Procedure & Administration
The misclassification of workers by taxpayers has been a widespread problem. By treating workers as nonemployees, taxpayers do not pay the employer portion of the Social Security and Medicare taxes on the compensation paid to the workers. In hopes of increasing tax compliance, the IRS has announced a Voluntary Classification Settlement Program (VCSP) (Announcement 2011-64). This program allows eligible taxpayers to voluntarily reclassify their workers as employees for federal employment tax purposes for future tax periods while receiving some relief for the tax liability relating to the past treatment of the workers as nonemployees. Taxpayers must meet certain requirements to be eligible and must apply to participate in the VCSP. If they are accepted, they must enter into a closing agreement with the IRS.
To be eligible, taxpayers must:
- Have consistently treated the workers (or a class or group of workers) as nonemployees;
- Have filed all required Forms 1099 with respect to the workers for the previous three years;
- Not currently be under IRS audit;
- Not be under audit by the Department of Labor or a state agency regarding the classification of the workers (or class or group of workers); and
- Have complied with the audit results if the taxpayer was previously audited by the IRS or the Department of Labor.
The VCSP offers several participation incentives, including allowing taxpayers to reclassify the workers without having to go through the usual administrative processes. The VCSP limits the tax liability to 10% of the employment tax liability that would have been due on the compensation paid to the workers in the most recent tax year as calculated under the reduced rates of Sec. 3509. Interest and penalties will not be charged on the liability. The classification of these workers for prior years will not be subject to an employment tax audit; however, the statute of limitation on assessment of employment taxes is extended from three to six years for the first, second, and third calendar years beginning after the date the taxpayer begins treating the workers as employees under the VCSP closing agreement.
Eligible taxpayers who want to participate in the program can apply by filling out Form 8952, Application for Voluntary Classification Settlement Program (VCSP) . The form can be filed at any time but must be filed at least 60 days before the date the taxpayer wishes to begin treating the workers as employees. The IRS will contact the taxpayer once the taxpayer’s eligibility has been verified. Once the application is accepted, the taxpayer will enter into a closing agreement with the IRS to finalize the terms of the agreement and simultaneously make a full payment as determined under the closing agreement.
Practitioners should evaluate the facts and circumstances of their clients that employ workers as nonemployees (i.e., independent contractors) to determine if taking advantage of the VCSP is an option for them.
Michael Koppel is with Gray, Gray & Gray, LLP, in Westwood, MA.
Unless otherwise noted, contributors are members of or associated with CPAmerica International.