Voluntary Classification Settlement Program expanded

The IRS significantly modified its Voluntary Classification Settlement Program (VCSP). In Announcement 2012-46, in effect until June 30, 2013, the IRS is temporarily permitting employers who have not filed Forms 1099 for their workers to participate in the program by paying a larger amount of past-due tax than under the normal VCSP (see previous Tax Matters coverage, Dec. 2011, page 59). In Announcement 2012-45, which modifies and supersedes Announcement 2011-64, the IRS said it is liberalizing the program’s rules.

Liberalized VCSP rules. After a year of experience with the program and in response to feedback from taxpayers and their representatives, the IRS made the following changes or clarifications:

• A taxpayer under IRS audit other than an employment tax audit is now eligible to participate. Formerly, employers could not be under audit by the IRS for any issue.
• A taxpayer is no longer required to agree to extend the limitation period on employment tax assessment as part of the VCSP closing agreement with the IRS. Formerly, employers were required to extend the period for three years for each of the three calendar years beginning after the date of the agreement.

The IRS reiterated the previous eligibility requirement that a taxpayer that is a member of an affiliated group under Sec. 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit. The IRS also emphasized that a taxpayer is not eligible to participate in the VCSP if the taxpayer is contesting in court the classification of the class or classes of workers from a previous IRS or U.S. Labor Department audit.

Temporary expansion of VCSP eligibility. In response to requests from taxpayers that requested VCSP relief but did not qualify for the VCSP program because they had not filed Forms 1099 for their workers, the IRS announced a temporary program. To participate, taxpayers must submit applications to the IRS by June 30, 2013. The temporary eligibility expansion is available for taxpayers who want to voluntarily change the classification of workers from independent contractors to prospectively treat the workers as employees.

To be eligible to participate in the temporary expansion, before executing the temporary eligibility closing agreement, the taxpayer must furnish to the workers being reclassified and electronically file with the IRS all required Forms 1099 consistent with nonemployee treatment for the previous three years.

If the IRS approves a taxpayer’s application, the taxpayer will:

• Pay 25% (compared with 10% in the regular VCSP) 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 that year, determined under the reduced rates of Sec. 3509(b); and
• Pay a reduced penalty for unfiled Forms 1099 for the previous three years for the workers being reclassified.

Furthermore, approved taxpayers will not be liable for any interest and penalties on the liability and will not be subject to an employment tax audit for the worker classification of the class or classes of workers for prior years.