Introduction
On February 18th, a deranged taxpayer smashed his airplane into an IRS office in Austin, Texas, killing himself and a long-time IRS employee.
While this terrorist ranted against several institutions of authority, including the Catholic Church, his suicide note blamed an obscure tax provision, IRC Sec. 1706, for ruining his life.
How could this be?
High-Tech Workers
Section 1706 of the Tax Reform Act of 1986 (P.L. 99-514), enacted in 1987, caused a schism between high-tech companies and their self-employed consultants.
Prior to IRC Sec.1706, professionals who formed single-owner consulting businesses considered themselves independent contractors, but Congress then singled out high-tech programmers, engineers and analysts and, in essence, reclassified them as employees of the companies receiving their services.
Note: Section 1706 is not part of the Internal Revenue Code. It is subsection (d) to Section 530 of the Revenue Act of 1978.
Upshot
After enactment of IRC Sec.1706, large and mid-sized high-tech firms stopped hiring professionals operating as independent companies and forced them to join the payroll as employees
Thus, Congress targeted this particular class of entrepreneurs and crushed their American dream of owning and growing their independent consulting businesses.
IRS Rationale
Section 1706 was supposed to recover revenue allegedly lost through tax cheating by consultants who owned their businesses.
However, later studies concluded that IRC Sec.1706 did not raised revenues and may have cost the government money. In response to these studies, Congress tried, but failed, to repeal the law.
Conclusion
Sometimes, enacting a tax provision produces unintended results.
Section 1706 harmed the budding industry of professional consultants owning their companies, including — according to his suicide note — the crazed pilot who crashed into the IRS building in Texas. This discriminatory law should be repealed.
Ironically, IRS has recently stepped up audits against high-tech consultants in the search for additional revenue and, once again, has been aggressively reclassifying them as employees. Will Congress finally intervene?
