Category Archives: Tax Amnesty

Risky Business: Playing Fast and Loose with Worker Classification

Risky Business 1920 Silent Film With Gladys Walton

Risky Business 1920 Silent Film With Gladys Walton

In light of the IRS’s fairly recent Voluntary Worker Classification Settlement Program (VCSP) issued in 2012, employers need to consider the benefits and risks of their current classification of employees as independent contractors. This window of opportunity is only available before the IRS or Department of Labor initiates an examination.

Small companies and businesses of many sizes have classified their workers as independent contractors and not employees to gain the following illegal advantages and savings:

  • Avoid paying payroll taxes including Social Security, Medicare, Unemployment, and Federal tax withholding.
  • Avoid having to pay for medical insurance.
  • Avoid making payments of contributions into employer retirement plans.
  • Obtaining services at a fixed rate, no matter what the time required to complete the assignment.
  • Reducing employee record keeping, clerical and other administrative cost savings.

These tempting advantages have created a tremendous incentive for employers to classify workers as independent contractors when they are truly employees.  The IRS has warned that it is stepping up its policing of this area.  Here are some of the costs and penalties employers face if caught by the IRS:

  • Payroll tax liability, plus significant penalties and interest.
  • Various civil and criminal sanctions brought by the IRS, including fines and imprisonment.
  • Retirement plan disqualification or remediation and penalties.  If these workers were wrongly excluded from coverage under any and all retirement plans, such plans would not meet certain plan qualification tests and could be disqualified.  In the alternative,  the employer would have to go through an IRS plan remediation application and pay various penalties and costs to salvage the plan. For more details on plan remediation see Failing To Update Retirement Plans: Avoid Plan Disqualification & Penalties By Using the VCP Program
  • Personal liability for corporate officers of up to 100% of the amount the employer should have withheld from the employee’s compensation in payroll taxes.  Section 6672 imposes personal liability on officers, shareholders and board of directors as “responsible persons.”  For more details read Personal Liability For Corporate Employment Taxes.
  • Legal fees, the lost time spent litigating this matter and the related out-of-pocket costs of litigation.  In these cases, payments to accountants and other experts are necessary for the attorney to prepare for the case and for such experts to appear in court. Even if the case avoids full-blown litigation, legal fees and out-of-court settlement fees will result.

A battle with the IRS is only part of the employer’s problem.  Additionally, a disgruntled or vengeful worker can make real trouble for the employer by making the following claims against the employer:

  • Medical coverage:  If the employer had medical plans for its other employees, these excluded workers may make claims for lack of coverage.
  • Retirement Benefits:  For all the years in which they were erroneously treated as independent contractors, such workers may demand to have contributions made to the employer’s profit-sharing, 401(k), pension or other retirement plan.  This could be a very large liability if the claim involves multiple employees over multiple years.
  • Other Fringe Benefits: In addition to retirement plans, workers may demand stock options, disability payments, workers’ compensation and any other fringe benefits being offered by the employer to its other employees.
  • Overtime Pay:  These workers would be entitled to overtime pay under the Fair Labor Standards Act if the hours he or she provided to the employer in the past exceeded the standard workweek.
  • Unemployment claims.  For those workers erroneously treated as independent, they may assert a claim to collect unemployment for past employment.
  • Lawsuits:  Lawsuits brought against the worker may trigger legal action against the employer to hold the employer legally responsible.

Where the worker seeks reclassification and complains to the authorities, the IRS or the Department of Labor may then get involved by auditing the employer  on how it classifies all of its independent contractors. A full-blown audit could result in economic disaster or ruin for an employer.

Bottom Line:  Any employer playing fast and loose in this area needs to look at their employment practices very carefully.  For determining whether a worker is truly independent please read my article Employee or Independent Contractor?  Finally, see Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean for the details and qualification requirements for coming within the IRS’s Voluntary Worker Classification Settlement Program (VCSP).

The key here is to get with your tax attorney to review your situation and take advantage of the VCSP before the IRS comes knocking on your door.


Quiet Disclosures of Offshore Foreign Accounts

Quiet Disclosures: Telling the IRS Quietly May Not Be A Good Idea

Quiet Disclosures: Telling the IRS Quietly May Not Be A Good Idea

Taxpayers with foreign accounts are in a tight spot now.  They can take advantage of the current voluntary disclosure program  (as discussed Foreign Offshore Accounts: IRS Third Amnesty Program) to minimize their tax exposure and to resolve these looming and unresolved problems.  However this disclosure program brings IRS scrutiny and potential civil penalties, and in the most serious situations criminal penalties. In light of these exposures, some taxpayers with interests in foreign assets have tried to sidestep these issues by employing a strategy called a “quiet disclosure.”

The quiet disclosure is implemented by simply amending a previously filed tax return to show the foreign accounts, report the income associated with the account and paying the tax with the amended return.  The problem with this strategy is that the IRS has made clear that this strategy is not acceptable.  The IRS clearly states in its Questions and Answers of May 6, 2009 that quiet disclosures do not satisfy reporting requirements.  On June 1, 2011, IRS announced that it would be opening up examinations against such taxpayers who have employed this strategy.  They have made clear from Q&A #10 of 2009 and Q&A #15 of 2011 of their disclosure programs that such taxpayers who have made quiet disclosures would be best served to come forward to take advantage of the penalty framework of the voluntary disclosure programs.

