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IRS Targets Contractors and Foreign Tax Deals

February 19, 2010

The Obama administration plans to raise revenue in part by cracking down on companies that classify employees as independent contractors and arrange for dubious foreign tax credits.

The administration’s proposed 2011 budget requests funds to hire 100 additional IRS enforcement personnel to probe companies that illegally misclassify workers, according to The New York Times. The IRS began a three-year audit earlier this month of 6,000 companies aimed at ferreting out such abuses. The agency will conduct about 2,000 such audits per year using statistical sampling techniques, according to With the crackdown, the administration hopes to recover an estimated $7 billion over 10 years.

However, the IRS will have to be careful in how far it pushes enforcement of the contractor tax laws. The vengeful pilot who steered his plane into an IRS building in Austin on Thursday in part blamed his financial troubles on a 1986 change in the Tax Code that made it harder for contract software programmers like him to stay self-employed (see Plane Crashes into IRS Building).

The Tax Code change had been inserted into the 1986 Tax Reform Act by the late Sen. Daniel Patrick Moynihan, D-N.Y., at the behest of IBM, which wanted a tax break for its overseas business, according to The New York Times. Numerous attempts over the years at repealing the provision have been unsuccessful.

Another strategy the IRS plans to leverage is cracking down on foreign tax credits. Multi-national companies have been setting up investments overseas that make money and are taxed by other countries. They can then claim foreign tax credits on their U.S. corporate returns. Hewlett-Packard is one company finding itself a target of the IRS crackdown, according to MarketWatch. The tech giant is fighting with the IRS in U.S. Tax Court over $132 million in disallowed tax credits claimed on a Dutch entity known as Foppingadreef. The IRS calls the Dutch deal a sham, but HP claims otherwise.

Most of the companies that have set up the foreign tax credit generators and are in litigation defending them against the IRS happen to be in the financial industry, MarketWatch points out. They include AIG, Bank of New York Mellon, Principal Financial Group, Sovereign Bancorp and Wells Fargo.

Some of these same firms were also beneficiaries of last year’s financial bailout. What the Treasury Department can give, the IRS can take away.

Comments (2)
The best way is to outsource your tax and accounting related tasks to country like India...this way you can get your work done without employing any one as independent contractor. I would be ready to provide more information to interested people.
Posted by ramanchadha | Tuesday, March 02 2010 at 6:54AM ET
So now if I do what the law does not proscribe and the IRS or the executive branch does not like it they can go after a client. Maybe it is time to get a court to determine that: 1) tax reduction that raises profits and returns on investments to the stakeholders is a legitimate business goal and, 2) if it is not proscribed by law then a structure is not a sham just because the government does not like that playing by the rules the government (Congress) established happens to benefit the taxpayer.
Posted by Brian Levy | Monday, February 22 2010 at 9:42AM ET
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