For the past several years, the Internal Revenue Service (“IRS”) has been devoting considerable attention to worker classification issues involving the misclassification of employees as independent contractors. These misclassifications are important to the IRS and the federal government because they often lead to underreporting and underpayment of taxes. Traditionally, the IRS has sought to address worker classification issues through the audit process, which can quickly become costly for employers that are assessed unpaid taxes, penalties and interest for workers who are reclassified as employees by the IRS.
Voluntary Classification Settlement Program
In 2011, however, the IRS implemented an alternative approach when it started a voluntary program that allows eligible employers to prospectively treat one or more classes of their workers as employees and receive partial relief from federal employment taxes. A prior summary of that program can be found . Known as the Voluntary Classification Settlement Program, or VCSP, it has been well received by employers/taxpayers according to the IRS. Based on feedback the IRS has received from taxpayers and practitioners, the IRS made two announcements in December of 2012 detailing modifications to the program. The changes clarify certain aspects of the VCSP and, in some cases, relax the eligibility restrictions, which may make the VCSP more enticing for some employers.
VCSP – Permanent Changes
First, in Announcement 2012-45, the IRS announced the following permanent changes:
- An employer under IRS audit, other than an employment tax audit, is eligible to participate in the VCSP. Previously, an employer could not participate in the VCSP if it was under an IRS audit.
- An employer no longer must agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS. Previously, an employer was required to extend the period of limitations on assessment of employment taxes in order to benefit from the VCSP.
- An employer who is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit.
- An employer is not eligible to participate if the employer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or Department of Labor.
VCSP – Temporary Changes until June 30, 2013
Second, in Announcement 2012-46, the IRS announced the following temporary changes, which are only available through June 30, 2013:
- An employer who has not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified is nonetheless eligible for the VCSP through June 30, 2013. Under the standard program, a taxpayer must have filed all required Forms 1099 for the previous three years to be eligible for the VCSP.
- An employer who participates in the VCSP through this provision will be required to (i) furnish to the workers, and electronically file with the IRS, all required Forms 1099 for the workers being reclassified for the previous three years, and (ii) pay a higher settlement fee in comparison to the standard VCSP.
Application Process
To participate in the VCSP, an employer must apply using Form 8952, Application for Voluntary Classification Settlement Program. The IRS indicates that the application should be filed at least 60 days prior to the date the employer wants to begin treating its workers as employees in order to allow sufficient time for processing to be complete by the requested date for voluntary reclassification.
Employers Should Evaluate Consequences of Participation
While the VCSP may be appealing for federal tax purposes, it does not address exposure to other federal, state or local issues, nor does it address potential private actions by affected workers for applicable benefits. Notably, employers would still be open to review by other federal agencies, such as the Department of Labor (in minimum wage and overtime investigations), as well as state and local agencies for worker classification issues in prior years.
Conclusion
These announcements reemphasize the continued attention that the IRS is devoting to worker classification and provide an expanded opportunity for employers to address any outstanding worker classification issues. As stated in Hall Render’s prior summary, the VCSP provides several valuable benefits, such as reduced taxes and elimination of potential penalties and interest for prior years, but employers should be aware that the VCSP does not resolve all worker classification issues and concerns. Thus, employers considering the VCSP should carefully weigh all aspects of a decision to voluntarily reclassify their workers under the expanded program.
Should you need assistance with your organization’s evaluation of worker classification issues, including possible participation in the VCSP, please contact Calvin R. Chambers at 317- 977-1459 or cchambers@wp.hallrender.com or your regular Hall Render attorney.
