Gross Receipt Taxes not paid

Hi everyone,
I was approached by a young man who worked in 05 and 06 as a
contractor, at least he was classified as one. He never paid the Gross
Receipt Taxes and the State of NM has now caught up with him. He
clearly was not a contractor, he worked as a maintenance person for
serveral apartment complexes for one owner. His schedule was Mo - Fr;
7:30 AM till 4PM. He was provided with tools to do his job. However,
he was not supervised by the owner or anybody else. Tenants would call
him and tell him the problem to fix and he did it. Needless to say he
is completely broke and can not afford to pay the close to $5,000 in
back taxes which includes the penalty. Since 07 the young man has
been properly recorded as an employee and all taxes were paid by the
same owner. Is there anything the young man can do or write back to
the State of NM to lower the taxes an penalties? Also, could the young
man request to be recategorize for 05 and 06 to be treated as an
employee. If yes what would happen to the social security and medicare
that he paid on the employer taxes? He did enter all earnings on his
tax returns as Schedule C income. Any help is greatly appreciated,
Liz from ABQ, NM
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For others reading this: NM does not have a sales tax. It has a gross receipts tax that must be paid by the business on their gross receipts (there are exemptions and deductions available). Businesses typically pass this tax through to the buyer so it looks to the buyer as if it is a sales tax. In fact, it is typically referred to as a sales tax in the media.
Last December as part of the instructor training for AARP Taxaide, the NM Tax & Rev management team told us that NM Tax & Rev was obtaining the Schedule C and C-EZ data and feeding it to the Gross Receipts computers and that NM was billing back taxes. Your post now confirms that is the case. We decided to provide this information to all our AARP Taxaide volunteers here in Santa Fe. They have been instructed to caution all clients that have business income and do not have deductions for GRT that they are liable for those taxes and that they should obtain a CRS number and pay those taxes. We believe there will be some backlash in the form of understated gross income for those individuals dealing on a cash basis. It is also a conundrum for all the unlawful immigrants whose tax returns we prepare.
As to your query:
You have an uphill fight. The client filed his returns as being self-employed. As such, he should have obtained a CRS number from the state and paid his GRT. We are all aware that many individuals were not paying the tax either because they were not aware of their liability or thought that NM had no way to audit for it. Obviously, technology has come to NM.
NM is not going to make any adjustment just based on his assertion that he was not self-employed in 2005 and 2006. (As an aside, it is not clear to me based on the information provided that he was an employee in 2005 and 2006.) The process to be reclassified usually takes the form of filing as an employee (substitute W-2) or amending a previously filed return (substitute W-2) and filing form SS-8 with the IRS requesting a determination. The IRS will then request that the employer file Form SS-8 also. It is highly unlikely the employer is going to go along with this for 2005 and 2006. I don't even know if 2005 and 2006 is open for this type of action with the IRS. For sure, 2005 is closed for an income tax refund and 2006 will close for a refund on 4/15/10. As you are probably aware, most individuals that are independent contractors or treated as ICs, don't do anything as being employed as an IC is better than being unemployed.
My advice is to arrange for a meeting with NM Tax & Rev and try to negotiate an adjustment of the amount. Try to see if they will waive any failure to file and failure to pay penalties. They are probably also open to a payment schedule. With a $600M state budget deficit don't expect a warm response.
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