Many organizations have workers who they consider independent contractors but whose status may be questionable, thus potentially subjecting the organization to an IRS audit and, worse yet, employment taxes, penalties and interest for prior years. To assist organizations in this predicament, yesterday the IRS announced a new Voluntary Classification Settlement Program whereby these organizations can agree to treat a group of workers as employees going forward in exchange for significantly reduced prior year employment tax.
To be eligible for the program, the organization must have consistently treated the workers at issue as independent contractors, have filed all required Forms 1099 for the previous three years, not currently be under audit by the IRS, and not currently be under audit by either the Department of Labor or a state agency in regard to worker classification. Also, if the organization underwent a prior IRS or Department of Labor audit regarding worker classification, the organization is not eligible for the program unless it complied with the results of that audit.
If eligible, the organization can apply for entry into the program using Form 8952 and, if accepted, will enter into a closing agreement with the IRS settling employment tax liability. The terms of the settlement are that the organization agrees to treat the workers as employees going forward but has only minimal liability for prior years. Specifically, the organization agrees to pay 10 percent of otherwise applicable employment tax for the immediately preceding year, using Section 3509's reduced rates for cases of honest misclassification. No penalties or interest for that year may be imposed and all other prior years are "closed" for employment tax audit purposes. However, the organization must agree to an extended statute of limitations (six years as opposed to the usual three) for employment tax assessments for the first three years beginning after the closing agreement is signed.
The details of the program are described in Announcement 2011-64, as well as IR-2011-95. As explained in the Announcement, this program is a complement to an existing settlement program for organizations already under audit regarding worker classification. Organizations considering this program should also keep in mind that the IRS is in the midst of a three-year program that significantly increases the number of worker classification audits.
This program is offered by the IRS and addresses federal employment tax liability only. Organizations must consider the impact participation in the program may have under the Fair Labor Standards Act or similar state laws. Baker Hostetler’s Misclassified Workers’ Taskforce helps our clients avoid misclassification and mitigate risks where a company's employment practices may be questionable. We take an interdisciplinary approach looking at tax issues, benefits issues and employment issues and the legal questions that arise with each area. We help clients assure that they are in compliance with IRS and labor laws, and we stand with employers in the event of an audit.