Misclassified: Iowa won’t refund veteran's $5K payment

CEDAR RAPIDS, Ia. — The state of Iowa is refusing to refund a $5,000 settlement paid by an 83-year-old Navy veteran who the federal government says was misclassified as a contract employee.

“I believe I am the classic example of governmental rape,” said James Robertson of Cedar Rapids. “I feel seriously prevailed upon.”

At least one lawmaker and an eastern Iowa nonprofit that advocates on behalf of workers' rights agree his money should be returned and the loophole in state tax law that allowed it to be taken fixed.

Robertson fell victim to a largely unknown section of Iowa tax code that requires some contract employees to charge their employers sales tax, which is supposed to be remitted to the state.

Robertson, who lives with his wife, Judy, on less than $1,200 in monthly Social Security payments, contends he never collected the tax because he wasn’t supposed to do so.  Smulekoff’s, a now-closed Cedar Rapids furniture store where he was a maintenance worker for three decades, misclassified him as a contract worker, he said.

But Robertson said the Iowa Department of Revenue refused to investigate his claims that his employment status was wrongly classified. The state even tried to prohibit the renewal of his drivers’ license because the debt  it claimed he owed. (He filed an objection and was ultimately allowed to renew his license during his appeals.)

Iowa: We can do more to stop misclassification

So after roughly two years of frustrations — and what he said were daily calls from collectors for the Iowa Department of Revenue insisting he owed more than $10,000 — he agreed in June to pay the settlement.

But he did so believing that the money he borrowed from a friend would be returned once a federal review process he was pursuing verified his claim he was not a contract worker.

The Internal Revenue Service on Oct. 14 determined that Robertson was indeed wrongly classified, documents he provided to The Des Moines Register show. The agency declined to speak about Robertson's case because federal law prohibits it from commenting on individual taxpayer situations, spokesman Christopher Miller said.

The state rejected Robertson's refund request despite the IRS determination.

Victoria Daniels, a spokeswoman for the Department of Revenue, said it’s unlikely Robertson can win an appeal because he participated in what her agency calls its “offer in compromise” program.

Robertson signed a document during the settlement negotiations saying he accepts that “all administrative and judicial protests and actions filed in relation to these taxes and tax periods be dismissed.”

“When a person signs an offer in compromise, one of the things that they are signing their names to is the fact that they are giving up their appeal rights and the rights to get any of that money back,” Daniels said. “When you sign an offer in compromise with the Department of Revenue you are signing away any appeal rights you may or may not have had.”

Robertson said the documents he signed pertained to unpaid tax liabilities, not to his rights to a refund for taxes he never owed. And he said the department collectors led him to believe a refund would be made in the event it was shown he'd been unjustly classified as a contract employee.

“That settlement was an effort to show the state of Iowa that I was sincere in trying to work this out,” Robertson said. “I thought, ‘Well, if we settle with them now and the IRS comes back in my favor, then Iowa will do the right thing and issue a refund.’”

Worker misclassification has been a longtime issue, sometimes used by employers to avoid paying benefits like workers’ compensation and Social Security. Multiple calls to Ann Lipsky, the owner of downtown Cedar Rapids furniture store before it closed, were not returned.

Iowa Workforce Development officials said they couldn’t comment about businesses that might be under investigation for possible worker misclassification violations unless a final administrative decision has been made. State records do not indicate such actions taken against the former store or its owners.

State Rep. Art Staed, D-Cedar Rapids, declined to comment as to whether he believes the store’s owners should bear responsibility for the issue. But he said the state Department of Revenue should at least reconsider its decision to withhold Robertson’s refund.

“It just seems like an awful thing,” Staed said. “It seems like Iowa would want to right a wrong.”

Misty Rebik of the Center for Worker Justice of Eastern Iowa reviewed Robertson’s case more than two years ago and said she always believed from his records and statements that he was a victim of misclassification.

Robertson’s case requires reconsideration because the state’s no-appeal provision is intended for people who settled tax debts that they rightfully owed. Robertson’s involves settlement for a tax that he never should have paid, Rebik said.

“I think this case exemplifies misclassification in general and shows that it’s a really big issue,” Rebik said. “It’s hard for workers to identify and know when it’s happening. That’s why the issue is so silent and you don’t read a lot of news about it.”