The IRS announced a new Voluntary Classification Settlement Program (“VCSP”) on September 21, 2011.  The VCSP provides taxpayers not currently under examination with an opportunity to voluntarily reclassify their workers as employees for future tax periods. The employer will be liable for 10% of the liability due on compensation for the most recent tax year, as determined under the reduced rates of Code Sec. 3509, but will not be liable for penalties and interest and will not be subject to audit for employment tax issues. 

The IRS announced a new Voluntary Classification Settlement Program (“VCSP”) on September 21, 2011.  The VCSP provides taxpayers not currently under examination with an opportunity to voluntarily reclassify their workers as employees for future tax periods. The employer will be liable for 10% of the liability due on compensation for the most recent tax year, as determined under the reduced rates of Code Sec. 3509, but will not be liable for penalties and interest and will not be subject to audit for employment tax issues. 

To be eligible, an applicant must meet the following requirements:

  1. Consistently have treated the workers in the past as nonemployees;
  2. Have filed all required Forms 1099 for the workers for the previous three years;
  3. Not currently be under audit by the IRS; and
  4. Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers.

Employers apply for the program by filing IRS Form 8952 at least 60 days before they want to begin treating the workers as employees.  If accepted into the program, employers 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.  Taxpayers must agree to extend the three-year statute of limitations on assessment of employment taxes for three additional years, for periods beginning in the first, second, and third calendar years after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.

Risk for Employers

On September 19, 2011, two days prior to the IRS’s announcement of the VCSP, the IRS and U.S. Department of Labor entered into a Memorandum of Understanding regarding an information-sharing arrangement, in order to coordinate enforcement of worker classification.  It is important for taxpayers to note that while the VCSP offers tax liability benefits, the lack of an amnesty program for the non-tax liabilities related to reclassifying workers may lessen its attractiveness.  In other words, the employer may be retroactively liable for any fees or penalties associated with such things as employee benefit plans, worker’s compensation or unemployment insurance or violations of overtime requirements.