABA conferences and elsewhere that brown envelope revelations were not an uncommon thing for the IRS.  Companies who were offered a tax shelter by a promoter, for example, may have refrained from buying in, yet recognized that they would be at a competitive disadvantage to companies that aggressively pursued the deal.  Snitching evens the playing field, and lets the IRS find out about the newest tax "inventions" long before it otherwise would have.  I never asked, but I always assumed that the snitching was done anonymously--materials from a promoter sent in a brown envelope with no trace or obvious identification of the sender.  I guess Kies was trying to be more up front, and hoping that his candor would encourage Ohio officials to honor his confidentiality request. 

We tend not to like snitches, of any kind, and thus the "gotcha" sense about Kies' outing.  But we really do want people to help ensure that everyone complies with the tax laws and be willing to report gross miscompliance rather than be cowed by fear of being known as snitchers.  I suspect states and the fed should err on the side of protecting the identity of snitches, and be grateful for the evidence that helps end noncompliance.

Comments

[Michael]

I would have done the same thing... everyone should be paying and equal amount of taxes for the same job...

Now if Fedex was using the savings on taxes to bring better health care and insurance and wages for their employees than cool, snitching on them was wrong.

But that wasn't what was happening, they were just pinching pennies and keeping profits... I'm glad they got caught up...

[Mike Sylvester]

The moral of the story is that employers must be very careful when they determine whether a person working for them is a contractor or an employee. There is a growing trend for employers to pay people as contractors; thereby saving on payroll taxes.

Employers need to talk to their tax professional and carefully consider the rules!

Mike Sylvester, CPA/ABV

[LindaMBeale]

You're absolutely correct, Mike. Thinking that you can just willy-nilly call somebody an independent contractor and save on your taxes is just going to get most employers in trouble--and deservedly so. Trying to get by with misclassifying employees is ultimately harmful not just to the employees (who lose out on benefits, at the least), but also to the employer and society in general.