IRS Issues New Voluntary Compliance Initiative for Worker Reclassification

The IRS recently launched a new voluntary compliance program that allows employers to prospectively reclassify—as employees—those workers they have treated as independent contractors incorrectly. The program contains generous settlement terms and provides audit relief for previous years.  The IRS determined that it would be beneficial for all involved to create a program that allows for voluntary reclassification of workers as employees outside of the examination arena.

Am I Eligible?

The voluntary classification settlement program (VCSP) is available to taxpayers who are currently treating their workers (or a class / group of workers) as independent contractors or other non-employees and want to treat the workers as employees going forward. The program is open to businesses, tax-exempt organizations, and government entities.

In Order To Be Eligible:

- The taxpayer must have consistently treated the workers as non-employees for as long as the workers have been providing services to the taxpayer;

- The taxpayer must have filed all required Forms 1099 for the workers for the previous three calender years ending before the date the Form 8952 (the application for entry into the program) is filed.

- The taxpayer cannot currently be under audit by the IRS, the Department of Labor (DOL) concerning the classification of the workers, or by a state government agency.

What Are The Settlement Terms?

A taxpayer who applies for and is accepted into the VCSP will agree to prospectively treat the class of workers as employees for future tax periods and in exchange:

- Will pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year;

- Will not be liable for any interest and penalties on the liability;

- Will not be subject to an employment tax audit for the worker classification of the workers for prior years; and

- Will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.

How Do I Apply?

Taxpayers will have to apply on Form 8952 for participation in the program, and provide the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848). The Instructions to Form 8952 provide that the form can be filed at any time but should be filed at least 60 days before the date a service recipient wants to begin treating the class or classes of workers as employees. The IRS will then contact the taxpayer or authorized representative to complete the process once it has reviewed the application and verified the taxpayer’s eligibility.

Please note the IRS retains discretion as to whether to accept a VCSP application.

Accepted applicants will enter into a closing agreement with the IRS to finalize the terms of the VCSP and will simultaneously make full and complete payment of any amount due under the closing agreement.

Please contact us today if this might be a program that can help your business.

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CIRCULAR 230 DISCLAIMER: ADVICE, ARTICLES AND COMMENTARY INCLUDED HEREIN DO NOT CONSTITUTE AN OPINION AND ARE NOT INTENDED OR WRITTEN TO BE USED, AND THEY CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER.