IRS temporarily expands tax relief program for businesses with misclassified workers

| December 21, 2012 | Law Alerts/Updates

Gift-from-IRSBased on the responses we’ve received to McAfee & Taft’s recent webinar and follow-up post on worker misclassification, the issue appears to be front of mind for many businesses. Just how hot a topic is this? The IRS is weighing in—again—with favorable news for businesses looking to correct their mistakes proactively.

Call it an early holiday gift. Call it an instance of the government being responsive to the concerns of businesses with misclassified workers who just want to make things right and avoid stiffer penalties down the road.

Either way, just this week the Internal Revenue Service announced it is temporarily expanding its eligibility requirements to allow more businesses to take advantage of its Voluntary Classification Settlement Program.

Originally introduced in September 2011, the VCSP allows businesses that meet certain eligibility requirements to voluntarily reclassify their workers. In exchange for agreeing to prospectively treat the workers as employees for future tax periods, the businesses is provided tax relief in the form of reduced employment tax liability for past worker misclassification, plus the added benefit of no assessment of interest and penalties on the liability. Furthermore, the businesses would not be subject to an employment tax audit with respect to worker misclassification for prior years.

To be eligible for such tax relief, though, one of the key requirements of the current program is that the business must have filed Form 1099s for the past three years for all workers it incorrectly identified as independent contractors.

Under the temporary eligibility expansion, which is available through June 30, 2013, businesses that would otherwise be eligible for the current VCSP but have not filed Forms 1099 for three years are now eligible. Like the original VCSP, the VCSP Temporary Eligibility Expansion program allows businesses to voluntarily reclassify their workers and obtain similar, though a bit less generous, relief. The original VCSP reduced the assessment on employment tax liability for the past year to 10 percent; under the VCSP Temporary Eligibility Expansion program, the assessed amount is 25 percent.

Businesses wishing to take advantage of this modified program must submit an application to the IRS using Form 8952 (Application for Voluntary Classification Settlement Program) on or before June 30, 2013, and write “VCSP Temporary Eligibility Expansion” at the top. Upon approval, businesses must then furnish their misclassified workers with the required Forms 1099 for the previous three years and file them electronically with the IRS prior to the closing agreement being finalized.

More information, along with the VCSP application, can be found at www.irs.gov.

Also this week, the IRS published a bulletin clarifying several eligibility requirements of the VCSP based on feedback it has received from taxpayers. IRS Announcement 2012-45 modifies the VCSP as follows:

  • Permits businesses under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP
  • Clarifies that any business that is a member of an “affiliated group” is not eligible to participate if any other member of that group is under an employment tax audit.
  • Clarifies that any business that is contesting in court the results of a previous worker misclassification audit by the IRS or U.S. Department of Labor is not eligible to participate.
  • Eliminates the requirement that the businesses agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

Resolving worker misclassification issues remains a priority for governmental agencies and many businesses alike, and we’ll continue to keep you posted as new developments arise.


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Keith Peters

About the author

Keith Peters is a tax attorney with the McAfee & Taft law firm. His practice is focused on general tax planning for corporations, partnerships, and individuals; structuring business transactions; estate planning; and federal and state tax disputes. He has successfully represented clients before the IRS, the Oklahoma Tax Commission, the U.S. Tax Court, and in other federal and state courts.

Keith is an author and speaker on various tax topics. He has authored articles in the Oklahoma Bar Journal, CPAFocus and The Daily Oklahoman; presented a continuing education seminar sponsored by the Oklahoma Bar Association; and spoken to groups of physicians regarding asset protection.

Keith’s achievements have earned him inclusion in Oklahoma Super Lawyers’ list of “Oklahoma Rising Stars”, which recognizes the state’s top up-and-coming attorneys. In 2010, Oklahoma Magazine included Keith in the publication’s list of outstanding emerging professionals in the state.
Prior to entering Harvard Law School, Keith was awarded the Gold Medal by the Oklahoma Society of Certified Public Accountants for earning the highest CPA exam score in Oklahoma.