Worker tax information discoverable in worker reclassification case

The disclosure of third-party taxpayer information needed to absolve an employer of his tax liabilities in a worker reclassification case was not barred under Code Sec. 6103. Moreover, the worker’s tax information was discoverable even though the taxpayer/employer had the burden of proving that the workers paid their income taxes to get relief.

After an audit, the IRS reclassified hundreds of workers employed by an American Indian tribe. The tribe attempted to get each reclassified employee to complete Form 4669, Statement of Payment Received. However, many of the tribe’s former workers had moved or lived in hard-to-reach areas, so the tribe was unable to find and secure executed Forms 4669 from 70 of the reclassified workers.

Comment. The IRS normally accepts Form 4669 as prima facie evidence that a worker filed an individual income tax return and paid the income tax due. This relieves the employer of its withholding tax liabilities. It is not clear what an employer may use to substantiate reclassified workers’ tax filing and payment in the absence of a Form 4669.

In its discovery request, the tribe asked the IRS to produce the information that would appear on Form 4669 for each worker identified in the determination. The IRS objected, claiming that the information was protected under Code Sec. 6103 and that producing the information would shift the tribe’s burden of proving that the workers had paid their taxes to the IRS.

While the tribe was clearly requesting “return information,” Code Sec. 6103(h)(4)(C) permits disclosure of returns or return information if such “return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer, which directly affects the resolution of an issue in the proceeding.” Since the workers had a “transactional relationship” with the tribe and the tribe’s defense under Code Sec. 3402(d) would be proved and the case would be entirely resolved if the workers did indeed pay their tax liabilities, the return information could be disclosed under Code Sec. 6103(h)(4)(C). Moreover, contrary to the IRS’s contention, the information was discoverable. Tax Court Rule 70(b) provides that information is discoverable or not regardless of the burden of proof involved. Thus, the tribe’s burden of proof had no effect on the IRS’s obligation to comply with appropriate discovery requests. Further, the IRS’s argument that compliance with the discovery request placed too great a burden on it was rejected. (Mescalero Apache Tribe, 148 TC —, No. 11, Dec. 60,867.)

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