The IRS Voluntary Worker Reclassification Program created the VCSP in 2011 to allow taxpayer employers the opportunity to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To apply to participate in the VCSP, an eligible employer must file Form 8952, Application for Voluntary Classification Settlement Program and enter into a closing agreement with the IRS. To be eligible for the VCSP, the employer must want to voluntarily change the classification of its workers. This means the employer must not currently be under an IRS employment tax audit or under a DOL or state agency audit concerning the classification of its workers. In addition, the employer must have consistently treated workers as independent contractors and must have filed all Forms 1099 for the workers to be reclassified for the previous three (3) years. If the IRS accepts the eligible employer’s application, the employer must agree to prospectively treat the workers as employees for future tax periods. In exchange, the employer only has to pay 10% of the employment tax liability that would have been due on compensation paid to the reclassified employees for the most recent tax year, and the employer will not be liable for penalties or interest or be subject to a tax audit for the prior years.
The response to the VCSP was overwhelming, and the IRS received multiple requests for a similar program for employers that have not filed all of the required Forms 1099 for the previous three years for the workers being reclassified. On December 17, 2012, the IRS announced a temporary program to permit previously ineligible employers to enter the Voluntary Classification Settlement Program Temporary Eligibility Expansion (“VCSP TEE”). Other than allowing for the expanded eligibility, the VCSP TEE requires eligible employers to file Form 8952, with some modification. VCSP TEE agreements with the IRS require the employer to agree to prospectively treat the reclassified workers as employees, and in exchange the employer will pay only 25% of the employment tax liability that would have been due in the previous tax year plus a graduated penalty for unfiled Forms 1099 for the previous three years. As with the regular VCSP, the employer will not have to pay interest or a penalty and will not be subject to an employment tax audit with respect to the reclassified workers.
What does this mean for my organization – we have our workers classified correctly. Take another look, do you really have those workers classified correctly? The line between “employee” and “independent contractor” is extremely blurry. The facts and circumstances of each individual situation make a difference in determining who is or is not an employee. Small differences in who has control over a worker’s job duties, forms of payment, whether or not benefits are provided, and more, may all affect whether a worker is an “employee” or “independent contractor.” Because the correct employment classification can often make a huge difference for tax liability purposes, it is extremely important to review your worker classifications before the IRS or the DOL comes knocking at the door. As an added bonus, if you have been misclassifying employees as independent contractors and are eligible for the VCSP or the VCSP TEE, you can pay next to nothing in past tax liability compared to what you will pay otherwise. The June 30th application deadline for the VCSP TEE poses a great opportunity to review your worker classifications and make good with the IRS, eliminating much of the audit risk employers face.
Do not fear rejection! Another major reason to take advantage of the opportunity to apply for VCSP or VCSP TEE is that even if your application is rejected, your application will not trigger a Federal audit. Ineligibility for the programs may be due to current audit status by the IRS or DOL, failure to file required forms, etc. Although your company may be audited for other reasons, applying for these programs will not put a target on the way your company does its business.
Aren’t sure what to do next? Give us a call – the lawyers at The Lowenbaum Partnership can smoothly guide you from reviewing your worker classifications to applying for the VCSP or the VCSP TEE. Remember, the VCSP TEE application deadline is June 30, 2013 – so get started on your review today!
For more information call Dannae Delano.
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