Modifications and Temporary Relief Granted under the Voluntary Worker Classification Settlement Program

The Internal Revenue Service recently announced modifications to its Voluntary Worker Classification Settlement Program (VCSP). The program, originally implemented in September of 2011, grants relief for certain taxes, penalties and interest of eligible employers who voluntarily reclassify workers as employees.

Under the original program, eligible employers would agree to consistently treat reclassified workers as employees prospectively in exchange for:

1) Payment equal to 10 percent of the employment tax liability that may have been due on compensation paid to workers for the most recent tax year;
2) Waiver of interest and penalties associated with such liability; and
3) Audit protection, for employment tax purposes, for the reclassified workers for prior years.

Although employers could receive substantial benefits from participating in the program, they were also required to agree to extend the statute of limitations on assessment of employment tax for the first three tax years beginning after the date of participation in the VCSP. In addition, if the employer did not file all required Forms 1099 for the misclassified workers and/or the employer, or an affiliate of the employer, was under audit, the employer was not eligible to participate in the program.

In two recent announcements, Ann. 2012-45 and 2012-46, the Internal Revenue Service issued additional guidance as well as temporary relief for certain employers.

Notable changes to the employer eligibility requirements include clarification that an employer under audit (other than an employment tax audit) is eligible to participate in the VCSP. In addition, an employer is no longer required to extend the statute of limitations on assessment of employment taxes.

In an attempt to encourage more employers to participate in the VCSP, the Internal Revenue Service has relaxed the eligibility requirements through June 30, 2013. Employers ineligible to participate in the VCSP because they have not filed all required Forms 1099 for misclassified workers can now participate in a “modified” VCSP.

To participate in the “modified” VCSP, employers must submit Form 8952 to the Internal Revenue Service by June 30, 2013 and write “VCSP Temporary Eligibility Expansion” at the top of the form.

The expanded eligibility requirements do come at a cost for those employers filing under the “modified” VCSP. These employers are required to pay 25 percent of the employment tax liability due instead of the 10 percent under the general VCSP. Additionally, employers must file all unfiled Forms 1099 for the previous three years and pay a reduced penalty for non-filing of the Forms 1099.

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