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Section 7436 Notice Not Jurisdictional Requirement for Employers to Appeal Certain Determinations in Tax Court

Posted on Dec. 20, 2022

We welcome back guest blogger Omeed Firouzi, who works as a staff attorney at the Taxpayer Support Clinic at Philadelphia Legal Assistance. In this post, Omeed discusses a revenue procedure from earlier this year that clarifies the process for employers to appeal IRS worker reclassification.

The Internal Revenue Service issued Rev. Proc. 2022-13, effective on February 7, 2022, regarding how employers can petition the U.S. Tax Court for review of a determination under Section 7436. Under Section 7436, employers who issue 1099-NECs (or 1099-MISCs reporting non-employee compensation) to their workers can petition for review before the Tax Court. Such review would come after the IRS makes a determination that the employer wrongly classified their employees as independent contractors or that the employer is not entitled to Section 530 “safe harbor” relief that would shield the employer from employment tax liability.

These determinations must be determinations employers receive in connection with an examination involving an actual controversy with the IRS. Crucially, an employer cannot directly appeal a Form SS-8 determination that its workers are employees (similarly, individuals also cannot appeal negative SS-8 determinations, an issue former National Taxpayer Advocate Nina Olson flagged in one of her annual reports to Congress).

There would have to be an examination and controversy that is associated with or resultant from the SS-8 determination for an employer to contest an SS-8 determination (even so, it would be a petition to the Tax Court). Technically then, an SS-8 determination that an employer misclassified its workers *could* serve as a “determination” for purposes of Sec. 7436 – but again only if the statutory requirements are met that the determination was in connection with an examination and involved a controversy. Two Tax Court cases, SECC Corp. v. Commissioner, 142 T.C. 225 (2014), and American Airlines, Inc. v. Commissioner, 144 T.C. 24 (2015), established this principle. Therefore, this is a means of appeal of an SS-8 determination for employers for which there is no equivalent for workers.


When the IRS issues a 7436 Notice after an examination, this notice serves as the employer’s equivalent of an individual taxpayer’s Statutory Notice of Deficiency (SNOD). As described by Tax Analysts, a 7436 Notice is issued only if the IRS “has determined that (a) one or more individuals performing services for the taxpayer are subject to reclassification as employees and (b) that the taxpayer is not entitled to relief from employment tax obligations under Section 530” (more on that later). Just like the SNOD for individuals, an employer has 90 days to petition the Tax Court in response to this notice – or 150 days if the employer is outside of the United States. Again, as is the case with individuals, the IRS cannot prematurely assess an employer’s tax liability after the Tax Court petition has been filed while the case is pending.

Importantly for our purposes though, those same aforementioned Tax Court cases – SECC Corp. and American Airlinesbroadened Tax Court jurisdiction to make it such that a Section 7436 Notice is not a *requirement* for an employer to petition the Tax Court. This Rev. Proc. aims to reconcile the discrepancy between this case law, that says a 7436 Notice is not a jurisdictional requirement, and a 2002 Rev. Proc. (Notice 2002-5, now superseded here) that said a 7436 Notice must be issued before taxpayers petition the Tax Court. Here, the Service makes clear in the new Rev. Proc. that the IRS does not need to issue a 7436 Notice to officially render a reviewable determination. Now, in response to a determination of employment tax liability without safe harbor relief – even without a notice and so long as the determination is in connection with an examination that involves a controversy – an employer can petition for review before the Tax Court.

My perspective here is as someone who has represented dozens of workers misclassified by their employers as independent contractors. At first glance, the impact of this Rev. Proc. may be limited. After all, Tax Court precedent already established that a 7436 Notice is not required for an employer to petition the Tax Court. But it could potentially mean, now that the IRS has officially clarified this matter in a Rev. Proc., that employers will feel there is one less administrative burden for them to seek relief from employment tax obligations. At the same time, workers are without much recourse if they get an unfavorable SS-8 determination. Moreover, workers cannot be parties to a 7436 case even though a 7436-related determination can affect a whole class of workers. On the other hand, when a worker files an SS-8, that SS-8 determination only applies to that worker.

It should be noted too that one of the causes of action for an employer to seek 7436 review is if they were denied Section 530 relief. Section 530 of the Internal Revenue Act of 1978 provides a so-called “safe harbor” for employers to avoid paying employment taxes (including the employer share of Social Security and Medicare taxes). They can qualify for safe harbor if they demonstrate reporting and substantive consistency and a reasonable basis for their classification of workers. It is a requirement for the Service to ask about safe harbor in examinations of employers’ classification of workers. Meanwhile, employees remain on the hook for their own uncollected employee share of FICA taxes.

Employers can also avail themselves of the Voluntary Classification Settlement Program to avoid full liability. Per the Taxpayer Inspector General for Tax Administration, there is also a history of employers not abiding by SS-8 determinations at all, waning audit referrals from the SS-8 Unit, and a decline in enforcement actions against employers. It remains to be seen if this trend will continue in the aftermath of the increased IRS enforcement funding in the Inflation Reduction Act (IRA). If the Biden administration’s language on prioritization of closing the tax gap when it comes to high-net-worth individuals and businesses bears fruit, it stands to reason there would be more enforcement here.

This most recent Rev. Proc. is part of a concerning inconsistency between the appeal rights that employers – who contribute to the tax gap here by misclassifying their workers – enjoy and the appeal rights individual working taxpayers enjoy in the realm of worker classification. Consider this same exact issue that this Rev. Proc. deals with and how the analogous situation is for individual taxpayers. It is a jurisdictional requirement for a statutory notice of deficiency to be issued for an individual worker to petition the Tax Court. A petition in a deficiency case that is filed before the Service issues a notice of deficiency does not confer jurisdiction on the Tax Court. So, in summation: if an employer wants to appeal an adverse worker classification determination to the Tax Court, they need not wait for a specific notice to be issued by the Tax Court. But if an employee wants to appeal an IRS determination that they owe taxes, they must wait for a notice before petitioning the Tax Court.

This incongruity between employer and employee appeal rights in worker classification is a problem Nina Olson identified in testimony before the Senate Finance Committee in June 2011. Olson urged Congress at the time to “amend Section 7436 to allow both employers and employees to request classification determinations and seek recourse in the Tax Court.” However, no congressional action has occurred on this front since then. We shall see if that changes now with the publication of this Rev. Proc.

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