Caraker Law Firm Blog

Voluntary Classification Settlement Program Expansion and Temporary Changes

Posted by Chad Caraker on Wed, Jan 02, 2013 @ 10:20 PM

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The Internal Revenue Service has recently issued guidance expanding eligibility for taxpayers to qualify for the Voluntary Classification Settlement Program (VCSP). In addition to the expanded qualification guidelines, the IRS is temporarily removing a key requirement for acceptance into the program that could provide many employers with a valuable opportunity to reclassify its workers with very limited federal employment tax liability for prior nonemployee treatment. The temporary relief is associated with taxpayers who have failed to properly issue 1099’s to their workers.

The VCSP has been critical given the aggressive nature of worker reclassification at the state level. Many states are seeking to close the gap on unemployment benefit contributions paid by employers versus unemployment benefit payments paid to workers. As the states have had to borrow from the federal government, they have many times incurred additional costs and interest to do so. Several states have increased program activity associated with the recharacterization of 1099 workers to employees. Of course, the contributions to the state unemployment office for re-characterization may not be terribly burdensome, but recharacterization by the IRS becomes much more likely after a state audit and paying inappropriately withheld income taxes, Social Security and Medicare taxes, may very well be too burdensome for the average small business.

The objective of the IRS as set forth in Announcement 2012-45 is to “facilitate voluntary resolution of worker classification issues and achieve the benefits of increased tax compliance and certainty for taxpayers, workers and the government.” In order to expand the program, the IRS has modified it by adjusting the following items:

1) The IRS will now permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate;

2) Clarified guidance that a member of an affiliated group is not eligible to participate in the program if any member of the affiliated group is under an employment tax audit by the IRS;

3) Clarified that a taxpayer is not eligible to participate in the VCSP if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or Department of Labor; and

4) Eliminated the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

IRS Announcement 2012-46 temporarily expands eligibility for the program until June 30, 2013. One of the requirements of the existing program is that all 1099s were to have been properly filed for the previous three years with respect to the workers to be reclassified. Many times, this prohibited the taxpayer from qualifying for the program. As such, the IRS will temporarily eliminate this requirement and allow taxpayers who have not complied with 1099 filing requirements to qualify for the program.

If the taxpayer qualifies but is not compliant with 1099 requirements, the taxpayer will pay a greatly reduced employment tax liability for reclassified workers based on the prior year’s compensation. Additionally, the taxpayer will pay a reduced penalty for unfiled Forms 1099 for the prior three years with respect to the workers being reclassified. There will not be any interest or penalties otherwise calculated.

The potential savings from this program along with the certainty it provides are well worth the effort to explore whether or not the taxpayer qualifies. If you require any assistance with a review or submission of an application for the VCSP please do not hesitate to contact our office.

Tags: employment taxes, Voluntary Classification Settlement Program

Understanding the Voluntary Classification Settlement Program

Posted by Chad Caraker on Mon, Aug 20, 2012 @ 02:58 PM

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Has your business recently undergone an examination by the state unemployment office?  Did that examination result in independent contractors being recharacterized as wage earners?  If so, you likely are facing a new tax debt for unpaid unemployment contributions with the state agency.  Many businesses are finding themselves in this situation.  However, the problem does not end there.  The recharacterization will be shared with the federal government, and the IRS will also assess a new debt for unpaid Social Security, Medicare, and income taxes for these employees.  
If your business has concerns about the status of independent contractors, there is an opportunity to be proactive and avoid the problems of federal reclassification by examination. Additionally, you can dramatically reduce the overall debt owed to the federal government.  The Voluntary Classification Settlement Program (VCSP) was created by the IRS to resolve worker classification issues and provide certainty to taxpayers.
The basic concept of the program is simple:  if a business is willing to voluntarily reclassify independent contractors as employees, then the IRS will allow the business to pay a greatly reduced amount for  any unpaid Social Security, Medicare, and income taxes for previous periods.  The important point is that the business will be required to pay all Social Security, Medicare and income taxes for all future periods after the reclassification has been completed.
When a business applies to the VCSP, the IRS will calculate a fee equal to approximately 1% of the amount paid to reclassified workers in the last calendar year.  No further assessment will take place by the IRS if accepted into the program and the employer begins treating the reclassified workers as W-2 employees.
This program has very specific criteria. However, the program is broadly available to businesses, not for profit entities, and governmental entities. In order to be accepted in the program, the taxpayer must meet the following criteria: 

  1. The taxpayer must want to voluntarily reclassify certain workers as employees for federal income tax withholding, Federal Insurance Contributions Act (FICA), and Federal Unemployment Taxes for future periods;
  2. The employer must be treating the workers as non-employees;
  3. The employer must have satisfied any 1099 requirements for each of the workers for the 3 years preceding the calendar year ending before the date the request for reclassification is submitted. If the worker didn't work for the employer for the entire three year period, this requirement is met if the Form 1099 has been issued to the worker for the time period he or she did work for the employer;
  4. The employer must have consistly treated the worker as a non-employee. In other words, a business cannot reclassify a worker who is on a 1099 if that worker was provided a W-2 in a prior year;
  5. The employer must have no dispute with the Internal Revenue Service as to whether the workers are non-employees for federal employment tax purposes;
  6. The employer cannot be currently under examination by the IRS;
  7. The employer must not be under examination by the Department of Labor or any state agency for the proper classification of the worker. This is key a point—if the issue was brought to the taxpayer's attention by a state unemployment agency, the taxpayer will want to apply for this program after the conclusion of the state examination, but before receiving a notice from the IRS that the taxpayer is subject to a federal audit!
  8. The taxpayer must not have been previously examined by the IRS or the Department of Labor for the classification of worker, or if the taxpayer has been examined previously by either entity, then the taxpayer must have complied with the results of the prior examination.

 Finally, there is a provision of the agreement that extends the statute of limitations for assessment of employment taxes for three years for the first, second, and third calendar years beginning after the date the taxpayer elects to begin treating the workers as employees under the program.
 The good news is that there is a high level of certainty upon completing this program. Once the proper form is submitted to the IRS, the IRS will review the request and if accepted, enter into a closing agreement with the taxpayer.
 To put the importance of this program into perspective, if an employer requested reclassification of workers previously reported on Forms 1099 that totaled $200,000 in the prior calendar year, and the IRS accepted the employer into the program, the employer would pay a fee of approximately $2,000 to address the periods of questionable classification. Absent this program, the employer would pay $26,600 in delinquent Medicare and Social Security taxes alone! This amount would also be increased by unpaid employee income taxes, penalties, and interest.
 The Voluntary Classification Settlement Program is part of the IRS Fresh Start program and a wonderful window to avoid burdensome delinquent taxes, penalties, and interest. If you have questions about the VCSP, please feel free to contact our office to learn more.

 

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Tags: employment taxes, Voluntary Classification Settlement Program, unemployment taxes