It can be difficult to determine if a person is an employee or an independent contractor. The Rabinowitz v. Commissioner case highlights the difficulties that taxpayers face in making this distinction.

Facts & Procedural History 

Rabinowitz is an insurance salesman. Rabinowitz asked the IRS and, upon IRS refusal, the U.S. Tax Court to lift a tax lien that he believed was preventing him from acquiring another insurance sales job. The court disagreed, saying that even if the lien was lifted, Rabinowitz would still owe the underlying tax and would have to disclose that information upon request.

Of course, very few facts are set out in the court opinion. Rabinowitz was most likely paid as an independent contractor and paid entirely or partially on commissions from insurance sales. Rabinowitz probably had one or more less productive sales years immediately following one or more productive sales years. This probably left Rabinowitz with a large tax debt that he could not fully pay. The IRS probably issued a federal tax lien because Rabinowitz failed to work out other payment arrangements or he may have even ignored the IRS altogether.

These types tax delinquencies are all too common. Independent contractors often believe that they will continue to have high earnings; earnings which will enable them to pay their past year tax debts in full when the tax becomes due.

In this case, Rabinowitz probably could not work out a payment agreement for his tax liability because he was unemployed (and the IRS could not seize his wages as, again, he was unemployed) and he probably had very few assets upon which the IRS could levy on, so the IRS filed a federal tax lien and placed the case on “uncollectible” status.

While the court appears to have reached the right result, the analysis is somewhat lacking.

The court was correct in noting that Rabinowitz would still have been liable for the underlying tax if the federal tax lien was lifted and he would have to disclose the debt upon request (in some instances). What is missing is the fact that Rabinowitz may not have had to disclose the debt to obtain certain jobs in the insurance industry, as his personal debts are not subject to public scrutiny for many insurance positions — unless they are listed on his credit report, which the federal tax lien in question probably is.

If that is the case, Rabinowitz and the government probably would have been better off if the tax lien was lifted because then Rabinowitz may be able to find another insurance sales job and he could work out a payment agreement with the IRS (or the IRS would have wages to begin garnishing). That is what Rabinowitz was asking for, but the court was not willing to accommodate Rabinowitz.

This is a cost-benefit decision that the IRS has to make. The IRS has to decide whether it will accommodate taxpayers so that the government collects some of the taxes owed, or it has to decide to not accommodate taxpayers and accept nothing less than full payment. The IRS and tax practitioners know that in the later case the IRS almost always ends up collecting nothing or next to nothing.

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