
Addressing Tax Policy Challenges For Workers With Disabilities
Disabled person sign and gavel. Accessibility law concept.
In this episode of Tax Notes Talk, Kimie Eacobacci of the National Council on Disability details how a 60-year-old revenue ruling can exclude workers with disabilities from standard employment benefits and protections.
Tax Notes Talk is a podcast produced by Tax Notes. This transcript has been edited for clarity.
David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: tax and disability.
Federal law prohibits employers from discriminating against disabled workers, but some workplaces may be using a half-century-old IRS ruling to do just that. A recent study conducted by the National Council on Disability [NCD]
This week's episode is part of a series we've been doing on how tax rules affect marginalized groups. We'll include links in the show notes to our previous episodes on the intersection of tax and racial inequality, LGBTQ rights, feminism, diversity, and the tax bar, tribal taxation, race-based tax weapons and wealth and inequality.
But joining me now to talk more about the National Council on Disability's findings is their legislative affairs specialist, Kimie Eacobacci. Kimie, welcome to the podcast.
Kimie Eacobacci: Well, thank you so much, David, for having me today, and we are excited that you're interested in — hopefully, your audience is interested in the National Council on Disability's report.
David D. Stewart: Well, we love talking about anything tax. Could you just give me an overview of this study that you performed?
Kimie Eacobacci: So for your audience today who's probably not familiar with NCD, I just want to give a little bit of a background about our agency because we are an independent federal agency. We were created in 1978. We were first housed under the Department of Health, Education, and Welfare. And then in 1984, Congress made NCD an independent federal agency.
And so in 1986 we wrote the first draft of the Americans With Disabilities Act, which was introduced in the House and Senate in 1988 and then was ultimately signed into law by President Bush in 1990. And since then, our agency, we are charged statutorily to conduct evaluations over policies and programs and how they can impact people with disabilities. And we advise the president, Congress and federal agencies.
My role as the legislative affairs specialist at NCD, I work more closely with Congress and congressional committees, but on this report — I was the lead on this report. I was able to work with the Internal Revenue Service as well with their taxpayer advocate office.
David D. Stewart: And I should clarify for listeners that an independent agency is a government body that was established outside of an executive branch department, with limited presidential control.
Kimie Eacobacci: So an overview of this report — during the pandemic, NCD was alerted by attorneys for a blind woman in Louisiana who was furloughed when a sheltered workshop that she worked at was closed due to the pandemic. Now she had applied for unemployment benefits, and the state of Louisiana's Workforce Commission determined that she was not an employee, she was a rehabilitation client.
NCD was very interested in how this could happen because this woman had been working at the sheltered workshop as an employee for years. She was being paid regular wages. She had some benefits. So we were not understanding how the state would determine she was a rehabilitation client and not an employee.
We were also concerned that when the sheltered workshop closed and everything else was closed, what sources of income would she have during the pandemic? Because she also lost the enhanced pandemic unemployment insurance. So that's why we underwent this study.
David D. Stewart: So before we move on to get deeper into this, I think we might need to define some terms for the sake of our listeners. First of all, what does a rehabilitation client mean?
Kimie Eacobacci: Currently, we have — there are federal programs that are intended to provide job training and skills to people with disabilities and transition them into what is currently known as competitive integrated employment. In our report, what we found is that disability policy and disability employment policy has evolved so much, but within the tax code, as we've seen, there's a lot of terms that were created in the 1960s that aren't consistent with current disability policy. And so we're finding that the tax code hasn't kept pace with the evolution of disability laws. And so that's another reason why NCD was really interested in undergoing this study.
David D. Stewart: And what is a sheltered workshop that you've mentioned?
Kimie Eacobacci: To understand how sheltered workshops operate, historically, what they were — in the 1960s, when this revenue ruling that we'll be discussing today, when it was created — at that time, socially, it was acceptable to institutionalize people with disabilities and put them in an institution, give them menial tasks to perform and pay them marginal wages. And that was intended to protect people with disabilities. And so we're seeing that a lot of these policies and laws and programs back in the '60s were intended to protect these individuals and keep them away from the burdens and the responsibilities of employment, like paying taxes.
However, they still exist now. Today, what has happened is, starting in the 1970s, Congress wanted to start mainstreaming or socializing people with disabilities. And so they've passed several laws, like in 1973, the Rehabilitation Act, which prohibits discrimination of people with disabilities from recipients of federal funding.
Capitol city. Travel Destination.
Then Congress passed the Individuals With Disabilities Education Act, which guaranteed a right to public education for people with disabilities. And then you have the Americans With Disabilities Act, which continued to systematically bring people with disabilities into the community and give them an equal opportunity to have employment. Today, the term "sheltered workshop" is no longer used as much. It's transitioned to a "community rehabilitation program."
