Withholding judgment on IRS amnesty program

by Michael E. Barnsback

For the past couple of years, the IRS has focused its enforcement efforts on the misclassification of independent contractors. Many employers improperly classify workers as independent contractors to avoid paying FICA taxes and providing benefits. Others make the mistake simply because they don’t understand the differences between the two classifications. Regardless, misclassifying employees as independent contractors can be costly. Not only are you liable for back payroll taxes and interest, but there are potential civil and criminal penalties as well.

VCSP
Last October, the IRS announced an amnesty program called the Voluntary Classification Settlement Program (VCSP). According to a September 21, 2011, IRS press release, “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.” Employers are eligible for the program if they:

• Consistently treated workers as contractors in the past;
• Filed 1099 forms for the workers for the previous three years; and
• Aren’t currently under audit by the IRS or the U.S. Department of Labor (DOL).

All an eligible employer needs to do is submit Form 8952 to the IRS. If accepted into the program, the employer must pay an amount equal to a little more than one percent of the wages paid to the reclassified workers for the past year. And there’s a bonus: no interest or penalties! That sounds like a good program.

Program is a bust
The IRS has announced that during the 11 months of the program, approximately 700 employers filed applications to participate. Those 700 employers cover approximately 14,000 workers who will be reclassified as employees. You read correctly. The 14,000 workers are represented by just 700 employers. By all measures, this program is a bust.

An IRS spokesperson indicated that the agency is considering possible enhancements to the program as a result of comments received and lessons learned.

Wage and Hour Compliance Manual

The way I see it . . .
Enhancements aren’t going to save the program. No amnesty program is going to work unless it addresses the other critical player involved in misclassification issues: the DOL. Under the program, an employer may receive amnesty for back payroll taxes, but there is no amnesty for back overtime that wasn’t paid because of the classification of the worker as an independent contractor.

What does the IRS think is going to happen when all of a sudden, workers who have been paid as independent contractors are told they now are employees? Workers will question the change, which will lead them to question how they were paid in the past, which will lead to DOL wage and overtime audits and individual suits for back overtime pay.

Unless and until a worker misclassification amnesty program provides a mechanism to resolve wage and overtime claims, it will be a bust.

Michael E. Barnsback is a partner with LeClair Ryan in the firm’s Alexandria, Virginia, office. He can be reached at michael.barnsback@leclairryan.com.