Issues

Employee or Contractor? Winning a Worker Classification Case

The IRS reclassified your 1099 contractors as employees—or stuck you with 15.3% SE tax. Here's how to win a worker-classification case in Tax Court.

Liam Williams

Liam Williams

— 24 min read
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Two readers land on this page with the same word at the center of their problem: "employee."

The first is a small-business owner. You ran lean, paid people on 1099s, and never ran payroll. Then the IRS audited your employment taxes, decided your contractors were really employees, and sent you a notice demanding back FICA, withholding, penalties, and interest—a bill that can run into five or six figures.

The second is a worker. You got a 1099, and at tax time you got hit with self-employment tax of roughly 15.3%—nearly double what an employee pays—even though you took orders, worked set hours, and looked a lot like every W-2 employee around you.

Same legal question, two completely different paths into Tax Court. This guide covers both. The first thing you need to know is which door is yours, because picking the wrong one wastes the only time you have.

Which Door Is Yours

There are two distinct routes, and they do not overlap.

The business uses IRC § 7436. When the IRS audits a business's employment taxes and concludes its 1099 workers were really employees—or that the business doesn't qualify for Section 530 relief (more on that below)—it issues a Notice of Determination of Worker Classification (NDWC), which arrives as IRS Letter 3523. That notice is the employment-tax cousin of a Notice of Deficiency. You then have 90 days (150 days if your business is located outside the United States) to petition the Tax Court under IRC § 7436.

Crucially, only the business can file a § 7436 petition. The statute says a pleading "may be filed under this section only by the person for whom the services are performed." A worker cannot use § 7436 to challenge their own classification. This trips people up constantly, so say it plainly to yourself: if you are the worker, § 7436 is not your door.

The worker uses the ordinary deficiency door. A misclassified worker's fight almost always surfaces as an income-tax problem. The IRS assesses SE tax on your 1099 income, or it rejects your attempt to pay only the employee share, and it issues a regular Notice of Deficiency—the 90-day letter. You then petition the Tax Court the ordinary way, within 90 days. Your substantive tools are Form SS-8 and Form 8919, covered in detail below.

For the mechanics of filing either petition—the filing fee is $60, and a fee waiver is available if you can't afford it—see how to file your Tax Court petition. Because both fights begin as an IRS exam, how to respond to an IRS audit is the companion to read first.

Do You Actually Have a § 7436 Case?

Before a business spends a dollar on this fight, make sure there is a fight the Tax Court can hear. Section 7436 jurisdiction is narrower than it looks, and the most common dismissal comes from misunderstanding it.

The court has jurisdiction only where, in connection with an audit, there is an "actual controversy" over one of two things: whether your workers are employees for employment-tax purposes, or whether you qualify for Section 530 relief. The IRS guidance and the case law break this into four elements (drawn from American Airlines, Inc. v. Commissioner, 144 T.C. 24 (2015)):

  1. an examination in connection with an audit of any person;
  2. a determination that either (a) workers are employees for employment-tax purposes, or (b) the person is not entitled to Section 530 relief;
  3. an actual controversy involving that determination as part of the examination; and
  4. the filing of an appropriate pleading in the Tax Court.

The reclassification-vs-wage-characterization line is the one readers miss. Section 7436 covers reclassification—the IRS saying your non-employees are actually employees. It does not cover a wage-characterization dispute, where you already treat someone as an employee and the only fight is whether a particular payment (a bonus, a "lease" payment, a distribution) counts as wages. If your dispute is really about characterizing a payment for someone you already call an employee, Section 530, § 3509, and § 7436 do not apply. The current capstone IRS guidance, Rev. Rul. 2025-3, walks through five fact patterns and draws exactly this line. And if you never claimed Section 530 and aren't being reclassified, the IRS won't issue a § 7436 notice at all—there is no Tax Court door.

