The IRS has announced the launch of a new Voluntary Classification Settlement Program (VCSP) that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers. Under the VCSP—which is a part of the IRS’s “Fresh Start” initiative to help taxpayers and businesses address their tax responsibilities—employers can become compliant by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.
The new VCSP is designed to increase tax compliance and reduce burden for employers by providing greater certainty for employers, workers and the government. Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.
To be eligible, an applicant must: (1) consistently have treated the workers in the past as nonemployees; (2) have filed all required Forms 1099 for the workers for the previous three years; and (3) not currently be under audit by the IRS, the Department of Labor or a state agency concerning the classification of these workers.
Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.
Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.
Full details, including FAQs, are available on the Employment Tax pages of IRS.gov, and in Announcement 2011-64.
For questions or more information about applying to the program, please contact Deborah Kosnett, CPA at dkosnett@tatetryon.com.
