Allman, the taxpayer in this case, worked as an employee for eleven and a half months in 2003. Allman worked for a construction company for the remainder of the year and he was paid “under the table” for this work. The IRS asserted that Allman failed to report interest income from two insurance policies, Allman underreported his income, and Allman failed to pay self-employment taxes.
Allman testified that he did not own insurance policies and he did not receive interest income from an insurance policy and, therefore, he did not report the interest income on his tax return. The IRS attorney presented no evidence to counter the taxpayers testimony, so the tax court held for the taxpayer.
Allman then argued that his employer, the construction company that paid him “under the table,” had overstated the amount it paid to him on the Form 1099 that it reported to the IRS. Allman was paid cash, so there were no records of how much he was paid. Allman testified that he worked 35 hours per week for 27 days at a $12.50 per hour (with two weeks off for the holidays) to come up with how much he was paid. The IRS attorney cited only the amount listed on the construction company’s Form 1099, rather than presenting evidence that Allman worked more than the hours that he testified to. Because the IRS attorney failed to put on any of this evidence, the court held for the taxpayer.
Allman then argued that he was an employee of the construction company and not an independent contractor; therefore, he was not responsible for paying self-employment taxes. Allman testified that his manager directed him as to what to do for this position, he used the construction company tools, and he did not sign a employment agreement with the construction company. Again, the IRS attorney presented no evidence. As such, the tax court held in favor of the taxpayer.
At the end of the day, the taxpayer prevailed on every issue. The result would have probably been different had the IRS attorney merely called the construction manager to testify and contacted the insurance company to determine ownership of the insurance policies.
Odds are that the IRS attorney did not take this case serious because the amounts in dispute were small and/or the issues were not complicated. If that is the case, the lesson from this case is that small taxpayers should litigate their cases rather than paying the underlying tax. I bet that is not a lesson that the IRS wants taxpayers to learn.