In Announcements 2012-45 and 2012-46, the IRS has temporarily eased the eligibility requirements for employers to participate in the employment-tax Voluntary Classification Settlement Program ("VCSP") that was begun last year.
Executive Summary: In Announcements 2012-45 and 2012-46, the IRS has temporarily eased the eligibility requirements for employers to participate in the employment-tax Voluntary Classification Settlement Program ("VCSP") that was begun last year. (See our Legal Alert dated 9/27/2011.) Specifically, employers may participate in a slightly modified version of the program (the "Modified VCSP") even if they haven't filed all required Forms 1099, as is required for the VCSP. In addition, the prohibition against participation by taxpayers under audit and the requirement to extend the limitations period for future assessments were both changed for purposes of the Modified VCSP.
In September of 2011, the IRS began the VCSP, under which employers not under examination (i.e., any IRS examination, or a worker-classification examination by the U.S. Department of Labor (DOL) or a state agency) could voluntarily reclassify workers as employees without having to go through normal, sometimes complex, administrative correction procedures generally applicable to employment taxes. The employer's tax liability under the VCSP is also substantially reduced. In order to be able to use this program, the employer must have consistently treated the workers in question as non-employees, including properly filing all required Forms 1099 for the workers for the preceding three years. In addition, if the employer had previously had a worker-classification audit by the IRS or DOL, the employer must be in compliance with all results of that audit.
An employer who participates in the VCSP agrees prospectively to treat the workers in question as employees, and to pay 10% of the employment tax liability that would have been due on the workers' compensation for the most recent tax year, determined using the already-reduced rates of section 3509 of the Internal Revenue Code. The employer will not be liable for any interest or penalties on that tax liability, and will not be subject to an employment tax audit with respect to the classification of the workers for prior years. On the other hand, the employer must agree to extend by three years the period of limitations on assessment of employment taxes for the first three calendar years beginning after the date as of which the workers are treated as employees.
VCSP Temporary Eligibility Expansion
Under the new Announcements, the IRS has provided temporary relief to employers that may not have qualified for the VCSP due to not having filed all required Forms 1099. Until June 30, 2013, an employer that would have been eligible for the VCSP, but for the fact that it has not filed all required Forms 1099 for the previous three years, is eligible for a "modified" VCSP. The Modified VCSP still allows eligible employers to prospectively treat workers as employees in exchange for partial relief from past employment taxes, though the payments required under the Modified VCSP are higher than those required by the original VCSP (i.e., 25% of the otherwise-computed Section 3509 employment tax liability, compared to 10% under the VCSP). The settlement payment under the Modified VCSP also includes a reduced penalty for failure to file prior years' Forms 1099.
Based on taxpayer feedback concerning the VCSP, the IRS did make some other modifications to the terms of the Modified VCSP. In addition to not requiring all past Forms 1099 to have been filed, and increasing the required settlement payment:
- employers who may be under IRS audit (other than an employment tax audit) are eligible to participate in the Modified VCSP;
- an employer that is a member of an affiliated group (within the meaning of Section 1504(a) of the Code) is not eligible to participate if any member of the group is subject to an employment tax audit;
- an employer that challenges, in court, the classification of the workers from a previous IRS or DOL audit may not participate; and
- the employer need not agree to extend the period of limitations on assessment of future employment taxes in order to participate in the Modified VCSP.
In order to participate in the Modified VCSP, employers must submit a modified Form 8952 (Revised 12-2012) (http://www.irs.gov/pub/irs-pdf/f8952.pdf) to the IRS by June 30, 2013. They should write "VCSP Temporary Eligibility Expansion" across the top of the form, cross out Part V, Line A3 (which is a certification that previous years' Forms 1099 have been filed), and omit Part IV, "Payment Calculation," using instead the modified version of Part IV that is provided in Announcement 2012-46.
If you have any questions regarding the new program or employee classification in general, please feel free to contact the author of this Alert, Jeffrey Ashendorf, firstname.lastname@example.org, or any member of FordHarrison's Employee Benefits Practice Group. You may also contact the FordHarrison attorney with whom you usually work.