8638. How can an employer show that it had a reasonable basis for classifying its workers as independent contractors, rather than employees, in order to qualify for the Section 530 safe harbor?Alexis Longrcline202014-07-07T22:25:00Z2014-07-07T22:25:00Z26153508Summit Business Media2984115148638. How can an employer show that it had a reasonable basis for classifying its workers as independent contractors, rather than employees, in order to qualify for the Section 530 safe harbor?An employer can avoid IRS reclassification of its independent contractors as employees if it is able to prove, among other requirements (see Q 8637), that it had a reasonable basis for its classification of workers. The courts have found that the “reasonable basis” requirement is satisfied when the employer relies on one or more of the following: (i)judicial precedent, published rulings or IRS letter rulings to the taxpayer (IRS rulings addressed to other taxpayers have been found insufficient);. See Darrell Harris, Inc. v. United States, 770 F. Supp. 1492 (1991) (in which the taxpayer was not entitled to rely upon a letter ruling to satisfy the reasonable basis requirement because it was not issued directly to the taxpayer). (ii)a past IRS audit of the employer where there was no assessment attributable to the treatment of individuals holding positions similarly situated to the individual at issue for employment tax purposes;(iii)a longstanding recognized practice of a significant section of the industry in question;.See Nu-Look Design v. Commissioner, 356 F.3d 290 (2004), Greco v. United States, 380 F. Supp. 2d 598 (2005). or(iv)as a catch-all, any other reasonable basis for not treating an individual as an employee.The courts have found the reasonable basis requirement to be satisfied even in cases where the employer relied upon an IRS audit of one class of workers to justify independent contractor status for a second class. For example, the courts have allowed an employer to rely upon an audit of the classification of its landscaping staff in order to provide a reasonable basis for that same employer’s treatment of its janitorial staff as independent contractors..Lambert’s Nursery and Landscaping, Inc. v. U.S., 894 F.2d 154 (1990). The relevant inquiry was into the relationship between the employer and the workers, in terms of control and supervision, rather than the actual type of work that was being performed.An employer can also rely upon a “longstanding” custom used by a “significant section” of the industry to establish a reasonable basis for the workers’ classification. The practice must be longstanding, and, under Section 530, an industry practice is longstanding if it has been in existence for at least 10 years (the statute does not require that the custom be in use for 10 years, but does preclude the courts from requiring a longer time period)..Section 530(e)(2)(C)(i). See also, IRS Publication on the history of Section 530, available at: http://www.irs.gov/pub/irs-utl/irpac-br_530_relief_-_appendix_natrm_paper_09032009.pdf (last accessed May 28, 2014). A “significant section” of the industry means 25 percent of the industry, excluding the employer in question, though a lower percentage may apply if the facts and circumstances of the particular case show that such percentage is appropriate..Section 530(e)(2)(C)(ii). The taxpayer is not required to look to the practices in the industry on a nationwide basis. Instead, the courts have permitted taxpayers to look to the segment of the industry in which they practice, using factors such as the size of the employer and the geographic region in which it operates to determine the relevant comparison..General Inv. Corp. v. United States, 823 F.2d 337 (1987), J & J Cab Service, Inc. v. United States, 75 AFTR 2d 618 (1995). Even if the employer has no precedential opinion, past IRS audit or industry custom to rely upon, it can still establish that it had a reasonable basis for classifying its workers as independent contractors if it can show that it had some other reasonable basis for the classification..Rev. Proc. 85-18, 1985-13 IRB 27. For example, employers who have relied upon professional advice (such as from an accountant or attorney) in classifying workers as independent contractors may be able to use this advice as a reasonable basis for the classification..Smoky Mountain Secrets v. United States, 910 F. Supp. 1316 (1995). Some courts have also found that a reasonable basis for the classification existed when the common law factors (see Q 8630) weighed in favor of independent contractor classification..In re Critical Care Support Services, Inc., 138 BR 378 (1992), American Institute of Family Relations v. United States, 79-1 USTC 9364 (1979).Planning Point: An IRS determination of a particular classification, made in response to a request made by a firm or worker on Form SS-8 (see Q 8636), would also constitute a reasonable basis for the classification under “(i)” above. A determination letter applies only to a worker (or a class of workers) requesting it, and the decision is binding on the IRS. Note that in certain cases a formal determination will not be issued. Instead, an information letter may be issued. Although an information letter is advisory only and is not binding on the IRS, it may be used to assist the worker to fulfill his or her federal tax obligations..General Instructions to IRS Form SS-8.