A single audit can also split period by period. In Reflectxion Resources, Inc. v. Commissioner, T.C. Memo. 2020-114, the Tax Court found jurisdiction for only 11 of 16 calendar quarters; for the other 5 quarters the taxpayer had filed its own employment-tax returns, so there was no reclassification controversy for those periods.

The NDWC Is the Cleanest Clock—But Not the Only One

Here is a point where older write-ups get it wrong: the formal NDWC is no longer a strict jurisdictional prerequisite. Two reported Tax Court opinions—SECC Corp. v. Commissioner, 142 T.C. 225 (2014) and American Airlines, Inc. v. Commissioner, 144 T.C. 24 (2015)—held that a § 7436 notice is not required for jurisdiction; the court can have jurisdiction over a worker-classification determination made during an audit even without a formal Letter 3523. The IRS then adopted that position in Rev. Proc. 2022-13, which superseded its earlier guidance. (This change came from those cases and that revenue procedure—not from the Taxpayer First Act, which did not amend § 7436.)

What this means in practice:

  • If you got a Letter 3523 NDWC by certified or registered mail, treat it exactly like a 90-day letter. The clock is clean, and the safest move is to petition within 90 days.
  • If you got something else that looks like a worker-classification determination during an audit, you may still have a § 7436 case—but jurisdiction is fact-specific and the deadline math gets murky. This is the moment to get professional help fast.

Many employment-tax disputes also pass through IRS Appeals before any NDWC issues—a chance to settle without litigating. If you haven't been to Appeals yet, how to request an IRS Appeals conference explains that step. Appeals is optional, though: it does not extend your 90 days Tax Court clock once a Letter 3523 arrives.

Small-Case Procedures—Watch the Per-Quarter Rule

Section 7436 cases can use the simplified small-case ("S") procedures, but the threshold works differently than in an ordinary deficiency case. Under § 7436(c)(1), S-case treatment is available where the employment taxes in dispute are $50,000 or less per calendar quarter—not $50,000 for the whole case. That is more generous than the general S-case rule (which caps at $50,000 per tax year), so don't assume the ordinary limit applies here. As with any S case, the decision is final, non-precedential, and cannot be appealed. The procedure is governed by Tax Court Rules 290–294.

A regular (non-S) § 7436 case, by contrast, can be appealed to a U.S. Court of Appeals if you lose. And the Tax Court is not the only forum: a business can instead pay the tax, file a refund claim, and sue in U.S. district court or the Court of Federal Claims—Tax Court vs. district court vs. Court of Federal Claims compares the trade-offs. Tax Court is the only forum that lets you litigate before paying, which is why most pro se petitioners start there.

The Test That Decides Everything: Common-Law Control

Whether someone is an employee for federal employment taxes is decided under common-law agency principles, not by whatever the contract calls them. IRC § 3121(d) defines an "employee" as someone who, under the usual common-law rules, has the status of an employee. A piece of paper that says "independent contractor agreement" does not settle it.

One related trap for S-corp owners: § 3121(d) also makes a corporate officer who performs services a statutory employee. You can't sidestep employment tax by paying yourself only in distributions instead of a reasonable salary—that's a separate "reasonable compensation" fight, but it springs from the same statute.

The Supreme Court Anchor

The Supreme Court laid down the framework in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992). Where a statute uses "employee" without a real definition, courts apply the traditional common-law agency test, and the central question is "the hiring party's right to control the manner and means by which the product is accomplished," weighed against a non-exhaustive list of factors—skill required, who supplies the tools, where the work is done, how long the relationship lasts, how the worker is paid, whether benefits are provided, and the tax treatment, among others.

The Court was blunt that there is no magic shortcut, quoting NLRB v. United Insurance Co. of America, 390 U.S. 254 (1968): "there is no shorthand formula or magic phrase that can be applied to find the answer, but all of the incidents of the relationship must be assessed and weighed with no one factor being decisive." That is the whole game—no single fact wins; you weigh everything.

