While much of the hoopla over the Taxpayer Relief Act of 1997 concerns ordinary citizens, a small provision in the law could end years of squabbling between independent contractor reps and the Internal Revenue Service.
Previously, the IRS had attempted to classify some brokers and advisers as employees, instead of independent agents, because they were supervised by their affiliated firm under federal and state securities laws.
"It's easier for the IRS to audit and track big firms than a lot of independent contractors," says Nancy Lininger, founder of The Consortium, a compliance consulting firm in Camarillo, Calif. "That's where the IRS has historically come from."
However, according to an official in the IRS' office of chief counsel, the agency has never classified brokers as employees simply because they were supervised by a firm.
But Section 921 of the new law states the IRS can give "no weight" to supervisory status. In other words, the "duty to supervise does not automatically throw someone into the employee category," Lininger says.
The scuffle over whether brokers are independent contractors or employees started with Blinder Robinson, the now-defunct penny stock firm. Blinder claimed its brokers were not employees, and the firm had no obligation to supervise them.
"When Blinder started trying to tell securities regulators that we can't supervise these people, it didn't make them any friends with regulators," says Dale Brown, associate executive director of the International Association of Financial Planning in Atlanta. "It also got the attention of the IRS."
The IRS apparently concluded that, since all brokers must be supervised by their firm under securities laws, that made them employees.
"We strongly disagreed," Brown says. "We felt it ignored a lot of other factors." Brown points out that independent reps pay their own expenses, lease their own office space, set their own hours and often sell other products such as insurance under their own contracts with carriers.
Another problem was that the IRS was going firm by firm, instead of making an industrywide decision. That could have put some firms at a disadvantage if they had to spend time and money keeping track of an employee's hours, health insurance and other things while other firms did not, says Tony Greene, president of Investment Management & Research Inc., an independent financial services firm in Atlanta.
The IRS still can claim independent brokers are, in fact, employees. But the agency must use other factors to support its classification, such as whether a company sets a broker's hours.