Joe, Please give a little information about what constitutes a permanent position. Specifically, If I accept a job that has no definite end date, but I to take a month off once a year and return to that job, is it a permanent or temporary job? What about the same situation, except that there is a scheduled end date that is more than a year away? Can I just work 11 months, and go work somewhere else for a month to "reset the clock"?
If someone offers me a job that is scheduled to last 3 years, and offers per diem for the first year, is that okay? What about if they pay the per diem for the whole 3 years but treat it as taxable income after the first year?
Good question
The definition of a tax home is a taxpayer's primary area of income unless they fall under the temporary stay provisions that are laid out in IRS publication 463, which is a layman’s overview of the Code and Regulations governing these situations. If the job has no terminus, is open ended or presumed to be permanent, then it is an indefinite position. Taking a month off each year does not change the fact that you are receiving a continuous income stream from the same place nor does it change the nature of your ongoing obligations to a permanent position. If the position was temporary as defined by a contract, a month long break would still not reset the clock and any further work would be considered part of an indefinite position.
There are at least 4 Chief Counsel Memorandums in the IRS literature that address the length of break that is necessary to "reset the clock" for temporary assignments. These memorandums are basically answers to questions posed to the IRS attorneys by appeals agents or other staff. These rulings advise the following: 1) a three week break is insignificant, 2) a 7 month break is significant and 3) a 12 month break is definitely significant. This may be a bit confusing, but if you keep in mind that a tax home is empirically the primary area in which you earn your income, looking at the income of a taxpayer over an extended period of time (like 24 months, 36 months etc) can establish an repetitive pattern of income in the same area. Since audits of temporary professionals are often more than a year, if an agent notices 18 months of income over a 24 month span in the same area, that is ample evidence to posit that the area in question is the “primary place of income”. For that reason, we have advised clients to avoid working the same area > 12 out of 24 months, 18 out of 36 etc. or otherwise they would need to have all tax free allowances treated as taxable compensation including the fair market value of any lodging provisions.
The tax home concept is based on a “foreseeable” length of service and any temporary work that lasts beyond a year is considered indefinite. If you accept a position that is more than a year, it is permanent, however, you may structure the contracts for an initial one year period, but the moment pen hits paper to an extended commitment, the tax home shifts and all compensation is taxable. In an audit environment, I would not want to show any prior agreement for extended service.
One thing to keep in mind with contracts. Employers are required to exercise due diligence in screening employees for prior service (to avoid the 12 month rule) and whether the employee has a reasonable basis for a tax home to be away from. However, the burden of proof for an employer is much less that it is for the employee/contractor. A 30 day break could be allowed in an employer audit as a reasonable estimation of a “break in service”, however an employee with 23 out of 24 months of service in the same area has obviously established a new tax home.
