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Friday, January 4, 2013

In 2011, the IRS announced a voluntary correction program for employers that erroneously classified employees as independent contractors that we previously covered here. On December 17, the IRS made it easier to qualify for the program.

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The Background.  The program permits a taxpayer not under an employment tax audit to reclassify workers previously classified as independent contractors as employees for federal employment tax purposes. Exposure to delinquent employment taxes and penalties is limited. The reclassification is prospective only and it applies only to employment tax issues.  It does not address any other issues, such as eligibility to participate in an employer’s employee benefit plans.

The program may be of value to taxpayers who want clarification of the status of workers who are in the grey area between employees and independent contractors.

The Changes.  In Announcement 2012-45, the IRS announced the following favorable changes:

  • A taxpayer under IRS audit but not for employment tax issues can now apply for the program. Previously, any open IRS audit of the taxpayer disqualified it for this program.
  • The taxpayer is no longer required to extend the period of limitations on employment tax liability to obtain the relief.

Other restrictions continue to apply:

  • The relief is not available to a taxpayer under current employment tax audit by the IRS or current audit of worker classification by the Department of Labor or any state government. A prior audit does not disqualify a taxpayer that complied with the results of the prior audit.
  • The relief is not available to any member of an affiliated group within the meaning of section 1504(a) of the Internal Revenue Code if any other member of the group is under current employment tax audit.
  • The relief is not available to a taxpayer that is contesting in court a prior IRS or Department of Labor classification of the workers.
  • The taxpayer must have consistently treated the reclassified workers as independent contractors in the past and furnished them with all required Forms 1099 for the prior three years.
  • The taxpayer must pay 10% of the employment tax that would have been due on compensation of the reclassified workers for their most recent taxable year, determined under the reduced rates provided for in section 3509(a) of the Code.
  • There is no liability for interest and penalties on the liability and no exposure to IRS audit for the prior classification.

The application process is described in the Announcement.

Special Limited Relief if 1099s Were Not Filed. In Announcement 2012-46, the IRS announced that the program will be available through June 30, 2013 for taxpayers who are ineligible under the general criteria because they did not provide the required Forms 1099 to the affected workers for the prior three years. The following additional requirements apply:

  • The taxpayer must furnish affected workers and the Treasury all required Forms 1099 for the prior three years.
  • The taxpayer must pay 25% of the employment tax that would have been due on compensation of the reclassified workers for their most recent taxable year, rather than 10%.
  • The taxpayer must pay a graduated penalty for the unfiled Forms 1099 for the prior three years, based on the number of failed Forms 1099 for the prior three years.
  • There is no liability for interest and penalties on the liability and no exposure to IRS audit for the prior classification.

A separate, more complicated application process is described in the Announcement.

Final Thoughts. With the IRS, Department of Labor, and state agencies ramping up enforcement of worker classification audits, this program offers an opportunity for employers to get out in front of the issue and try to solve it before the government comes knocking.  While it may only provide assurance from the IRS, and only on employment tax issues, utilizing the program is evidence of good faith and may prove helpful even as against other auditing agencies.

What do you think?  Is this program helpful?  Will the liberalized eligibility rules make it more likely for employers to take advantage of the program?

Related Links

IRS Page on VCSP

IRS FAQs on VCSP

IRS Form 8952 VCSP Application & Instructions

Independent Contractor (Self-Employed) or Employee? IRS Page

Disclaimer/IRS Circular 230 Notice

 

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