The question of whether an individual is working as an independent contractor or an employee is not a new one. A study in 1996 showed that between 1988 and 1996, 90 percent of court cases challenging independent contractor status resulted in the IRS classifying the workers as employees, not contractors, forcing taxpayers to come up with over $751 million in back taxes and penalties.

Shortly after these findings were released, President Clinton signed the Small Business Job Protection Act so that the burden of proof resided with the IRS, meaning the IRS had to prove that someone was an employee, rather than the employer having to come up with proof that a worker was truly an independent contractor. Business owners at that time could take a few steps to set up an independent contractor properly, such as having a written agreement, denying any fringe benefits and getting the contractor to set up their own business, and they could sleep well at night knowing they were most likely in the clear.

While the question of independent contractor vs. employee hasn’t completely gone away, it hasn’t received much attention since that time. But times have changed. With the federal government and states on the hunt for additional tax revenues to help cover growing deficits, both levels of government are on the lookout for ways to collect more taxes, and this seems to be their latest solution.

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1. Every disaster needs a new tax law…apparently.

We, like the rest of the world, were saddened by the tragedy of the Haiti earthquake, and, like so many, were inspired to donate what we could. As accountants, however, we also realized this created a new issue for the upcoming tax season. They do make tax planning a challenge. For an analysis of deducting Haiti donations made in 2010 on your 2009 tax return, look at page 3 of our newsletter. This is hot off the government presses and doesn’t apply to any of the other worthwhile causes out there.

2. Another developing issue: if you’ve worked diligently with your attorney to develop an estate plan, congratulations, that plan may now be useless — at least for the time being.

As of January 1, 2010 the estate tax has been temporarily repealed. Don’t worry, though; it comes back as of January 1, 2011. Congress may extend the tax retroactively, but who knows. You may want to contact your attorney to see if a fix to your plan is warranted.

There may be more retroactive tax laws to follow, so stay tuned!

On a more positive note, wouldn’t it be nice if the Kansas Legislature actually considered and passed a repeal of the Kansas Income Tax? I understand that other taxes would be expanded to cover the shortfall, but I am growing tired of Kansans moving to Texas, Florida or Nevada to avoid the Kansas Income Tax. Even boring accountants can dream.

It comes as no surprise that blindly following tax advice from a software program, an inexperienced tax preparer, a Google search or worse, a know-it-all friend or acquaintance, can be just as dangerous. 

At least the GPS tells you that you are “assuming all risks” when you start up the device.  Signing your tax return also means you are “ASSUMING ALL RISKS.”  If there is an error, you pay all of the tax, interest and penalties.  Drawing the attention of the IRS is never pleasant.

The tax laws are much more complex and confusing than simply finding a location on a map.  Alternative minimum tax, taxation of social security benefits, tax credits, phase outs all are examples of thinks not appearing as they seem.  Rules of thumb are now extinct when it comes to taxes.  Laws changing every year and sometimes multiple times a year means last years good advice may be this year’s bad advice.

Sometimes you just need to ask for directions.  When navigating dangerous terrain, also known as the Internal Revenue Code, use a guide that has the experience and continuous training to get you home safely.  An experienced and licensed tax advisor is invaluable.

Steve