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Tax Court Decision Yields Important Victory for Medical Transcription Industry in Battle to Define Independent Contractors

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After a lengthy and expensive legal battle, an IRS tax case was recently settled in favor of a medical transcription service organization (MTSO). In a rare defeat, the IRS conceded that the MTSO was in the right.

The IRS had demanded an amount exceeding $500,000 in overdue taxes and penalties for what it characterized as improper reporting and payment of payroll taxes. At the center of the legal controversy was the MTSO’s treatment of its medical transcriptionists as independent contractors instead of employees. The IRS argued that the medical transcriptionists providing services to the MTSO should have properly been designated as employees and that the company should have been withholding and submitting payroll taxes to the US Treasury on behalf of these employees on a quarterly basis. Mr. Brager, on behalf of his client, argued that the transcriptionists in fact met the IRS definition of independent contractor and that no taxes were due.

At the conclusion of a multi-year legal battle the tax courts ruled in favor of Mr. Brager and his medical transcription service client – and the IRS conceded that the evidence supported the claims of the MTSO. The courts also ordered the IRS to pay attorney fees to the MTSO in light of the unreasonable legal burdens which had been placed upon the MTSO in defending its position.

The case represents a significant victory for MTSO’s and other small businesses who make an honest concerted effort to comply with published standards as they distinguish between employees and contract workers. For more information on IRS employee vs independent contractor standards consult the IRS website.

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