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.
The IRS has temporarily modified this program to expand the group of employers that can benefit from this program. However, this expanded eligibility is only available until June 30, 2013. So employers need to act fast. Here are some of the details and clarifications of this expanded program under IRS Announcement 2012-46:
- Temporary Expanded Eligibility For Not Filing Form 1099s for the last three (3) years: To qualify under this provision the employer must:
- Furnish all workers being reclassified all required Form 1099s for the last three years.
- Electronically file with the IRS all required Form 1099s for the last three years.
- Pay 25% (not the 10% penalty under the normal VCSP program) of the employment taxes due on compensation paid to the reclassified workers for the most recent tax year as if classified as employees as calculated under the reduced rates under Section 3509(b). Generally, this amounts to anywhere between 1 to 3 % of the payroll involved. For more on this please read Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean
- Pay a reduced penalty for Form 1099s not filed for the previous three years.
- File all required IRS forms.
- Enter into a closing agreement.
- Employers who enter the program successfully will:
- Not be liable for any interest and penalties on the liability,
- Not be subject to an employment tax audit for worker classification issues for earlier years, and
- Not have 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 not required under the temporary program.
Here are some 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:
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.