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April 19, 2014

IRS Provides Additional Favorable Guidance on Recently Modified Voluntary Classification Settlement Program

On February 27, 2013, the Internal Revenue Service (IRS) issued News Release IR-2013-23 to provide additional favorable guidance regarding modifications to the Voluntary Classification Settlement Program (VCSP) issued in Announcements 2012-45 and 2012-46 addressing worker classification issues.  The VCSP allows eligible employers to voluntarily reclassify their workers for federal employment tax purposes and obtain considerable “forgiveness” for previous non-employee treatment.  The IRS describes the program as a “low-cost option” for achieving certainty under the law by reclassifying workers as employees for future tax periods.


The Internal Revenue Service (IRS) has provided additional guidance regarding recent modifications to the Voluntary Classification Settlement Program (VCSP) issued in Announcements 2012-45 and 2012-46, published in Internal Revenue Bulletin 2012-51.  The VCSP, originally established in December 2011, allows eligible employers to voluntarily reclassify their workers previously characterized as independent contractors (for whom no employment tax withholding was made) as employees for federal employment tax purposes and obtain relief from the vast majority of the sanctions that would otherwise apply for previous non-employee treatment. 

Click here for a more in-depth discussion of Announcements 2012-45 and 2012-46.

Additional Guidance

News Release IR-2013-23, released on February 27, 2013, provides additional details regarding the VCSP and the VCSP Temporary Eligibility Expansion, as well as links to guidance, including frequently asked questions and Form 8952, Application for Voluntary Classification Settlement Program.  The guidance clarifies how employers can reclassify some or all of their workers and how, once reclassified, all workers in the same class must be treated as employees for employment tax purposes.  The guidance also provides instructions for filing the application using Form 8952 and explains how the VCSP payment is calculated.

Once the VCSP application is submitted, the IRS will review the application and confirm the employer’s eligibility.  The IRS will then contact the employer (or its authorized representative, if an executed Form 2848 is included with the application) to enter into a closing agreement.  The employer is not required to pay the full amount due under the VCSP until the employer returns the signed VCSP closing agreement to the IRS.  An employer that participates in the VCSP agrees to treat the class of workers identified in the application as employees for future tax periods.  In return, employers that properly filed Forms 1099 are only required to pay 10 percent of the employment tax liability that would have been due on compensation paid to the workers being reclassified for the most recent tax year if those workers were classified as employees for such year, as determined under the reduced rates of Code section 3509(a).

Temporary Eligibility Expansion

Those employers that would otherwise qualify for the VCSP, but have not filed all of the required Forms 1099 for the previous three years for the workers to be reclassified, are eligible for the VCSP Temporary Eligibility Expansion.  However, the Temporary Eligibility Expansion is only available through June 30, 2013, and the employer must file the requisite Forms 1099 for past open years.  After the employer submits the Temporary Eligibility Expansion application, the IRS will review the application and confirm eligibility, then contact the employer to enter into a closing agreement.  The employer also is required to pay the full amount due under the Temporary Eligibility Expansion when the employer returns the signed Temporary Eligibility Expansion closing agreement to the IRS, and to agree to treat the class of workers identified in the application as employees for future tax periods.  Employers that apply under the Temporary Eligibility Expansion may obtain similar relief to those under the VCSP, but must instead pay 25 percent of the employment tax liability along with certain other requirements.  In addition, the employer under either program is not liable for interest and penalties on the employment tax liability and is not subject to an employment tax audit with respect to the worker classification for prior years.

The IRS also reassures employers that filling under the program is not an admission of misclassification and that participation in the program will not subject an employer to additional audit scrutiny in the future.

Summary

This latest announcement illustrates that the IRS continues to pave the way for future compliance with respect to the IRS’s preference for workers to be classified as employees rather than independent contractors.  Those employers that have doubts or concerns regarding their current classification of workers should reevaluate their situation in light of this new guidance.

© 2014 McDermott Will & Emery

About the Author

Associate

David Diaz is an associate in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office. His practice includes a variety of employee benefits matters related to pension plans, 401(k) plans, cafeteria and welfare plans.

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About the Author

Partner

Jeffrey M. Holdvogt is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Chicago office. 

Jeffrey focuses on matters related to employee benefits and executive compensation, including pension, profit sharing, 401(k), ESOPs, welfare and nonqualified deferred compensation plans.   Prior to joining McDermott, Jeffrey served as a law clerk for the Honorable Paul H. Anderson and James H. Gilbert of the Minnesota Supreme Court.

While in law school, he was an executive...

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Partner

Ruth Wimer, Esq., CPA, is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  She focuses her practice on matters related to executive compensation including international, fringe benefits, personal use of employer aircraft and qualified and non-qualified deferred compensation.

Ruth has extensive experience advising clients on structuring optimum ownership of business aircraft, factoring in deduction and income inclusion for personal use, excise tax, depreciation, ...

202-756-8614

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