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The IRS has expanded its Voluntary Classification Settlement Program (“VCSP”) established in September 2011 to allow more businesses to qualify for this low-cost option to resolve instances of questionable qualification of workers as independent contractors instead of as employees. (We discussed the VCSP in this prior alert.) The VCSP allows employers that meet certain criteria to voluntarily reclassify workers from independent contractors to employees and pay only a fraction of their federal employment tax liability for past nonemployee treatment while avoiding penalties, interest payments and audits.

Temporary relief

One of the eligibility requirements for participation in the VCSP is that an employer must have satisfied the IRS Form 1099 reporting requirements for the previous three years for the workers being reclassified. However, until June 30, 2013, the IRS is waiving this eligibility requirement and permitting employers who have not satisfied such IRS Form 1099 reporting requirements, but otherwise meet all other VCSP eligibility requirements, to participate in a modified version of the VCSP – the VCSP Temporary Eligibility Expansion. The benefits of the temporary program are the same as under the VCSP, but participating employers must satisfy certain additional obligations. An employer qualifying under the temporary program must:

  • Pay 25 percent (instead of 10 percent under the VCSP) of the employment tax liability that may have been due on compensation paid to the reclassified workers for the most recent tax year
  • Pay a reduced penalty for unfiled IRS Forms 1099 for the previous three years with respect to the workers being reclassified
  • Furnish to workers and electronically file (per specific IRS instructions) all required IRS Forms 1099 for the previous three years for such reclassified workers prior to executing the VCSP Temporary Eligibility Expansion closing agreement

Applying under the VCSP Temporary Eligibility Expansion

Employers that wish to participate in the VCSP Temporary Eligibility Expansion must submit an application on or before June 30, 2013. Applicants should use IRS Form 8952 to apply, but should write “VCSP Temporary Eligibility Expansion” at the top of the form in order to take advantage of the expanded eligibility of the temporary program. Applicants to the temporary program should put a line through Part V, Line A3 of IRS Form 8952 to indicate that the applicant has not met all IRS Form 1099 requirements for the previous three years for the workers being reclassified. Furthermore, applicants should not complete Part IV, Payment Calculation, of IRS Form 8952. Instead, applicants should complete and attach this worksheet.

Additional modifications to the VCSP

On the same day the IRS announced the VCSP Temporary Eligibility Expansion, the IRS provided the following modifications and clarifications regarding the VCSP, which also apply to the VCSP Temporary Eligibility Expansion:

  • Employers under IRS audit are now eligible to participate in the VCSP, provided the audit is not an employment tax audit
  • Members of an affiliated group are not eligible to participate in the VCSP if any member of such affiliated group is under an employment tax audit
  • A business is not eligible to participate in the VCSP if it is challenging in court the classification of the class(es) of workers from a previous IRS or Department of Labor audit
  • Businesses are no longer required to agree to extend the period of limitations on assessment of employment taxes as a part of the VCSP closing agreement with the IRS

Given that worker classification is a high priority with the IRS and other federal and state agencies, employers should carefully evaluate the benefits of resolving their potential federal employment tax liabilities by participating in this program.

For more information, please contact:

David M. Kall

216.348.5812

dkall@mcdonaldhopkins.com

Susan Millradt McGlone

216.430.2022

smcglone@mcdonaldhopkins.com

Tax Practice

Tax planning needs to be strategic. We consult with businesses at all stages of their development, from the initial choice of entity, through acquisition and other growth transactions, to business succession planning, and dispositions. Our tax advisors also work closely with clients on individual tax planning. Our attorneys provide businesses and individuals with comprehensive counseling in all areas of federal, state and local taxation.

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