New IRS Program Encourages Worker Classification Settlements

Internal Revenue Service Announcement 2011-64 provides notice and details for an IRS Voluntary Classification Settlement Program (VCSP) under which eligible organizations may receive partial relief from federal employment taxes if they prospectively agree to treat workers as employees. This new, voluntary program is in addition to an existing reclassification program (CSP) that was created for organizations under IRS examination.

 

An organization participating in the VCSP will agree to prospectively treat its workers or a class or group of workers as employees for future tax periods. In exchange, the organization will pay 10% of the employment tax liability that might have been due on compensation paid the workers for the most recent tax year, determined under the reduced rates of Internal Revenue Code (IRC) Section 3509; will not be liable for any interest and penalties on the liability; and will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years. In addition, the organization will agree to extend the statute of limitations on the assessment of employment taxes for three years for the first, second, and third calendar years beginning after the date on which the organization has agreed, under the VCSP closing agreement, to begin treating the workers as employees.

 

The determination of whether a worker is performing services as an employee or as an independent contractor depends upon the facts and circumstances of each particular situation and is, generally, determined under the common law test of whether the service recipient has the right to direct and control the worker as to how to perform the services. In some situations, the determination of the proper worker classification may not be clear. For organizations currently under IRS examination, the CSP (which was already available) is available to resolve federal employment tax issues related to worker misclassification, if certain criteria are met. The voluntary program, the VCSP, permits the prospective reclassification of workers as employees, with reduced federal unemployment tax liabilities for past nonemployee treatment. Organizations and IRS examiners can, under the program, resolve worker classification issues as early in the administrative process as possible, thereby reducing the burden on the organization under examination and providing efficiencies.

 

The IRS feels that it is beneficial to both taxpayers and the IRS to provide taxpayers with a program that allows for voluntary reclassification of workers as employees outside of the context of an IRS examination and without the need to go through normal administrative correction procedures applicable to payroll taxes.

 

The VCSP is available for organizations wanting to voluntarily begin treating their workers or a class or group of workers as employees rather than nonemployees. To be eligible, an organization must:

Eligible organizations wishing to participate in the VCSP must submit an application for the program, which is available at http://www.irs.gov/formspubs/article/0,,id=242970,00.html. Along with the application, the name of a contact or authorized representative with a valid power of attorney (Form 2848) should be provided. The IRS will contact the organization or its representative once it has reviewed the application. The IRS retains discretion about whether to accept the application. If an organization’s application is accepted, the IRS will enter into a closing agreement with the organization to finalize the terms of the VCSP, and the organization must simultaneously make full and complete payment of any amount due under the closing agreement.

For information regarding the VCSP or any worker classification issue, contact Rich Ruvelson or Penny Lecheler.