IRS Announces Voluntary Classification Settlement Program
October 2011
By: Sean M. Aylward, Adam B. Cantor, and Farah N. Ansari
Wolff & Samson Tax Law Alert
The Internal Revenue Service (“IRS”) recently announced a Voluntary Classification Settlement Program (“VCSP”) that gives employers an opportunity to correct the misclassification of workers as independent contractors rather than employees for federal employment tax purposes. The VCSP provides for reduced tax liability and relief from interest and penalties.
Generally, workers are treated as “employees” or “independent contractors” based on the facts and circumstances of a particular situation. In specific situations, it is not always clear whether a worker is an independent contractor or an employee, and such uncertainty may trigger an employment tax liability down the road.
To be eligible for the VCSP, the employer must meet the following requirements:
1. The employer must have consistently treated the workers (or a class or group of workers) as independent contractors or other non-employees;
2. The employer must have filed all required Form 1099s for the workers for the prior three years;
3. The employer must not be under an audit by the IRS;
4. The employer must not be under an audit regarding the classification of workers by the Department of Labor or by a state government agency; and
5. The employer must have complied with the results of a prior audit conducted by the IRS or the Department of Labor regarding the classification of workers.
An employer that participates in the VCSP must agree to treat the same class of workers as employees prospectively. Under the VCSP, the employer is obligated to pay 10% of the employment tax liability for the most recent tax year applicable to such workers, determined under reduced Internal Revenue Code rates. The employer will not be subject to interest and penalties on the liability and the employer will not be subject to an employment tax audit with regard to the reclassified workers for previous years. The employer must, however, agree to extend the statute of limitations for an assessment of employment taxes (from three years to six years) from the first three years following the execution of the VCSP closing agreement. Exempt organizations and government entities are also eligible to participate in the VCSP.
An employer must apply to participate in the VCSP by filing IRS Form 8952, “Application for Voluntary Classification Settlement Program.” This application should be filed at least 60 days before the date the employer wants to reclassify its workers as employees. After reviewing the submission the IRS will contact the representative to finalize the application. If accepted into the VCSP, the employer will enter into a closing agreement with the IRS and make any required payment at such time.
The determination of whether an employer has properly classified a worker as an independent contractor is highly fact sensitive. The tax attorneys at Wolff & Samson can assist with this analysis and determine whether an employer should participate in the VCSP.
For more information, please contact:
Sean M. Aylward ■ Member of the Firm ■ (973) 530-2105 ■ saylward@wolffsamson.com
Adam B. Cantor ■ Member of the Firm ■ (973) 530-2020 ■ acantor@wolffsamson.com
Farah N. Ansari ■ Associate ■ (973) 530-2044 ■ fansari@wolffsamson.com
