Employers often misclassify actual employees as independent contractors. The government wants these employers to pay employment tax (Social Security, Medicare and unemployment taxes) related to worker misclassification. The IRS initiated a voluntary program to facilitate resolution of worker classification issues and increase tax compliance.
The Voluntary Classification Settlement Program (VCSP) was established in 2011, allowing certain taxpayers the ability to willingly contact the IRS and settle employment issues. Taxpayers had to meet certain requirements to be eligible for the original VCSP, including: a) consistently treated workers in question as nonemployees and b) already filed all required Forms 1099 for those workers for the previous three years and c) not be under IRS audit for any issue.
The IRS encountered many taxpayers who wanted to apply for the VCSP but couldn’t qualify. The IRS recently responded by providing a temporary eligibility expansion, known as the Voluntary Classification Settlement Program Temporary Eligibility Expansion (VCSPTEE). Taxpayers must submit applications to the IRS by June 30, 2013. These are the main changes in eligibility:
- Once the IRS has verified the taxpayer is eligible for the program, the taxpayer must furnish all reclassified workers in question, and electronically file all required Forms 1099 for the previous 3 years prior to executing a closing agreement with the IRS.
- A taxpayer can be currently under IRS audit, as long as it is not related to employment taxes.
- A taxpayer who was previously audited by the IRS or the Department of Labor with respect to worker classification issues is eligible if the taxpayer complied with the results of that audit, and isn’t currently contesting the classification in court.
Taxpayers who reach an agreement under the VCSPTEE:
- Agree to treat the workers identified in their application as employees for future tax periods.
- Must pay 25% of the employment tax liability that would have been due on compensation paid those workers as employees for the most recent tax year.
- Pay a reduced penalty for unfiled Form s1099 with respect to reclassified workers for the previous three years. The penalty is graduated, based on the number of required Forms 1099 that weren’t filed.
- Is not subject to an employment tax audit with respect to worker classification for prior years.
Once the IRS confirms that the required Forms 1099 have been electronically filed, the taxpayer must make complete payment of any amount due before the IRS closing agreement is completed.
The deadline to apply for expanded eligibility is June 30, 2013. In addition to submitting Form 8952, Application for Voluntary Classification Settlement Program, the taxpayer can allow an authorized representative to communicate with the IRS throughout the application process. Gary Kaplan is authorized to represent taxpayers before the IRS, and is highly proficient in tax resolution matters. Contact him with your questions.
