In a recent move to encourage employers to correct past misclassification of workers, the IRS has established a voluntary compliance program, called the Voluntary Classification Settlement Program, or VCSP. The program permits employers to voluntarily reclassify their workers as employees for future tax periods with minimal tax liability for past non-employee treatment.
To participate, an employer must apply to the program. An employer is eligible to apply if it
(1) consistently treated the workers as nonemployees and filed all required Forms 1099 for the previous three years;
(2) is not under audit by the IRS; and
(3) is not under audit by the Department of Labor or any state agency with respect to the classification of workers.
If the IRS accepts an employer’s application, the employer only pays 10 percent of the federal employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined at reduced rates. The employer will not be liable for any interest or penalties on the assessed liability and the employer will not be subject to an employment tax audit with respect to the worker classification for any prior years. Finally, the employer must agree to extend the statute of limitations for assessment of employment taxes.
While the lessened payments are an attractive benefit, many shrewd employers wonder: What if my application is not accepted? It is a big gamble for any employer to take, particularly when a denied application would then put the IRS on notice of an employer’s prior misclassification. To this question, the IRS has only said that the rejection of a VCSP application will not automatically trigger initiation of an audit. But what does “automatically” mean? If the employer is audited for another reason, the employer will have provided the IRS with details of a potential misclassification and information that could be used against the employer in the audit.
Another concern employers have voiced is that the VCSP does not address any liability under state or local tax laws. Thus, filing an application to the VCSP could lead to an audit by state tax agencies for prior tax years.
While it is sometimes true that “no good deed goes unpunished,” additional clarification on the program is expected from the IRS, which perhaps will ease the minds of employers. As always, employers should proceed with caution and seek the advice of an attorney before applying to the VCSP. More information about the program is available at the IRS website, www.irs.gov/businesses/small/article/0,,id=246013,00.html.