Be aware that the civil and criminal penalties for foreign bank accounting reporting (hereinafter referred to as FBAR) violations are in most cases based on the intent of  the taxpayer.   (For more on these reporting requirements see Foreign Bank Account Reporting.) Where a taxpayer is aware of the FBAR requirements and the disclosure programs but knowingly attempts a quiet disclosure, the IRS may argue and a judge or jury may decide that this strategy is indicative of negligent, reckless, or perhaps willful conduct.

Equally important to note is that quiet disclosures may be  lacking in other ways.  Although amended returns (quiet disclosures) report income, taxes, and related interest, they do not show accuracy related penalties.  More importantly the amended return may not show the information required by the FBAR form (Form TD F 90-22.1) .

For taxpayers with foreign accounts they need to seek tax counsel to decide the proper course of action in this messy area.  But it would seem that using the quiet disclosure strategy would only compound the problem.  To take advantage of the IRS current amnesty program and to see the operative rules please read Foreign Offshore Accounts: IRS Third Amnesty Program.

Tax Practitioner Warning:  For those accountants subject to SSTS No.1, Tax Return Positions the following sobering warning should be kept in mind:  Tax advisors should “not take a questionable position based on the probabilities that the client’s return will not be chosen by the IRS for audit.”  Additionally, the various criminal and civil penalties under the Internal Revenue Code for tax practitioners should be taken very seriously in this context.  In light of these exposures, practitioners should take pause before  recommending a quiet disclosure.

Employers Playing Tax Games with Worker Classification: Part II: Employee or Independent Contractor?

Our previous post discussed the IRS new Voluntary Worker Classification Settlement Program (VCSP) offering past payroll tax relief when the employer agrees to reclassify workers as employees.  For the details and discussion of this VCSP program please see our just published article at my website at the following link:  Many have inquired as to what distinguishes an employee from an independent contractor.  For a discussion of this issue and the IRS and case law criteria involved please see our article entitled Employee or Independent Contractor? at  Both of these articles can be seen at our website  (

New Tax Alert: Employers Playing Tax Games with Workers: IRS Offers Way to Come Clean

The IRS has just introduced a new Voluntary Worker Classification Settlement Program offering past payroll tax relief when the employer agrees to reclassify workers as employees.  For the details and discussion of this VCSP program please see my just published article at my website at the following link: at my website (

Hidden Offshore Bank Accounts: IRS Offers A Second Chance To Come Forward

The Internal Revenue Service announced on February 8, 2011 a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes.  Here are some of the basic provisions of this program.

1. Deadline To Come Forward: August 31, 2011

This second new voluntary disclosure initiative will be available to taxpayers through Aug. 31, 2011.

2. 2011 Offshore Voluntary Disclosure Initiative Makes Raises Penalty Charges and Makes Other Changes to the 2009 OVDP

The new IRS program is called the 2011 Offshore Voluntary Disclosure Initiative (OVDI). It includes several changes from the 2009 Offshore Voluntary Disclosure Program (OVDP). The overall penalty structure for 2011 is higher, meaning that people who did not come in through the 2009 voluntary disclosure program will not be rewarded for waiting.

3. New Penalty Framework

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign bank accounts in the year with the highest aggregate account balance covering the 2003 to 2010 time period. Some taxpayers will be eligible for 12.5 or 5 percent penalties instead of the 25% penalty. Please see the discussion below for such exceptions.

4. Back Taxes Must Be Paid

Participants also must pay back-taxes and interest for up to eight years.

5. Additional and Usual Penalties Imposed

Taxpayers must pay accuracy-related penalties. No reasonable cause arguments can be made to avoid the such penalties. The IRS will also assert failure to file and failure to pay penalties.

6. Returns To Be Filed By August 31 Deadline

Taxpayers participating in the new initiative must file all original and amended tax returns and include payment for taxes, interest and accuracy-related penalties by the Aug. 31 deadline.

7. Special 12.5% Category Instead of 25% Penalty

The IRS also created a new penalty category of 12.5 percent for treating smaller offshore accounts. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the 2011 initiative will qualify for this lower rate.

8. Special 5% Category Instead of the 25% Penalty

If a taxpayer meets all four of the following conditions, then the offshore penalty is reduced to 5%:

 (A) did not open or cause the account to be opened (unless the bank required that a new account be opened, rather than allowing a change in ownership of an existing account, upon the death of the owner of the account);

(B) has exercised minimal, infrequent contact with the account, for example, to request the account balance, or update accountholder information such as a change in address, contact person, or email address;

(C) has, except for a withdrawal closing the account and transferring the funds to an account in the United States, not withdrawn more than $1,000 from the account in any year covered by the voluntary disclosure; and

(D) can establish that all applicable U.S. taxes have been paid on funds deposited to the account (only account earnings have escaped U.S. taxation).

9. Special 5% Category for Foreign Resident

If a taxpayer is a foreign resident who was unaware that he or she was a U.S. citizen, then the offshore penalty is reduced to 5%.

10. Benefits of 2011 Initiative: Avoid Higher Penalties and Possible Criminal Prosecution

The 2011 initiative offers clear benefits to encourage taxpayers to come in now rather than risk IRS detection. Taxpayers hiding assets offshore who do not come forward will face far higher penalty scenarios as well as the possibility of criminal prosecution.

Copyright © 2011, Steven J. Fromm.  All rights reserved. No part of this article may be reproduced or used in any form or fashion without the written permission of Steven J. Fromm.