IRS Voluntary Classification Settlement Program (VCSP) 2013

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The Internal Revenue Service has expanded its Voluntary Classification Settlement Program (VCSP), paving the way for more taxpayers to take advantage of this low-cost option for achieving certainty under the law by reclassifying their workers as employees for future tax periods.

The IRS is modifying several eligibility requirements, thus making it possible for many more interested employers, especially larger ones, to apply for this program. Thus far, nearly 1,000 employers have applied for the VCSP, which provides partial relief from federal payroll taxes for eligible employers who are treating their workers or a class or group of workers as independent contractors or other nonemployees and now want to treat them as employees. Businesses, tax-exempt organizations and government entities may qualify.

Under the revamped program, employers under IRS audit, other than an employment tax audit, can qualify for the VCSP. Furthermore, employers accepted into the program will no longer be subject to a special six-year statute of limitations, rather than the usual three years that normally applies to payroll taxes. These and other permanent modifications to the program are described in Announcement 2012-45 and in questions and answers, posted on IRS.gov.

Normally, employers are barred from the VCSP if they failed to file required Forms 1099 with respect to workers they are seeking to reclassify for the past three years. However, for the next few months, until June 30, 2013, the IRS is waiving this eligibility requirement. Details on this temporary change are in Announcement 2012-46.

To be eligible for the VCSP, an employer must currently be treating the workers as nonemployees; consistently have treated the workers in the past as nonemployees, including having filed any required Forms 1099; and not currently be under audit on payroll tax issues by the IRS. In addition, the employer cannot currently be under audit by the Department of Labor or a state agency concerning the classification of these workers or contesting the classification of the workers in court.

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will generally pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Employers applying for the temporary relief program available for those who failed to file Forms 1099 will pay a slightly higher amount, plus some penalties, and will need to file any unfiled Forms 1099 for the workers they are seeking to reclassify.

The VCSP is a voluntary program that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements and apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

The VCSP allows eligible taxpayers to obtain relief similar to that currently available through the Classification Settlement Program for taxpayers under examination.

The VCSP, originally released in Announcement 2011-64, has been modified in Announcement 2012-45 to:

  • Permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP
  • Clarify the current eligibility requirement that a taxpayer who is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit
  • Clarify that a taxpayer is not eligible to participate 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
  • Eliminate 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.

Announcement 2012-45 (2012-51 I.R.B. 724) provides notice and information about the revised program.

Eligibility

The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies 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.

A taxpayer must have consistently treated the workers as independent contractors or other nonemployees, and must have filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate. However, see the heading below, “VCSP Temporary Eligibility Expansion,” for a temporary expansion to eligibility for the VCSP.

Additionally, the taxpayer cannot currently be under employment tax audit by the IRS and the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.

If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.

Exempt organizations and government entities may participate in VCSP if they meet all of the eligibility requirements.

VCSP Agreements

A taxpayer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer will:

  • Pay 10 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code. See VCSP FAQ 15, for information on how payment under the VCSP is calculated. Also see Instructions to Form 8952;
  • Not be liable for any interest and penalties on the amount; and
  • Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

Applying for VCSP

To participate in the VCSP, a taxpayer must apply using Form 8952, Application for Voluntary Classification Settlement Program. The application should be filed at least 60 days prior to the date the taxpayer wants to begin treating its workers as employees. The IRS will make every effort to process Form 8952 with sufficient time to allow for the voluntary reclassification on the requested date.

Along with the application, the taxpayer may provide the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848).  However, the taxpayer, and not the taxpayer’s representative, is required to sign Form 8952. The IRS will contact the taxpayer or authorized representative to complete the process after reviewing the application and verifying the taxpayer’s eligibility.

Eligible taxpayers accepted into the VCSP will enter into a closing agreement with the IRS to finalize the terms of the VCSP, and will simultaneously make full and complete payment of any amount due under the closing agreement.

VCSP – Temporary Eligibility Expansion (VCSP TEE)

Announcement 2012-46 (2012-51 I.R.B. 725) provides notice and information regarding a temporary expansion of eligibility for the VCSP that will be available through June 30, 2013. The temporary eligibility expansion makes a modified VCSP available to taxpayers who would otherwise be eligible for the current VCSP, but who have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified.

Like the VCSP, the VCSP TEE permits eligible taxpayers to voluntarily reclassify their workers as employees for federal employment tax purposes and obtain relief similar to that obtained through the current Classification Settlement Program. Payment due under the VCSP TEE is higher than the payment under the VCSP, but the benefits are otherwise the same for taxpayers who participate.

To participate in the VCSP TEE, the taxpayer must meet certain eligibility requirements, apply on or before June 30, 2013, and enter into a closing agreement with the IRS. Taxpayers who would otherwise be eligible for the current VCSP, but have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified are eligible for the VCSP TEE. In addition, once a taxpayer is deemed eligible to participate, they must furnish to the workers and electronically file all required Forms 1099 for the workers being reclassified for the previous three years prior to executing the VCSP TEE closing agreement with the IRS. The IRS will provide instructions on how to electronically file Forms 1099 once it has reviewed the taxpayer’s application and verified that the taxpayer is otherwise eligible.

VCSP TEE Agreements

A taxpayer participating in the VCSP TEE will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer will:

  • Pay 25 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(b) of the Internal Revenue Code;
  • Not be liable for any interest and penalties on the liability;
  • Pay a reduced, graduated penalty for unfiled Forms 1099 for the previous three years for the workers being reclassified (see the worksheet provided with Announcement 2012-46, 2012-51 I.R.B. 725); and
  • Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified for prior years.

The taxpayer must certify as part of the VCSP TEE closing agreement with the IRS that it has furnished to the workers and has electronically filed all required Forms 1099, as instructed by the IRS, for the previous three years.

Applying for VCSP TEE

Eligible taxpayers who want to participate in the VCSP TEE must submit Form 8952, Application for Voluntary Classification Settlement Program (VCSP), on or before June 30, 2013. When applying for the VCSP TEE, applicants must:

  • Write “VCSP Temporary Eligibility Expansion” at the top of Form 8952;
  • Put a line through Part V, Line A3, to indicate that the applicant has not satisfied all Form 1099 requirements for each of the workers for the three preceding calendar years ending before the date of the application; and
  • Not complete Part IV, Payment Calculation. Instead, taxpayers should complete and attach the worksheet provided in Announcement 2012-46 to calculate their payment under the VCSP TEE.

Along with the application, the taxpayer may provide the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848). However, the taxpayer, and not the taxpayer’s representative, is required to sign Form 8952. The IRS will contact the taxpayer or authorized representative to complete the process after reviewing the application and verifying the taxpayer’s eligibility.

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