The IRS's Three Categories (Your Self-Diagnosis Tool)

For your own gut check, the IRS sorts the factors into three buckets. You'll see this framework in Pub. 1779, Pub. 15-A, and the IRS's Independent contractor or employee? page:

  1. Behavioral control. Does the business have the right to direct how the work is done—when, where, what tools, what sequence, and especially whether it trains the worker? More detailed instruction points toward employee. And note: the business doesn't have to actually exercise the control. The right to control is enough.
  2. Financial control. Does the worker have a significant investment in equipment, unreimbursed expenses, a real chance at profit or loss, and the ability to offer services to the open market? Pay by the job points toward contractor; pay by the hour or week points toward employee.
  3. Relationship of the parties. Is there a written contract (helpful but not decisive), employee-type benefits, an open-ended permanent arrangement, and is the work a key, integral part of the business?

The IRS's old 20-factor test from Rev. Rul. 87-41 still floats around in older articles. The three-category framework is just a modern repackaging of those same factors—use the three categories for your self-diagnosis.

The Test the Tax Court Actually Applies (Ewens & Miller's 7 Factors)

When you walk into Tax Court, the judge will measure your facts against a seven-factor test the court restated in Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263 (2001):

  1. the degree of control the principal exercises over the details of the work;
  2. which party invests in the work facilities and tools;
  3. the worker's opportunity for profit or loss;
  4. whether the principal can discharge the worker;
  5. whether the work is part of the principal's regular business;
  6. the permanency of the relationship; and
  7. the relationship the parties believed they were creating.

No single factor controls. But the court is clear that the right to control—whether or not the principal actually exercises it—is the "crucial test." Map the three IRS categories onto these seven and you have your roadmap: control lines up with behavioral control; investment and profit-or-loss line up with financial control; permanency, discharge, and the parties' belief line up with the relationship.

Two Stories, Same Test, Opposite Endings

Nothing makes this clearer than two Tax Court cases that ran the identical seven-factor test and came out the opposite way. The difference was the degree of control over the means and methods—plus whether the business filed its 1099s. (Both businesses had lawyers; these are doctrine illustrations, not pro se examples.)

The business that lost: Kurek v. Commissioner, T.C. Memo. 2013-64. A sole-proprietor contractor used roughly 30 construction workers on a single year's projects and treated them as independent contractors. The IRS reclassified them and assessed FICA, income-tax withholding, and FUTA. The workers set their own hours, moved project to project, supplied their own small tools, and both sides genuinely believed they were creating independent-contractor relationships. The business still lost, because it could not prove it lacked control: the owner set deadlines, visited the jobs almost daily to monitor and approve quality, had final say over what was done, was the sole point of contact with homeowners, and paid the workers weekly. Control, integration into the business, profit-and-loss, and the power to discharge all pointed to employee. And the Section 530 defense failed for one simple reason—the owner never filed a single Form 1099. No 1099s, no Section 530.

The business that won: Santos v. Commissioner, T.C. Memo. 2020-88. A small cleaning-business owner ran "Campos Cleaning" and was reclassified for three years, with about $125,799 in employment taxes assessed. She won. The court found her role "was more that of a dispatcher, acting as a financial and linguistic bridge" between experienced cleaners and the apartment complexes that hired them. She directed the result, not the means: the cleaners needed no training, could decline jobs, used their own supplies and transportation, set their own pace, could hire and pay their own helpers, were never formally fired, and worked for other clients too. The insurance terms in her contracts governed only her relationship with the complexes, not with the cleaners, and a label in a contract "will not control where the common law factors" point the other way.

Line them up: Kurek monitored daily, set deadlines, was the sole client contact, and paid weekly—employees, and no Section 530 because he filed no 1099s. Santos dispatched seasoned cleaners who used their own tools and set their own pace—independent contractors. If you are the business, this is your template for an honest self-assessment.

The Business's Best Defense: Section 530

Here is the most important thing a reclassified business can learn: you can win this fight without ever winning the common-law control argument. That is what Section 530 relief does.

