Section 530 – Substantive Consistency

This is the third article in a series dedicated to using Section 530 of the Revenue Act of 1978 as protection for businesses that have been using independent contractors, in good faith, but are now facing an IRS or State of Minnesota audit of that practice. Section 530 may be 34 years old, but it is still a viable option for many businesses.

Section 530 relief is available to a business that treats workers as independent contractors if the following tests are met.

  1. Reporting Consistency. The taxpayer files all requisite tax returns on a basis consistent with treatment as independent contractors;
  2. Substantive Consistency. The taxpayer has treated all workers holding substantially similar positions as independent contractors; and,
  3. Reasonable Basis. The taxpayer had a reasonable basis for treating the workers as independent contractors.

In this article, we focus on the second of these three elements, Substantive Consistency. Section 530 requires that the business, and its predecessors, have not treated any workers in substantially similar positions as employees. This is sometimes referred to as the Position Test. The reason for the predecessor requirement is to prevent businesses from availing themselves of Section 530 relief simply by reorganizing.

  1. What if the business has already converted its workers from independent contractors to employees? Section 530 relief is still available for periods prior to when the business started treating workers as employees. This is the result of a change in the law for periods after December 31, 1996. Previously, if a business converted its workers from independent contractors to employees it lost the ability to pursue Section 530 relief.
  2. Is the substantive consistency requirement based on the worker’s position or relationship to the company? Some courts look for consistency in treatment based on the job performed by the worker, not the relationship between the business and the worker. They are looking for workers performing substantially similar job duties. See Leb Enterprises, Inc. v. U.S., 2000 WL 139551, 85 A.F.T.R.2d 2000-886, 890 (N.D. Ill. 2000) (drivers working under separate contracts with separate relationships with the company, doing similar jobs). Other courts have looked to the consistency in the relationship between the business and the worker. Lambert’s Nursery and Landscaping, Inc. v. U.S., 894 F.2d 154, 156 (5th Cir. 1990) (landscapers and janitors had similar relationships to the business).
  3. Safe Approach. The safe approach is to demonstrate that the duties of the workers are substantially similar and the relationship between the workers and the business is substantially similar for all positions.