Later this week I need to bring my car in for service. The auto repair shop I use is on the up-and-up. However, not all of them are. Today, the Tax Court looked at a Colorado muffler shop which apparently decided to use the Cook/Schulz method of tax preparation. The results weren’t pretty.
Colorado Mufflers Unlimited, Inc. is exactly what you’d think: a muffler shop in Colorado. Back in 2000, they decided to start paying their employees in cash. That’s not necessarily a problem. But they didn’t withhold anything from their employees’ wages, didn’t issue W-2s, didn’t file Form 941 (or Form 940), and claimed that their employees weren’t employees. The IRS disagreed, and audited the business, found that they were employees, and that the company owed about $100,000 in back employment taxes. The company took the case to Tax Court.
Adding to the company’s problems was the fact that they requested a refund of employment taxes for early 2000 (they stopped paying them in the middle of the year) and they received an $88,000 refund in early 2001. The IRS filed a court case to get back the refund (there’s nothing in the case that notes how that case went).
The company also lacked good timing; they filed court papers late, and their filings were not allowed. That was their first strike.
Second, the testimony showed that the “employees” were paid by the hour, week, or month—not by the job. In other words, they looked like employees.
Not only that but:
“Petitioner’s behavior during the audit and the pretrial preparation of this case was characterized by a consistent lack of cooperation and by considerable obfuscation designed to prevent respondent from ascertaining the facts regarding petitioner’s business, business payroll, and workers. It appears that petitioner used fictitious names and/or other companies to hide the nature and extent of its business activity from respondent during the years at issue.”
That was strike two.
Then the Court looked to see whether an employer/employee relationship existed by evaluating seven factors. The Court found that all of the factors favored an employment relationship. Needless to say, the Court concluded, “After reviewing the record and weighing the factors, we conclude that petitioner has failed to prove that respondent’s determination treating the workers as petitioner’s employees was in error.” That was strike three, and the case went to the IRS.
And the Court was not amused with the company’s obfuscation and use of “frivolous or groundless” tactics. Even though the IRS did not ask for a penalty under §6673(a)(1), the Court imposed one of $3,000.
Case: Colorado Mufflers Unlimited, Inc. v. Commissioner, T.C. Memo 2007-222