So what we're seeing now is that people with disabilities, they can get training in a rehabilitation program, and some choose to stay there and work as an employee. However, we're finding that some of these sheltered workshops/community rehabilitation programs are keeping these people as rehabilitation client status even after the rehabilitation program has ended. And that's why we're having problems.
David D. Stewart: So let's talk about the revenue ruling at issue here. I believe it's 65-165. Tell me, what does it do and what issues is it creating?
Kimie Eacobacci: Sure. Revenue Ruling 65-165, it outlines three scenarios for people with disabilities in sheltered workshops. So they are a rehabilitation client status, an employee status, and then an independent contractor. And in our report, we didn't focus more on the independent contractor classification; we focused more on the rehabilitation client status because that's what we're seeing more of as we were doing more research.
And so it's actually unique because when I was talking to people about this revenue ruling, they only thought of employee versus independent contractor. They didn't realize there's actually three for people with disabilities who are in these sheltered workshop programs.
Under this revenue ruling, during the process of training, while the person is receiving rehabilitation services — which could be like job training or helping them write a resume or anything like that, job counseling — the revenue ruling states that the workshop supervises and directs the person as a trainee. And that was intended to rehabilitate and protect the person. And in this situation, the person with a disability is performing rehabilitation activities, not work, and there's no employment relationship in the circumstance.
Now, under the employee status — and I think this is where a lot of these provider employers are having some confusion — is that when the person with a disability has completed the training and is capable of performing jobs offered by the workshop or the rehabilitation program employer, the person with a disability may continue to work in the workshop temporarily as an employee while waiting placement of jobs in the private industry. Or they can work in the workshop permanently as an employee if unable to compete in the regular industry. And in these two situations, the person with a disability is working, is an employee and is able to receive benefits.
In addition, what we're seeing with this classification issue is that when the person with a disability is a rehabilitation client, the compensation they receive is classified as not wages for tax purposes, it's awards, incentives, and reimbursements. And so that's where NCD is also concerned too, is the misclassification of their compensation as well.
David D. Stewart: So what sort of outcomes is this creating for these employees that are not quite employees under the rule?
Kimie Eacobacci: What we've seen is — for example, with this situation, we found that the woman was denied unemployment benefits. We're also seeing that this misclassification keeps people with disabilities off the employer's payroll, which is really concerning to us as well too because it forces them to stay on Medicaid, whereas their nondisabled counterparts are receiving health insurance from the employer.
A Plate with word Medicaid and a stethoscope.
We're concerned that the misclassification of the compensation may leave them ineligible for the IRS's antipoverty programs like the earned income tax credit and other credits as well too. And then we are hoping that we would never find this, but there could be some people who have not been paying into Social Security and accumulating the required credits to be eligible for retirement benefits. I think as we hear more stories from people with disabilities, we will find additional concerns about this misclassification.
David D. Stewart: So why is the misclassification happening? If these people are basically becoming employees of the organization, why not treat them as employees of the organization?
Kimie Eacobacci: So what we're finding is that there are some bad providers — that's the problem too, is you have these employers that are providers of rehabilitation services and they're also employers and it gives them a lot of discretion.
But also too, during our investigation, we found online bulletins with tax attorneys for these sheltered workshops who were claiming or informing each other that based on Revenue Ruling 65-165, that all people with disabilities in the sheltered workshop were rehabilitation clients. They're making these broad assertions, and they're also saying that the compensation paid to all the people with disabilities is not a wage for IRS purposes. NCD, we recommend revoking Revenue Ruling 65-165 and using the IRS's common-law test to determine employment status.
David D. Stewart: Is this normal for NCD to engage with tax policy in this way? This seems like something I haven't seen before.
Kimie Eacobacci: Correct. So NCD — I don't think the disability community, there's very few that have been brave enough to venture into tax. And even when I was doing this report and interviewing disability groups, I think a few got a little nervous about tax. A lot of them work more with the Department of Labor. NCD, we're excited to educate people with disabilities about tax. There's so many benefits to them now that we have able accounts and how to fund able accounts, we can use these anti-poverty programs to help fund able accounts. So I think the disability community is slowly getting excited about tax.
David D. Stewart: So how does this ruling interact with the Federal Unemployment Tax Act?
Kimie Eacobacci: The Federal Unemployment Tax Act codifies this revenue ruling, and even if Congress were to repeal [section] 3309(b)(4) — which is the exemption under the Federal Unemployment Tax Act that excludes people with disabilities in sheltered workshop from the term "employment" — the revenue ruling in itself can still be used, and the IRS has said this; they use the revenue ruling for both FICA taxes and unemployment tax purposes. So in our report, we recommend that policymakers revoke Revenue Ruling 65-165 and that Congress repeal the exemption under the Federal Unemployment Tax Act.
