Tax Alert: IRS Launches Voluntary Worker Classification Settlement Program
10/19/2011
Last month the Internal Revenue Service (“IRS”) announced the launch of a new program to allow employers to resolve past worker classification issues at a low cost by voluntarily reclassifying their workers.
Under the new Voluntary Classification Settlement Program (“VCSP”), 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:
- Consistently have treated the workers in the past as nonemployees;
- Have filed all required Forms 1099 for the workers for the previous three years; and
- 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 the new 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 three years that generally applies to payroll taxes.
It is unknown whether state taxing authorities will piggyback the Federal treatment for employers that choose to participate in the program. It is also unclear how the reclassification of independent contractors to employee status will be treated for purposes of employee benefit plans as in a worst case scenario it is conceivable that a plan could be disqualified due to having failed to provide benefits to this segment of the workforce.
At about the same time as this plan was announced, a Memorandum of Understanding was executed between the IRS and the Department of Labor to strengthen information sharing between the two agencies as they independently identified workers erroneously classified as independent contractors. Several states, including New York and Connecticut, have also joined this new enforcement effort. Clearly the issue of misclassification of employees as independent contractors is being focused on by the IRS.
For more information on this and other issues, please contact Neil Becourtney, CPA, or your J.H. Cohn professional at 877-704-3500.
Neil Becourtney, CPA, is a partner at J.H. Cohn and leads the Firm’s Tax Controversies Group. He may be reached at nbecourtney@jhcohn.com or at 973-364-6671.
Circular 230 Notice: In compliance with U.S. Treasury Regulations, the information included herein (or in any attachment) is not intended or written to be used, and it cannot be used by any taxpayer for the purpose of i) avoiding penalties the IRS and others may impose on the taxpayer or ii) promoting, marketing or recommending to another party any tax related matters.
This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and J.H. Cohn LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.