IRS Modifies and Temporarily Expands Worker Voluntary Classification Settlement Program

The IRS announced an important settlement program, the Voluntary Classification Settlement Program or VCSP, on September 21, 2011.  Under VCSP, qualifying employers who misclassified workers as independent contractors were able to come forward and enter into a settlement with the IRS on favorable terms.  Details of the settlement program were provided in IRS Announcement 2011-64 and are discussed in a prior blog concerning the initial announcement.

The IRS has now made important modifications to VCSP in Announcements 2012-45 and 2012-46 which relax the requirements that must be met in order to participate in the program and eliminate a requirement to agree to extend the period of limitations on assessment as a condition of participation in VCSP.

Under VCSP, taxpayers generally must have filed all Forms 1099 to be eligible to participate.  The IRS has temporarily expanded VCSP eligibility to include taxpayers who have not filed all required Forms 1099.  The temporary expansion is only available, however, until June 30, 2013.  A taxpayer who participates in the VCSP Temporary Eligibility Expansion agrees to prospectively treat the class or classes of workers identified in the application as employees for future tax periods.  In exchange, the taxpayer pays 25 percent of the employment tax liability that would have been due on compensation paid to the workers being reclassified for the most recent tax year if those workers were classified as employees for such year (taxpayers who have filed all Forms 1099 pay 10 percent of the employment tax liability instead of 25 percent).  In addition, a graduated penalty is imposed for the failure to file required Form 1099.

The IRS has also relaxed the eligibility requirements for taxpayers under audit.  Prior to modification, taxpayers were ineligible for VCSP if they were under audit for any type of tax.  As modified, taxpayer will only be ineligible for VCSP if they are under an employment tax audit.

Taxpayer Impact

Taxpayers who have not filed all Forms 1099 have a brief window of opportunity to participate in VCSP.  Participation will resolve not only worker misclassification issues, but also the failure to file required Forms 1099, all on favorable terms.  Reclassifying workers is not to be done lightly, however, as state workers compensation, state unemployment, and state employment tax laws may also be implicated when workers are reclassified under VCSP.

Taxpayers who desired to participate in VCSP but who were under an audit other than an employment tax audit may now participate in VCSP.  As the risk of an employment tax audit is ever present, particularly when the IRS is already on the scene, taxpayers should move quickly if they desire to participate in VCSP.

The elimination of the requirement to extend the period of limitations on assessment in order to participate in the program is a favorable modification of VCSP.  This welcome relief will help to bring finality to prior tax periods while still allowing settlement on favorable terms.

About the Author

Jeffrey T. Allen
Jeff focuses his practice on business and tax matters. He provides advice to clients on a variety of transactional matters and represents clients in tax controversy matters before the South Carolina Department of Revenue (DOR), Internal Revenue Service (IRS), South Carolina Administrative Law Court, United States Tax Court and United States District Court.