David D. Stewart: Does this system of keeping these workers outside of the normal world of tax and employment, does it create other issues for them when dealing with the IRS and accessing benefits?
Kimie Eacobacci: It would in that if someone at VITA [volunteer income tax assistance] were to assist someone with a disability who is working in a sheltered workshop and has their tax documents at the end of the year, I think tax preparers would also rely on the revenue ruling and then assume that these workers are not employees and then maybe make them pay the payroll tax and a self-employment tax instead.
So I think that's another problem that we are also concerned about too, is that these sheltered workshops might be offsetting their tax burden onto these workers.
David D. Stewart: So what other recommendations does your group have for the IRS? I know this came up out of an incident that happened during the pandemic. Are there other things out there that the IRS should be keeping an eye out for, for disabled workers?
The US Internal Revenue Service (IRS) building is seen on the first work day for furloughed federal ... More workers following a 35-day partial government shutdown in Washington, DC, January 28, 2019. - The five-week government shutdown subtracted $11 billion from the US economy, about twice the amount President Donald Trump sought to fund a border wall, an independent congressional body said Monday. (Photo by SAUL LOEB / AFP) (Photo credit should read SAUL LOEB/AFP via Getty Images)
Kimie Eacobacci: So this report was like our agency's first dipping our toes into tax. We do think that the IRS should convene an interagency work group to identify other provisions that might be outdated, but also too, a lot of people with disabilities rely on government safety net programs. And so we don't want people with disabilities who need these programs to get kicked off. So we do need the IRS and like the Social Security Administration, agencies within the Department of Health and Human Services to kind of come together and identify when these people become reclassified, especially if they're reclassified retroactively, how can those payments affect their safety net benefits.
Another thing we — well, we strongly recommend that the IRS create like a disability advisory group within the IRS. We know that other federal agencies have done that too, to continue to identify new and emerging issues impacting people with disabilities. So for example, FEMA, the Federal Emergency Management Agency, they created one for people with disabilities for natural disasters. And we're seeing that that would be very helpful for the IRS to understand the needs of people with disabilities because they are so unique.
David D. Stewart: Well, yeah, definitely sounds like an area that could use some attention. Kimie, thank you so much for being here.
Kimie Eacobacci: Absolutely. And thank you again for having me.
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The move could add more uncertainty for American manufacturers, particularly the auto industry, which has been pushing for easier access. The Journal notes that the move gives China leverage down the line if tensions ratchet back up. From the report: In celebrating the agreement early Wednesday, President Trump noted "any necessary rare earths will be supplied, up front, by China." He did not mention any time limit on loosening those restrictions. Treasury Secretary Scott Bessent, in testimony before Congress on Wednesday, painted Wednesday's agreement as an incremental step on the longer road to a more comprehensive trade deal. "A trade deal today or last night was for a specific goal, and it will be a much longer process," he told a House committee. When asked if current US tariff levels on Chinese imports would not change again, Commerce Secretary Howard Lutnick told CNBC, "You can definitely say that." "We're in a great place with China," Lutnick said Wednesday. While the US-China truce framework is awaiting final word from US President Trump and Chinese President Xi Jinping, Lutnick added, "Both sides are really positive." The agreement is largely viewed as reestablishing the "handshake" that US and Chinese officials reached in Geneva last month, as details on a larger trade pact remain scant. Trump posted on social media this morning that the US has imposed 55% tariffs on China, a number that does not include any new tariffs but instead comprises some preexisting tariffs, Trump's fentanyl tariffs, and 10% "Liberation Day" tariffs. Lutnick touted that, as a result of the two-day talks, the US will gain access to rare earths and magnets, while the Chinese delegation sought to remove the US's export controls. He added that the trade deficit remains an ongoing issue, stating, "We're going to examine how China can do more business with us." May's Consumer Price Index (CPI) report showed inflation pressures eased on a monthly basis despite investor concerns that President Trump's tariffs would accelerate the pace of price increases. The Consumer Price Index (CPI) increased 0.1% on a monthly basis in May and 2.4% on an annual basis, a slight uptick from April's 2.3% gain. Yahoo Finance's Allie Canal reports: Read more here. I would keep an eye on consumer names off the news of a trade deal with China floated by President Trump this morning (see our prior post below). Seeing upticks premarket in