January 1, 2012
Voluntary Classification Settlement Program (VCSP)
By Kristin Jones, Tax Senior
The IRS recently launched a Voluntary Classification Settlement Program (VCSP) that offers relief to businesses which in the past may have misclassified workers as independent contractors rather than employees. Under the program, eligible employers will be granted the opportunity to get into compliance by making a required minimal payment, which would cover past payroll tax obligations. Eligible taxpayers would be offered relief from additional taxes, penalties and interest stemming from the misclassification. The IRS retains discretion over whether to accept an employer into the program.
The program was designed to increase tax compliance by reclassifying workers, and is available to many businesses, tax-exempt organization and government agencies.
To be eligible, an applicant must:
- Have consistently treated workers in the past as nonemployees
- Have filed all required 1099 Forms for the workers in the previous three years
- Not currently be under audit by the IRS
- Not currently be under audit by the Department of Labor or another state agency regarding the misclassification of the employees
An employer previously audited by the IRS or DOL concerning worker classification is eligible for this program if it has complied with the results of such an audit. Interested applicants can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement, at least 60 days before they want to begin treating the workers as employees.
Employers in the program will generally pay an amount equal to just over 1% of the wages paid to reclassified workers for the most recent tax year and will eliminate the potential audit exposure for all prior years. No interest or penalties will be due. Participating employees will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.
Under the Program, an employer does not have to reclassify all of its workers who are currently treated as nonemployees. However, once an employer chooses to reclassify certain of its workers as employees, all workers in the same class – i.e., workers who perform the same or similar services – must be reclassified as employees. Employers that participate must sign a closing agreement with the IRS extending the statute of limitations from three years to six years for the first three calendar years beginning after the agreement is signed. The agreement also requires the taxpayer to treat the same class of workers as employees in the future.
It should be noted that this program only applies to employment taxes and does not address the impact of the reclassification of workers on the employer's retirement plans and welfare plans (medical, dental, life, etc.). At this time, there does not appear to be any special relief for retirement and other benefit plans, so employers need to review the impact of any filing under the program on the benefit plans they offer.