First, cite it correctly. Section 530 is not part of the Internal Revenue Code. It is Section 530 of the Revenue Act of 1978 (Pub. L. No. 95-600), uncodified and printed as a note after IRC § 3401, and made permanent in 1982. Never write "IRC § 530"—both Rev. Proc. 2025-10 and Rev. Rul. 2025-3 state flatly that Section 530 is not part of the Code.

What it does. If a business meets all three prongs, the IRS may not reclassify the workers as employees for that period and may not assess back employment taxes, penalties, or interest—regardless of whether the workers actually are employees under common law. It is a complete defense you reach before the control fight even matters. In fact, the IRS is required to consider Section 530 first, and to hand you Pub. 1976 ("Section 530 Employment Tax Relief Requirements") at the very start of any worker-classification audit. If the examiner skips that step, that itself is worth flagging.

The current rulebook is Rev. Proc. 2025-10, which modified and superseded the 40-year-old prior guidance and is the first comprehensive Section 530 update in decades. Here are the three prongs—miss any one and Section 530 is gone.

Prong 1—Reporting consistency. You filed all required federal returns consistent with non-employee treatment—above all, the Forms 1099-NEC. This is tested period by period and worker by worker. Filed 1099s for 2024 but not 2023? No relief for 2023. Filed for workers A, B, and C but not D, E, and F? No relief for D, E, and F. A return you file after the IRS first contacts you about the exam does not count. (Kurek lost the whole defense right here.)

Prong 2—Substantive consistency. You—and any predecessor—never treated this worker, or any worker in a substantially similar position, as an employee at any time after 1977. "Substantially similar" looks at actual duties and the degree of control, not job titles. Treating someone as an employee in a later period doesn't retroactively kill relief for the audit years. One trap: signing a Classification Settlement Program (CSP) or Voluntary Classification Settlement Program (VCSP) agreement counts as employee treatment from that agreement's effective date.

Prong 3—Reasonable basis. When you started treating the worker as a non-employee, you reasonably relied on one of the safe harbors below. Congress directed that this prong be construed liberally in favor of the taxpayer. But negligence, intentional disregard, or fraud defeats it.

The Reasonable-Basis Safe Harbors

You satisfy Prong 3 by reasonably relying, at the time you started the treatment, on any one of these:

  • (a) Judicial precedent or published guidance—a court case, published ruling, or a private letter ruling or technical advice issued to you. It has to have existed when you started; you can't lean on a case decided later.
  • (b) A prior IRS audit that produced no employment-tax assessment for the way you treated substantially similar workers. For audits beginning after 1996, that prior audit must actually have been an employment-tax exam of the same or similar workers.
  • (c) Industry practice—a long-standing, recognized practice in a significant segment of your industry. The safe-harbor benchmarks: 25% of the industry (excluding you) is deemed "significant," and 10 years is deemed "long-standing," though less can still qualify on the facts.
  • (d) Some other reasonable basis—a catch-all covering things like the advice of your attorney or accountant, a favorable state determination, or a good-faith common-law analysis.

The Section 530 Burden Shift—and the Catch-All Trap

Section 530 carries its own burden-shifting rule, and it is the meaningful one for a business (the general burden-shift in § 7491 does not help in employment-tax classification cases—see below). Under Section 530(e)(4) and Rev. Proc. 2025-10, the burden of proof shifts to the IRS if you:

  1. establish a prima facie case of reasonable basis,
  2. meet the reporting and substantive consistency prongs and one of the enumerated safe harbors—(a), (b), or (c)—and
  3. fully cooperated with reasonable IRS requests.

The trap: the burden does not shift if you are relying only on the catch-all "other reasonable basis" prong (d). So the catch-all is procedurally weaker than the three named safe harbors. If you can fit your facts into (a), (b), or (c), do it.

