Employment-IRS Modifies Voluntary Classification Settlement Program (Which Provides Relief For Taxpayers Agreeing To Treat Workers As Employees)

In Announcement 2012-45, the Internal Revenue Service (“IRS”) says that it is modifying the Voluntary Classification Settlement Program (“VCSP”). The VCSP provides partial relief from federal employment taxes for eligible taxpayers who agree to prospectively treat workers as employees. It was established by Announcement 2011-64.

More specifically, Announcement 2012-45 modifies the VCSP to:

–permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP;

–clarify the current eligibility requirement that a taxpayer that is a member of an affiliated group, within the meaning of section 1504(a) of the Internal Revenue Code (the “Code”), is not eligible to participate in the VCSP, if any member of the affiliated group is under employment tax audit;

–clarify that a taxpayer is not eligible to participate in the VCSP if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or the Department of Labor; and

–eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

How the VCSP works, as so modified:

Eligibility. The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. To be eligible, a taxpayer must have consistently treated the workers as nonemployees, and must have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years with respect to the workers to be reclassified. The taxpayer cannot currently be under employment tax audit by the IRS. A taxpayer that is a member of an affiliated group within the meaning of Code section 1504(a) is considered to be under employment tax audit for purposes of the VCSP if any other member of the affiliated group is under employment tax audit. Furthermore, the taxpayer cannot be currently under audit concerning the classification of the class or classes of workers by the Department of Labor or by a state government agency.

A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the class or classes of workers is eligible for the VCSP if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.

Effect of the VCSP. A taxpayer who participates in the VCSP agrees to prospectively treat the class or classes of workers identified in the application as employees for future tax periods. In exchange, the taxpayer: (1) pays 10 percent of the employment tax liability that would have been due on compensation paid to the workers being reclassified for the most recent tax year if those workers were classified as employees for such year, determined under the reduced rates of Code section 3509(a), (2) is not liable for any interest and penalties on the liability and (3) is not subject to an employment tax audit with respect to the worker classification of the class or classes of workers for prior years.

Application Process. Eligible taxpayers who wish to participate in the VCSP must submit an application for participation in the program using IRS Form 8952. Along with the application, the taxpayer may provide the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848). The IRS retains discretion whether to accept a taxpayer’s application for the VCSP. The IRS will contact the taxpayer or authorized representative to complete the process once it has reviewed the application and verified the taxpayer’s eligibility. Taxpayers whose application has been accepted enter into a closing agreement with the IRS to finalize the terms of the VCSP and must simultaneously make full and complete payment of any amount due under the closing agreement.