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IRS Goes After British Consulate? Only in America

by Brian Mahany

Embassy and consulate workers are generally considered hands off. The embassy itself is usually considered foreign soil, even if located in downtown Washington D.C. It follows, then, that embassies don’t have to worry about complying with IRS regulations. Think again.

As only the IRS could do, auditors challenged Michael Rosenfeld over $2609! What makes the case even more interesting is that Rosenfeld is an employee of the British government. The Brits considered him an independent contractor and did not withhold taxes. Rosenfeld filed and paid taxes and took several work related deductions on his schedule C. Ultimately, the IRS disallowed the deductions and claimed Rosenfeld was not a contractor but an employee. They assessed him $2609.

That this case even made it to U.S. Tax Court is amazing but it did. And on May 23rd, a special judge upheld the I.R.S.  The costs to both governments to prosecute and defend this case? It is probably 100 times the amount of tax in question. And who ultimately was left holding the bag? Rosenfeld of course. The court did not hold Great Britain responsible.

The bigger issue here is that the IRS is very aggressive with businesses and organizations that attempt to classify workers as independent contractors instead of workers. There are many tests the IRS weighs when deciding the issue. Included are:

* degree of control held by the employer (including the ability to fire);

* the workers ability to share in profits or be responsible for losses;

* whether benefits are provided to the worker; and

* whether the position is permanent or temporary.

There are actually many more tests meaning there is rarely a black and white answer.  Don’t simply hire all your workers as independent contractors and think it will fly with the tax authorities. Key to a successful employment tax audit is having a well defined agreement with the workers. A good tax attorney can help you draft such an agreement and help you modify the work flow to avoid control issues common to employees.

Currently facing an audit or needing more information? Contact attorney Brian Mahany for a confidential consultation at (414) 704-6731 (direct) or by email at

Mahany & Ertl, LLC – America’s tax lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan and Portland, Maine. Services anywhere in the U.S.

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