Playing Games With Employees: IRS May Come Knocking

IRS Wants to Know: Are You Playing Games with Your Employees?

IRS Wants to Know: Are You Playing Games with Your Employees?

The Treasury Inspector General of For Tax Administration recently issued a report entitled Employers Do Not Always Follow Internal Revenue Service Determination Rulings that indicated the employers just do not get it when it comes to treating workers correctly for tax purposes.  This report sheds more light on non-compliance and will result in more audits of small businesses who have miss-classified workers as independent contractors.  So employers beware!

Employers illegally treating employees as independent contractors can come clean through a program called the Voluntary Classification Settlement Program (VCSP).  To explore in more detail the merits of this VCSP program and how it works, readers should look at Risky Business: Playing Fast and Loose with Worker Classification.  Basically, this program allows employers to voluntarily correct erroneously classified workers from independent contractors to employees in exchange for paying less taxes and penalties than if audited by the IRS.  Recently, the IRS provided some needed clarifications of this standard VCSP program under IRS Announcement 2012-46:

  • An employer can now be eligible for this program even if being audited by the IRS, except for a payroll tax audit.
  • An employer that is part of an affiliated group can not use the VCSP program where an employment tax audit involves one of its group members.
  • An employer that is in court contesting classification of workers from a previous audit by the IRS or Department of Labor is not eligible for the VCSP program.
  • An employer no longer has to agree to extend the limitation period on employment tax assessments as part of the closing agreement.  Under the original VCSP program, employers had to extend the statute of limitation for three years for the three taxable years after the date of the closing agreement.  This is no longer required under the standard VCSP program.

Additional Information and Insights:

For those interested in gaining greater insight into this problem and a lot more, please give a listen to my guest appearance on Money For Lunch.  We discuss not only the VCSP program but also explore the allowable “piercing of the corporate veil” by the IRS to impose individual personal tax liability on shareholders and officers for corporate tax obligations under Section 6672 of the Internal Revenue Code.  We also discuss related criminal tax implications.  So please click on the triangle to hear our discussion:

Money for Lunch

Bottom Line:

Employers should objectively and carefully review their employment policies.  If they are playing fast and loose with their classification of employees it could blow up in their face down the road.  The voluntary payments under this special program could be far less than the cost of an IRS employment tax audit for all open years resulting in the required payment of back taxes, interest and penalties.  With the IRS audit presence in this area, this may end up being a costly and in some cases a fatal gamble for a business and its shareholders or owners.  The sure thing is to use the current or the temporary VCSP to clean up a looming and expensive tax problem.

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18 responses to “Playing Games With Employees: IRS May Come Knocking

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  7. It doesn’t matter whether the employer is acting legally or not. The IRS has been pretty heavy-handed in forcing people to treat contractors as employees for a long time.

    Some years ago, my then boss got a visit from an IRS guy who told him the IRS guy wanted my boss to pay the feds $1,500 to help him meet his quota. My boss said he was completely OK. “I know that, but it will cost you $15,000 in accounting fees and lawyer’s fees to prove that. You can save 95% of that by settling with me.”

    That’s extortion, pure and simple. It’s interesting that they’re still at it.

    It isn’t just the IRS, the eco bureaucracies are at it too:

    http://www.scragged.com/articles/blackmail-by-bureaucrat

    Didn’t we fight the British because they multiplied officials who ate our substance? What’s the difference?

    • You raise some great points here and these situations do occur, no doubt. I will tell you that these special programs are highly regulated and they are not being conducted by field agents. So the chance of extortion under these special programs are remote. Having said that, after the recent tax exempt program debacle, I suppose anything is possible. So your skepticism is well taken. Thanks for stopping by and offering such an appropriate story and warning.

  8. I’m no professional in this subject matter, but I do know what I like to read. This is excellent content with well laid out viewpoints.

  9. Valuable information here. Thanks for sharing. I will share as well.

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