You Must Plead Section 530—Or You Lose It

Section 530 can be raised at any administrative or judicial stage, including in Tax Court. But—and this is the procedural cautionary tale from Santos—you have to actually assign error to the Section 530 determination in your petition. In Santos, the business "failed to assign error in her petition" to the IRS's denial of Section 530, so under Tax Court Rule 291(b)(4) that issue was deemed conceded. She only avoided the consequence because she won outright on the common-law factors. Don't count on that escape. Plead Section 530 expressly in your petition.

One more thing: even if the business wins Section 530 relief, the individual worker is not thereby declared an independent contractor. The worker can still be treated as an employee by other means and remains responsible for their own income tax and employee share of FICA. Section 530 protects the business from the assessment; it does not resolve the worker's own status. That is the bridge to the next two sections.

If Section 530 Fails: § 3509 Damage Control

Suppose you can't claim Section 530 and the workers get reclassified. IRC § 3509 can sharply cut the bill—precisely because you treated the workers as non-employees. It is a damage-control lever, not a defense: it lowers the number, it does not make the liability disappear.

The reduced rates (§ 3509(a)), when you filed your 1099s:

  • Your income-tax withholding liability is computed as if you had withheld 1.5% of wages.
  • The employee FICA you failed to withhold is computed at 20% of the employee FICA share (so roughly 1.53% of wages, since the employee share is 7.65%).

The 1099 disqualifier (§ 3509(b)). If you failed to file the required information returns, those rates double—to 3% for withholding and 40% for the employee FICA share—unless the failure was due to reasonable cause and not willful neglect. So not filing your 1099s costs you twice: once on Section 530 (you blow reporting consistency) and again here.

Intentional disregard wipes § 3509 out entirely (§ 3509(c)). If the misclassification was due to your intentional disregard of the requirement to withhold, § 3509 doesn't apply at all—you owe the full employee and employer FICA, full FUTA, and full income-tax withholding.

Two mechanics matter. First, under § 3509(d) you cannot recover these amounts from the employee, and the employee's own tax liability is unaffected. Second—and this is the part drafts often get wrong—§ 3509 only reduces the employee-share FICA and the withholding you failed to collect. It does NOT reduce your own employer-share FICA (the matching 6.2% + 1.45%) or FUTA. Those stay at full freight no matter what.

The Worker's Playbook: Pay 7.65%, Not 15.3%

Now the other reader. You got a 1099 and, by default, you are treated as self-employed and owe self-employment tax of 15.3% of your net SE income—IRC § 1401 breaks that into 12.4% for Social Security and 2.9% for Medicare (a 0.9% Additional Medicare Tax can apply above certain income thresholds). That's roughly double the 7.65% an actual employee pays, because an employer normally covers the matching half. If you were really an employee, you may be paying twice what you should.

You have two forms.

Form SS-8 (Determination of Worker Status). Either you or the firm can file Form SS-8 to ask the IRS to formally determine your status under the same common-law rules described above. Be realistic: it is slow. The IRS itself says a determination "may take at least six months." File it on its own; don't staple it to your return.

Form 8919 (Uncollected Social Security and Medicare Tax on Wages)—your lever. Form 8919 lets you report and pay only your employee share—6.2% Social Security (up to the wage base) plus 1.45% Medicare, totaling 7.65%—instead of the full 15.3% SE tax, when you were "an employee but were treated as an independent contractor." Filing it also credits those wages to your Social Security record. You must qualify under one of four reason codes:

  • Code A—you filed Form SS-8 and got a determination letter saying you're an employee.
  • Code C—you got other IRS correspondence saying you're an employee. (This also covers being designated a "section 530 employee"—where the IRS found you're an employee but granted the firm Section 530 relief.)
  • Code G—you filed Form SS-8 and haven't heard back yet. You must file the SS-8 on or before the date you file your return.
  • Code H—you got both a W-2 and a 1099 from the same firm, and the 1099 amount should have been W-2 wages. (Don't file SS-8 for Code H.)

