July 3, 2018

Avoiding an IRS Wage Levy by Change to Contractor Status

Tax Relief Articles

Houston Tax Attorney

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Can you avoid an IRS wage levy by having your employer change your status from that of an employee to a contractor?  The court addressed this in Hudiak vs. United States, No. MJG-11-1271 (D. Md. 2018) by ordering the taxpayer to make installment payments to the IRS despite the change in employment status.

The Facts & Procedural History

The taxpayer owed $2.3 million in unpaid payroll taxes.  The taxpayer and his wife were employed by a large freight company.  He made approx. $12 thousand a month and his wife made $3 thousand a month.  The IRS issued a wage levy for just over half of the husband’s pay.  One month later, the taxpayer quit his job and provided the employer with the following letter:

As you know in light of my tax issue I am losing about 95% of my pay check each week to this problem. It does not make financial sense for me to continue to work until this tax issue is resolved. . . . I am offering my resignation. I will contact you once my lawyers have reached a resolution in my case and I have a clear picture of what needs to be done to have my tax issue resolved. Only at this point does it make sense for me to resume working.

The wife formed a company and the husband, through the company, continued working for the freight company as a consultant.  He was paid the same amount as he had been previously, but grossed up to cover the taxes.  The freight company stopped honoring the IRS wage levy given that the company was not paying the husband wages.

At the same time, the taxpayers owned a $1 million home and only had a $610 thousand mortgages on the property.  It was a 7,500 square foot home on ten acres.

The IRS asked the court to order the husband to pay the same amount it had previously obtained via its levy on his wages.

The Court’s Power to Order Payments

The court has the ability to order taxpayers who receive self-employment income to make payments to the IRS.  This authority is found in Sec. 3204.

Section 3204 that provides that:

if it is shown that the judgment debtor —

(1) is receiving or will receive substantial nonexempt disposable earnings from self employment that are not subject to garnishment; or

(2) is diverting or concealing substantial earnings from any source, or property received in lieu of earnings;then . . . the court may, if appropriate, order that the judgment debtor make specified installment payments to the United States.

It goes on to require the court to consider the taxpayer’s financial situation:

In fixing the amount of the payments, the court shall take into consideration after a hearing, the income, resources, and reasonable requirements of the judgment debtor and the judgment debtor’s dependents, any other payments to be made in satisfaction of judgments against the judgment debtor, and the amount due on the judgment in favor of the United States.

The Court’s Installment Payment Order

The court did not accept the taxpayer’s statement of their living expenses.  It concluded that the taxpayers should not be able to maintain their lifestyle while owing the IRS such a large balance.

The court entered the following order:

The Court, on the record as it now exists, finds that Hudak can, without hardship imposed on him or his family, immediately commence making $1,200.00 monthly payments on the Judgment of over $2,000,000.00. He can, also without hardship, sell the residence and eliminate his payment of $4014.00 per month on the first mortgage.

The court allowed the taxpayers one year to sell their residence, given that the taxpayers kids were in their last year of highschool and the house sale could result in the children having to attend a different school.

So to answer the question, the taxpayer cannot avoid an IRS wage levy by having their employer change their status from an employee to a contractor.

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