Earlier this week, the IRS issued two announcements that will affect its Voluntary Classification Settlement Program (VCSP) that was first instituted in September 2011. In Announcement 2012-45, the IRS provided notice and information regarding a number of revisions to the VCSP and in Announcement 2012-46, the IRS has relaxed the requirements for participation in the VCSP through June 30, 2013.
By way of reminder, the VCSP allows eligible taxpayers to voluntarily reclassify their workers as employees for federal employment tax purposes and thereby obtain partial relief from federal tax liabilities. The goal of the program is to entice employers who suspect they might be misclassifying their workers to participate in order to avoid the heavier tax assessments that might follow an audit. Under the original terms of participation, in order to be eligible for the VCSP, the employer must: (a) not be under audit by any federal or state agency regarding worker misclassification; (b) have consistently treated the workers as non-employees; and (c) have filed all required Forms 1099 for the workers for the previous three years. An employer that was previously audited by the IRS or the Department of Labor concerning worker classifications would be eligible only if it had complied with the results of that audit. Once accepted into the program, an employer would be responsible for paying 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year.
In response to feedback from taxpayers and taxpayer representatives, the IRS modified the VCSP in a number of ways to increase participation. Most importantly, through June 30, 2013, the IRS has created a “VCSP Temporary Eligibility Expansion” to allow taxpayers to participate in a modified version of the VCSP even if they have not met the prior VCSP requirement of having filed all require Forms 1099 for the previous three years with respect to the workers to be reclassified.
Under the VCSP Temporary Eligibility Expansion, the employer must pay 25% of the employment tax liability, but would not be liable for interest and penalties on the underlying liability. The penalty for unfiled Forms 1099 is graduated – based on the number of required Forms 1099 that were not filed for the previous three years with respect to the workers being reclassified – but still represents a significant reduction.
Beyond this temporary change, the new modifications to the VCSP set forth in Announcement 2012-45 also:
- extend eligibility to taxpayers under IRS audit, other than an employment tax audits;
- clarify that taxpayers are eligible for the program if any member of the affiliated group is under an employment tax audit within the meaning of Section 1504(a) or if the taxpayer is contesting worker classification in court from a previous audit by the IRS or the Department of Labor; and
- eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.
Again, the temporary eligibility expansion is, as currently structured, only available through June 30, 2013.