For reference, the 2025 Social Security wage base is $176,100 (rising to $184,500 for 2026); Medicare has no cap.

How it reaches Tax Court. The most common path: you file Form 8919 under Code G (SS-8 pending), and the IRS disagrees with your status claim and bills you the difference between the 7.65% you paid and the 15.3% it says you owe, plus penalties and interest. The Form 8919 instructions warn outright that Code G "isn't a guarantee" and that you "may be billed for the additional tax, penalties, and interest" if the IRS disagrees. That bill becomes a Notice of Deficiency, and you petition Tax Court the ordinary way—see how to file your Tax Court petition. The substantive test you have to satisfy is the same common-law control test from above, just argued from your side. Because the worker side overlaps so much with 1099 income and SE tax, the sibling guide unreported income disputes in Tax Court is worth reading alongside this one.

Be candid with yourself: the worker's road is slow and uncertain. But the stakes are real—about 7.65% of every dollar, plus the Social Security credit you've been missing.

What's Actually at Stake: The Exposure Picture

Before you fight, get clear on the dollars. The numbers are what make Section 530 (wipes it out) and § 3509 (cuts it) and your 1099s matter so much.

Business Side—What the IRS Can Assess

For each reclassified period, the employer can owe:

  • Employer FICA—6.2% Social Security (up to the wage base) plus 1.45% Medicare = 7.65%, the employer's own share. Not reduced by § 3509.
  • Employee FICA you failed to withhold—normally 7.65%, but 20% of that if § 3509 applies (and 40% if you filed no 1099s).
  • Income-tax withholding you failed to collect—normally graduated, but 1.5% of wages under § 3509 (or 3% with no 1099s).
  • FUTA—6.0% on the first $7,000 of each worker's wages (an effective 0.6% when the state unemployment credit applies). Employer-only, and § 3509 doesn't touch it.
  • Penalties and interest—failure-to-deposit under IRC § 6656 (graduated 2% / 5% / 10% / 15% by lateness); failure-to-file and failure-to-pay under IRC § 6651 (5%/month and 0.5%/month, each capped at 25%); a possible accuracy penalty under § 6662; and interest on all of it.

The scariest line—the § 6672 Trust Fund Recovery Penalty. The trust-fund portion of the bill (the income tax and employee FICA the employer should have withheld) can be assessed personally, at 100%, against any "responsible person" who "willfully" failed to collect and pay it over—under IRC § 6672. That reaches owners, officers, and bookkeepers with check-signing authority. It pierces the corporate shield and survives the company's dissolution, which is why it frightens practitioners more than any other piece. If a TFRP is in play, the defenses overlap heavily with how to request IRS penalty abatement, and an asserted § 6662 accuracy penalty connects to how to fight the IRS accuracy penalty.

A worked example. Say a landscaping S-corp paid 5 workers $40,000 each ($200,000 total) in one year, filed no 1099s, and gets reclassified. Here is the same year under three scenarios. (The FICA, FUTA, and § 3509 percentages are exact from the statute; the withholding figure is a round illustration—your actual withholding depends on the workers' W-4s.)

Component Full freight (intentional disregard, no § 3509) § 3509(b) reduced (no 1099s, not intentional) Section 530 relief
Employer FICA (7.65%) $15,300 $15,300 $0
Employee FICA (uncollected) $15,300 (full 7.65%) ~$6,120 (40% rate) $0
Income-tax withholding (~10% illustrative) ~$20,000 $6,000 (3% rate) $0
FUTA (0.6% effective on first $7,000) $210 $210 $0
Subtotal (before penalties & interest) ~$50,810 ~$27,630 $0

Add failure-to-file and failure-to-deposit penalties and interest on top of the first two columns, plus personal § 6672 exposure on the roughly $35,300 trust-fund portion in the full-freight case. Same facts, a swing of more than $20,000 between the first two columns—and zero if Section 530 holds. That is the whole reason this article exists.