heavily China-exposed retailers such as Nike (NKE), Walmart (WMT), Target (TGT), and Abercrombie & Fitch (ANF). The premarket gains here aren't mind-blowing in part because tariffs appear to still be in place. Trump posted on Truth Social: OUR DEAL WITH CHINA IS DONE, SUBJECT TO FINAL APPROVAL WITH PRESIDENT XI AND ME. FULL MAGNETS, AND ANY NECESSARY RARE EARTHS, WILL BE SUPPLIED, UP FRONT, BY CHINA. LIKEWISE, WE WILL PROVIDE TO CHINA WHAT WAS AGREED TO, INCLUDING CHINESE STUDENTS USING OUR COLLEGES AND UNIVERSITIES (WHICH HAS ALWAYS BEEN GOOD WITH ME!). WE ARE GETTING A TOTAL OF 55% TARIFFS, CHINA IS GETTING 10%. RELATIONSHIP IS EXCELLENT! THANK YOU FOR YOUR ATTENTION TO THIS MATTER!" A variety of market observers quickly weighed in hours after Tuesday evening's unveiling to suggest that the deal may not have a lot of meat on the bones — but at least relations are no longer moving in the wrong direction. The talks perhaps underscored how unlikely a comprehensive trade deal is anytime soon, noted AGF Investments Greg Valliere, "but at least relations may not worsen as talks continue throughout the summer." Both sides promised additional talks in the weeks or months ahead, but none have yet been scheduled. Veronique de Rugy, a professor at the Mercatus Center at George Mason University, suggested the talks continued to show China's leverage. "China is hurting, yes—but they still hold the upper hand on critical resources, and they know how to use them." Any lessening of tensions — and freer flow — of these mineral resources in China would be a significant boost to the global economy with China holding outsized leverage in both the reserves and processing capacity of these key building blocks for everything from computers to electric vehicle batteries to medical devices. Likewise, the US offering concessions on export controls would be a significant move after years where successive US administrations have wielded these controls — especially around the design and manufacture of semiconductors — by saying they need to be tight on China for national security reasons. Read more here. May's Consumer Price Index (CPI) report will be released on Wednesday and its expected to show that prices rose a bit faster than in April. Yahoo Finance's Allie Canal breaks down what to look out for and how President Trump's tariffs are impacting what consumers are now paying for goods and services. Read more here. Now that the US-China trade truce is back on track, both sides are keen to ensure it stays that way. China's Vice Premier He Lifeng said both sides need to now 'show the spirit of good faith in abiding by their commitments and jointly safeguard the hard-won results of the dialogue.' Bloomberg News reports: Read more here. Reuters reports: Read more here. Despite the US-China trade truce resuming the pain from President Trump's tariffs remains in China, especially among small exporters. Reuters reports: Read more here. Japan warned Wednesday that tariffs threaten its economic growth, the government said in a monthly report. Reuters reports: Read more here. Reuters reports: Read more here. Reuters reports: Read more here. A federal appeals could said on Tuesday that President Trump's sweeping tariffs can continue for now. This is a significant win for Trump, who introduced tariffs back in March and declared "Liberation Day," as he saw them as a way to free the US from what he called unfair trade practices. Bloomberg News reports: Read more here. Early summer sales for Inditex, the owner of fashion retailer Zara, came in weaker, as the company missed expectations for first quarter sales on Wednesday. President Trump's tariffs have impacted consumer demand in the US and other major markets. Reuters reports: Read more here. After weeks of back and forth, the US and China have agreed on a framework to implement the Geneva consensus that helped ease tariffs. The breakthrough came after two days of talks in London, including a marathon session on Tuesday. US Commerce Secretary Howard Lutnick said both sides had to "get the negativity out" before making progress. 'Now we can go forward to try to do positive trade, growing trade,' he said. As part of the deal, Beijing has promised to speed up shipments of rare earth metals, a crucial component for global auto and defense industries. Washington will ease export controls. This marks the first sign of movement on key issues. The proposal will now be presented to President Trump and China's Xi. Still, the discussions also did little to resolve a long-standing issue: China's trade surplus with the US. 'Markets will likely welcome the shift from confrontation to coordination,' said Charu Chanana, chief investment strategist at Saxo Markets. 'We're not out of the woods yet — it's up to Trump and Xi to approve and enforce the deal.' The meeting was set up after a phone call between the two leaders, following weeks of each side accusing the other of breaking the Geneva commitments. Both countries had used chips, rare earths, student visas and ethane as bargaining tools. Josef Gregory Mahoney, a professor at East China Normal University, said trust, not money, has been the biggest casualty of the trade war. 'We've heard a lot about frameworks,' he said. 'But the fundamental issue remains: Chips versus rare earths. Everything else is a peacock dance.' Bloomberg reports: Read more here. Sign in to access your portfolio