10.13.2011

IRS Offers Amnesty for Employers who Voluntarily Reclassify Workers

It’s no secret that the United States Federal Government has devoted significant resources to combat worker misclassification (i.e., classifying workers as independent contractors when they are really employees). Last year, Roetzel & Andress highlighted developments in this area. (See Employment Services Newsletter, June 2010, available at: http://www.ralaw.com/event.cfm?sp=publication&id=308.) On September 21, 2011, the IRS announced a program that permits employers to reclassify workers without penalty. In effect, an employer may reclassify independent contractors as employees without the fear of being held liable for significant back taxes and penalties. The program is called the Voluntary Classification Settlement Program (VCSP). Importantly, employers who take advantage of the program will not be subject to audits related to worker classification for their past actions. To be eligible for the program, an employer must:
  1. Have consistently treated their workers as nonemployees;
  2. Have filed all required Forms 1099 for the workers to be reclassified for the previous three (3) years; and
  3. Not currently be under an IRS, Department of Labor or state agency audit related to worker classification.
Although the usual statute of limitations period is three years, it is important to note that employers must agree to a six-year statute of limitations during their first three years in the program. Additionally, an employer must make a minimal payment of 10% of the employment tax liability due on compensation paid to the reclassified workers in the past tax year. No interest or penalties will be due.
Employers can take advantage of the VCSP by completing Form 8952 (available here: http://www.irs.gov/formspubs/article/0,,id=242970,00.html) at least 60 days prior to treating the workers as employees. Employers must then enter into an agreement with the IRS to finalize the terms of any payment due.
On its face, the VCSP provides employers the opportunity to avoid significant tax liability for misclassifying workers. Appearances may be deceiving, however, as the IRS previously entered into a Memorandum of Understanding with the Department of Labor to share information related to worker misclassification. While the goal of the VCSP is to obtain voluntary compliance and encourage employers to properly classify their workforce, these goals will not be achieved if the IRS shares information with the Department of Labor. The practical effect would be that an employer enters into the VCSP and discloses that it improperly classified workers as independent contractors. The IRS then provides this information to the Department of Labor which institutes an enforcement action to recover overtime wages due to these workers. Unfortunately, the IRS has not stated whether it will share information obtained from the VCSP with the Department of Labor. Presumably, the IRS will provide employers with assurances that it will not share information submitted in the contact of the VCSP, but for now that issue is not clear. Accordingly, employers should consider all the ramifications of entering into the VCSP and be cognizant that entering into the VCSP does not make employers immune from local taxing authorities.


Contact: Jon Secrest
614.723.2029

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