Worker Side

  • Downside avoided. On $40,000 of misclassified pay, SE tax at 15.3% is $6,120; the employee share at 7.65% is $3,060—a roughly $3,060 difference (before the deduction for half of SE tax). Form 8919 captures the lower figure.
  • Your downside if you lose. If you pay only the 7.65% and the IRS disagrees, you don't just owe the difference back. The Notice of Deficiency can add an accuracy-related penalty of 20% of the underpayment under § 6662, plus a late-payment addition under § 6651 and interest on the whole amount from the original due date—the same penalties the Form 8919 instructions warn about. So a wrong Code G call on $40,000 can turn a $3,060 gap into roughly $3,060 plus a few hundred dollars in penalty and growing interest. If you fight the penalty, how to fight the IRS accuracy penalty explains the defenses.
  • Refund potential. If you already paid full SE tax and are later reclassified to employee, you may claim a refund—generally by filing an amended return (Form 1040-X) within three years of filing or two years of paying, whichever is later—though any refund can be offset by the employee FICA share. If the SE-tax refund window has already closed, IRC § 6521 may allow a mitigation credit so you aren't whipsawed.

Verify the IRS's Numbers Before You Fight Them

Never argue with a number you haven't checked. Pull these and read them line by line against your own records.

For the business:

  • The NDWC (Letter 3523) and its attachments. The notice comes with the worker schedules and, critically, Forms 4666, 4667, and 4668—the employment-tax examination reports that show the IRS's math, which rates it used (full versus § 3509-reduced), and the per-period adjustments. Form 4666 (Summary of Employment Tax Examination) is the single best document for checking the total and the rate assumptions. Pub. 3953 also accompanies the notice. Read every figure against your payroll records—this is where rate errors and double-counted periods surface.
  • Employment-tax account transcripts for the periods at issue, to confirm what's been assessed and when, and whether the assessment statute is still open. See understanding IRS statutes of limitations.
  • The examiner's workpapers, obtainable through a FOIA request—these show how the examiner applied the factors and built the assessment.
  • Any SS-8 determination sitting in the file.

For the worker:

  • Your Wage & Income Transcript. This shows every information return filed under your Social Security number—exactly which Forms 1099-NEC (and any W-2) the firm reported and the dollar amounts. Pull it first and confirm the income figure the IRS is taxing actually matches what you were paid. You can get this one yourself from IRS.gov.
  • The notice's own math. A misclassified worker's bill often arrives first as a CP2000 (the automated underreporter notice) before any Notice of Deficiency. Read its SE-tax computation line by line—see how to respond to a CP2000 notice—and confirm it used your net SE income (after business deductions), not gross, and gave you the deduction for half of SE tax.
  • Your Account Transcript, to confirm what's been assessed and when. You can pull this yourself too.

Which transcripts can you get yourself, and which need a practitioner? Both sides can pull their own Account Transcript (the most important one here), Wage & Income Transcript, and Record of Account directly from IRS.gov. But several transcripts that matter in these cases are practitioner-only, requiring a power of attorney: TXMODA (statute and CSED dates), AMDISA (audit/appeals status), and PINEX (penalty and interest computations—useful for checking the § 6651/§ 6656 math). For TFRP exposure, the practitioner-only Non-Master File transcripts and the Form 4180 interview records come into play. See how to get and read your IRS transcripts and how to read IRS transcript codes. The fact that the most diagnostic transcripts need a practitioner is one more reason these high-stakes cases often warrant help.

Burden of Proof: Who Has To Prove What

Three rules, in order of how often they bite.

The general rule cuts against you. The IRS's determination is presumed correct, and the taxpayer—business or worker—bears the burden of proving it wrong (Tax Court Rule 142(a); Welch v. Helvering, 290 U.S. 111 (1933)).

