Another IRS Amnesty Program: The Voluntary Classification Settlement Program

Another IRS Amnesty Program: The Voluntary Classification Settlement Program

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The IRS is apparently so happy with the results of it’s offshore voluntary disclosure program that it has established a similar program in the area of worker classification.

Michael Cohn of AccountingToday writes that the IRS has introduced a new voluntary compliance program Wednesday to convince employers to resolve their past issues with classifying employees as independent contractors:

The new Voluntary Classification Settlement Program is part of the IRS’s larger “Fresh Start” initiative to get more businesses and individual taxpayers into tax compliance and help close the tax gap.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman in a statement. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

Shulman and Secretary of Labor Hilda Solis signed an agreement earlier this week to improve their coordination on preventing businesses from misclassifying employees as independent contractors (see IRS to Team with Labor Department on Employee Classification).

Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed in the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as non-employees or independent contractors, and now want to correctly treat these workers as employees.

Here are the eligibility requirements:

To be eligible, an applicant must consistently have treated the workers in the past as nonemployees, have filed all of the required Forms 1099 for its workers for the previous three years, and not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of workers.

Employers can apply for the new program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount effectively equaling just over 1 percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

Here’s why it might be a good idea to do it (emphasis added):

A taxpayer who participates in the program will agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the taxpayer will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of Section 3509 of the Tax Code; will not be liable for any interest and penalties on the liability; and will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years.

In addition, a taxpayer participating in the VCSP will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.

The problem with this program compared to the OVDI program is that the classification of workers, unlike the duty to file a foreign bank account information return or the duty to report all of your income on your individual income tax return, is a subjective determination.

I suspect that most businesses who have been treating their workers as independent contractors rather than employees and properly issuing and filing forms 1099 believe their workers are independent contractors. These businesses will not participate in the VSCP because they don’t believe they have done anything wrong and don’t intend to change anything in the future.

Furthermore, if these businesses have been issuing 1099’s to their workers and those workers have properly filed their tax returns and properly included the amounts shown on the 1099 in their income tax returns, there should be no tax underpayment and the IRS will not have been damaged by the wrongful classification.

Having said all that, the worker classification Amnesty program will be a great opportunity for some businesses to get in good standing with the IRS at minimal cost.

If you believe that you are about to be audited or investigated for your worker classifications – perhaps because a former worker or a competitor is about to blow the whistle on you or because a former worker made a claim for unemployment benefits or workman’s compensation – you should consult with an attorney to determine whether your participation in the Amnesty program makes sense.

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About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida