Chief Counsel limits reach of Mescalero in employment tax discovery


In what is likely not to be the end of the matter, IRS Chief Counsel has advised that the Tax Court decision on Mescalero, 148 TC —, No. 11, Dec. 60,867, earlier this year does not stand for the proposition that taxpayers and/or their representatives are entitled to workers’ return information during the ordinary conduct of an employment tax audit or at the Appeals level. Special situations that may exist for discovery require Tax Court consideration, according to Chief Counsel.

Comment. Not only is Chief Counsel saying that a taxpayer would need to go to court before discovery involving other taxpayers’ returns is permitted, but in court the IRS would argue only the very limited and rare special circumstances as found in Mescalero would permit disclosure. At press time, the IRS has not indicated whether it would appeal Mescalero, issue a nonacquiescence or acquiescence in result only to it, or just let the case stand as a unique situation.

Mescalero. Mescalero involved an employment tax audit in which the IRS had determined that some of the contractors who received Forms 1099 from the taxpayer should have been classified as employees. Under Code Sec. 3402(d), the taxpayer could escape liability if it could prove that the workers paid the taxes themselves.

IRS’s position. Chief Counsel stressed how limited the use of Mescalero should be by taxpayers to facilitate discovery in employment tax situations. Chief Counsel concluded that the case does not stand for the proposition that taxpayers are entitled to workers’ return information during the conduct of an employment tax audit or at the Appeals level. Instead, Chief Counsel viewed the decision as limited to discovery requests made during the pendency of a Tax Court proceeding, “where the Tax Court has the ability to determine whether the requested information is disclosable …and has balanced the relevancy of the requested information against the burden placed on the Service pursuant to Tax Court Rules.”

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