IRS Reclassification Program: An Article Authored by Loree Dubois, CPA from KLR - Accounting Firm Boston, Massachusetts, Providence, Rhode Island

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IRS Reclassification Program

posted Nov 2, 2011 by Loree Dubois, CPA

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In September 2011 the IRS unveiled a new voluntary disclosure program to allow taxpayers the opportunity to reclassify workers erroneously treated as independent contractors.

The new program known as The Voluntary Classification Settlement Program or VCSP will allow eligible taxpayers to voluntarily reclassify independent contractor workers as employees for future tax periods with a reduction in federal employment taxes including interest and penalties for the past nonemployee treatment.

The VCSP program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. To be eligible, a taxpayer must:

  1. Have consistently treated the workers as nonemployees.
  2. Must have filed all required Forms 1099 for the workers for the previous three years.
  3. The taxpayer cannot currently be under audit by the IRS.
  4. The taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.
  5. A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the workers will only be eligible if the taxpayer has complied with the results of that audit.

Taxpayers who participate in the program will agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the taxpayer:

  1. Will pay 10% of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year.
  2. Will not be liable for any interest or penalties on federal taxes
  3. Will not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified for prior years.

Taxpayers must also agree to extend the statute of limitations on employment taxes for an additional three years beyond the normal statute time.  This allows the IRS time to ensure that the taxpayer is honoring the terms of the agreement.

If you think your company may have misclassified workers as independent contractors this is a rare opportunity and a relatively inexpensive way to remedy the situation; the federal tax due will be 10 cents on the dollar and there will be no interest or penalty which can often nearly double the amount due under audit. If you would like to find out more about the Voluntary Classification Settlement Program or how to determine employee or independent contractor status please contact us