Section 7491(a) does NOT help in these cases. Many taxpayers count on the general burden-shift in IRC § 7491. Don't. Both Kurek and Santos hold flatly that § 7491(a)'s burden-shift does not apply to employment-tax classification disputes. Cross it off your list for the classification fight.

Section 530's own burden-shift is the meaningful one for the business—the prima-facie-case-plus-enumerated-safe-harbor-plus-full-cooperation route described above. That, not § 7491, is where a business can flip the burden.

Section 7491(c) helps on penalties—for individuals. Under § 7491(c), the IRS bears the burden of production for any penalty or addition to tax asserted against an individual. So if you're a sole proprietor or a worker, the IRS has to come forward first on the penalties. Its reach over entity-level employment-tax penalties is narrower—don't overstate it for a corporation.

The Off-Ramp: VCSP (Not a Tax Court Remedy)

One alternative is worth knowing about, mainly so you understand it is a path you take instead of litigating. The Voluntary Classification Settlement Program lets an eligible business voluntarily reclassify its workers as employees going forward, on Form 8952 (filed at least 120 days before the intended reclassification date). The price is roughly 10% of the employment-tax liability that would have been due on the most recent year's compensation, computed at the § 3509(a) reduced rates—a steep discount, with no interest or penalties and no audit of prior years for those workers.

The catch for this article: you are not eligible for VCSP if you are contesting the classification in court, and you must already have filed all required 1099s and not be under an employment-tax audit. So VCSP and a Tax Court § 7436 case are mutually exclusive. Think of VCSP as something you consider before a dispute hardens—not a remedy once you're in court.

What To Do Now

If you're the business and your audit is still open (no Letter 3523 yet): Raise Section 530 now, in the exam—don't wait for the notice. Ask the examiner for Pub. 1976 and put your reasonable-basis safe harbor on the record. And cooperate fully with reasonable IRS requests: that cooperation is a precondition to shifting the burden of proof to the IRS later. If the case doesn't resolve in the exam, Appeals may come next, and only then the NDWC.

If you're the business and you got a Letter 3523:

  1. Calendar the 90 days deadline from the date on the NDWC—it works like a 90-day letter and cannot be extended.
  2. Read Forms 4666/4667/4668 against your payroll records and confirm which rates the IRS used.
  3. Run the Section 530 three-prong test honestly. Did you file every required 1099, period by period and worker by worker? Have you ever treated a similar worker as an employee? What was your reasonable basis when you started?
  4. In your petition, expressly assign error to the Section 530 determination—or you risk conceding it under Rule 291(b)(4), the Santos trap.
  5. If Section 530 is out, build the § 3509 argument—show you filed your 1099s and did not intentionally disregard the rules, to hold the rates to 1.5%/20%.
  6. Pull your Account Transcript yourself; get a practitioner for TXMODA/PINEX/AMDISA if statute dates or penalty math are in dispute.

If you're the worker:

  1. File Form SS-8 to ask the IRS to determine your status—and expect it to take six months or more.
  2. Use Form 8919 with the correct reason code to pay the 7.65% employee share instead of 15.3% SE tax, understanding Code G is not a guarantee.
  3. If the IRS bills you and issues a Notice of Deficiency, calendar the 90 days clock and petition Tax Court the ordinary way.
  4. Gather your evidence on control—schedules, instructions, training, who supplied tools—because you're arguing the same common-law test from the employee side.

For either side, if your income is at or below 250% of the poverty line and your dispute is at or below $50,000, you may qualify for free representation through a Low Income Taxpayer Clinic. Around 89% of Tax Court petitioners represent themselves, but worker-classification cases—especially anything touching the § 6672 Trust Fund Recovery Penalty—are high-stakes enough that you should seriously consider professional help.

Resources

Statutes and regulations:

IRS guidance, forms, and publications:

Cases cited:

Companion articles on TaxCourtHelp:

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax professional or attorney.

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TaxCourtHelp.com is not affiliated with the United States Tax Court or any government agency. This site provides general information only and does not constitute legal or tax advice.