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Employment Blog

IRS Invites More Employers to Settle; Promises Process Will Not Open Pandora's Box

Authored by Ruder Ware Attorneys
Posted on March 6, 2013
Filed under Employment

On February 27, 2013, the IRS announced expanded eligibility for its Voluntary Classification Settlement Program (VCSP). As many employers recognize, the Obama administration has made misclassification of employees (misclassified as independent contractors) a priority enforcement objective. The VCSP is a program that permits employers (taxpayers) to voluntarily reclassify their independent contractors as employees for future tax periods, for employment tax purposes. Employers whose applications into the program are accepted should expect to pay 10 percent of the amount of employment taxes that would have been due on compensation paid to the workers being reclassified for the most recent tax year, calculated under the reduced rates of section 3509(a) of the Internal Revenue Code to some employers, a small price to pay given the exposure. Perhaps more significant, according to the IRS, participating employers will not be liable for any interest and penalties on the payment under the VCSP, and will not be audited for employment tax purposes for prior years with respect to the classification of the employer's workers implicated by the VCSP application.

Until February 27, 2013, an employer that was already being audited by the IRS could not participate in the VCSP now, even if under an IRS audit (other than an employment tax audit) an employer can qualify for the VCSP. An employer that fails to file all required 1099s for the workers the employer seeks to reclassify, for the three-year period preceding the VCSP application, is not eligible for the VCSP. However, until June 30, 2013, this eligibility requirement is waived meaning even more employers are welcome to the party. NOTE: The "SS-8" determination process is NOT an audit even though my clients who have been through this process tell me it certainly feels like an audit (I agree). The SS-8 determination process is when an independent contractor files a request with the IRS to make a determination concerning whether he or she is really an employee for IRS purposes.

It may be hard to believe, but there may be some employers out there that are skeptical of the VCSP, some that may view the voluntary settlement process as opening Pandora's box (you know, the innocent looking box [or jar, depending on who you believe] full of really evil stuff that Zeus gave to Pandora to get back at Prometheus for stealing Zeus' fire (that would make me mad too). An employer may fear that the IRS (or another government agency) may use information it voluntarily discloses against it (the agencies seem to be talking to each other more these days - perhaps the government has a "share everything" plan?). The IRS is aware of these concerns, and offers the following assurances.

Q17: Will the IRS share information about VCSP applicants with the Department of Labor?

A17: No, the IRS will not share information about VCSP applicants with the Department of Labor.

Q18: Will the IRS share information about VCSP applications with state agencies?

A18: No, the IRS will not share information about VCSP applications with state agencies.

Q20: If I apply for the VSCP and my application is rejected, will I open myself up to an audit?

A20: No, rejection of a VSCP application will not automatically trigger initiation of a Federal audit [NOTE an audit is different that the SS-8 determination process]. You could be audited for another reason, but not as a result for filing Form 8952 [the application form].

Employers may have questions or concerns related to participation in the VCSP. I completely understand the IRS carries a bigger thunderbolt than Zeus.