IRS Offers Limited Amnesty Program for Employee Misclassifications; Agency Agreements and President's Deficit Reduction Plan also Focus on Issue

Employers that voluntarily reclassify their independent contractors as employees for federal tax purposes and pay a fee covering a portion of their past payroll obligations can escape certain tax liability for improper misclassification under the IRS’s new Voluntary Classification Settlement Program (VCSP). In a statement announcing the program, IRS Commissioner Doug Shulman said: “This settlement program provides certainty and relief to employers in an important area,” adding: “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

In order to be eligible for the program, the employer must: (a) not currently be under audit by any federal or state agency regarding worker misclassification; (b) have consistently treated the workers as non-employees; and (c) have filed all required Forms 1099 for the workers for the previous three years. An employer that was previously audited by the IRS or the Department of Labor concerning worker classifications will be eligible only if it has complied with the results of that audit.

If accepted into the program, an employer will be responsible for paying 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year. The employer will not be liable for any interest and penalties on the tax liability and will not be subject to an employment tax audit regarding worker classifications for past years. The employer must, however, agree to enter into a closing agreement with the IRS. As part of this agreement, the employer concedes to extend from three to six years the limitations period applicable to the assessment of employment taxes for the first three years under the program.

The tax amnesty provided for the in VCSP applies to federal employment taxes only.

Employers interested in participating in the VCSP can apply by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before the employer wishes to treat the workers as employees.  For more information on the VCSP, see Littler's ASAP: IRS Launches Voluntary Compliance Settlement Program for Misclassified Workers

Other efforts by the federal government and states to address worker misclassification also are underway. Earlier this week, the Department of Labor (DOL) and IRS signed a memorandum of understanding to improve agencies’ coordination on employee misclassification compliance and education. Labor commissioners and other agency leaders representing seven states signed memorandums of understanding with DOL. The signatory states are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington. Secretary of Labor Hilda Solis also announced that the Wage and Hour Division will enter into memorandums of understanding with the state labor agencies of Hawaii, Illinois and Montana, as well as with New York's attorney general. According to the press release, the memorandums of understanding “will enable the U.S. Department of Labor to share information and coordinate law enforcement with the IRS and participating states in order to level the playing field for law-abiding employers and ensure that employees receive the protections to which they are entitled under federal and state law.”

President Obama’s Deficit Reduction Plan (pdf) also includes a proposal regarding worker classification, which is estimated to raise tax revenues of $8 billion over ten years. Specifically, the President’s plan would permit the IRS to issue generally applicable guidance about the proper classification of workers and require prospective reclassification of workers who are currently misclassified.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.