Among other things, the IRS Explained that Voluntary Classification Settlement Program participation won’t trigger a federal audit and that IRS won’t share information about participants with the Department of Labor (DOL) or state agencies.
Background. Earlier this year, IRS launched this new program that allows employers to prospectively reclassify—as employees—those workers that they have erroneously treated as independent contractors or as other nonemployees.
The new program carries generous settlement terms and provides audit relief for previous years. (See our previous blog entry) This program is available to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. It is open to businesses, tax-exempt organizations, and government entities.
To be eligible, a taxpayer:
- Must have consistently treated the workers as nonemployees;
- Must have filed all required Forms 1099 for the workers for the previous three years; and
- Cannot currently be under audit by IRS, or currently under audit concerning the classification of the workers by the DOL or by a state government agency.
- A taxpayer that was previously audited by IRS or DOL about the classification of the workers will only be eligible if it has complied with the results of that audit.
Terms of the offer.
A taxpayer accepted into the program agrees to prospectively treat the class of workers as employees for future tax periods and in exchange:
(A) Pays 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced IRS rates.
(B) Won’t be liable for any interest and penalties on the liability;
(C) Won’t be subject to an employment tax audit for the worker classification of the workers for prior years; and
(D) Agrees to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.
THE IRS HAS RECENTLY CAME OUT WITH THE FOLLOWING CLAFIFYING POINTS ABOUT THE VOLUNTARY PROGRAM:
- IRS’s rejection of a application will not automatically trigger initiation of a Federal audit. The rejected taxpayer could be audited for another reason, but not as a result of filing Form 8952 (Application for Voluntary Classification Settlement Program)
- A taxpayer that signs into the Voluntary Program agreement is not admitting liability or wrongdoing for past periods.
One of the threshold qualifications for the Voluntary Program is filing Forms 1099 for the previous three years for affected workers. IRS says a taxpayer will be eligible for the Voluntary Program if it files the required Forms 1099 within 6 months of their due date (including extensions), assuming the other eligibility requirements are met. Those that haven’t previously filed required Forms 1099 or filed them more than 6 months after their due date (including extensions) are not eligible for the Voluntary Program.
IRS says that it won’t share information about Voluntary Program participants with the Department of Labor or state agencies.
IRS also clarifies that a worker’s filing of Form SS-8 (Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding) isn’t treated as an audit and won’t bar the taxpayer from participating in the Voluntary Program.
The state of MA has been aggressive in audits lately. They have been reclassifying workers who would be called subcontractors in the past.