IRS Deadline | by Rich Shavell

Dear Client:

While I am certain most all of our clients do not have an issue with independent contractors (“IC”), you should know that a voluntary IRS program is closing at the end of this month. This is an area that both the IRS and Department of Labor have pursued.

The fundamental issue is whether or not a worker is an employee or is an IC. The latter receives a 1099 and is not subjected to payroll taxes when paid (as is the employee). The IRS program permits more favorable terms that if the business is later audited and found to have employees who were treated as ICs.

If you do believe there may be an issue and want to prospectively reclassify workers as employees – call us to discuss this.

Taxpayers have until June 30 to apply for the temporary version of the IRS’s “Voluntary Classification Settlement Program” (VCSP). This version of the VCSP temporarily eased the eligibility requirements to allow more taxpayers to participate in the program.

The VCSP allows eligible taxpayers to prospectively reclassify workers who had been classified as independent contractors or nonemployees as employees, under generous settlement terms. Participation in the program is voluntary. Taxpayers must meet certain eligibility requirements (including filing all required Forms 1099 for the previous three years). They also must apply to participate in the VCSP and enter into a closing agreement with IRS.

Temporary expansion of program. In Ann. 2012-46, 2012-51 IRB 725, IRS temporarily expanded eligibility for the program until June 30, 2013 to a taxpayer who has not filed all required Forms 1099 for the previous three years with respect to the workers that are being reclassified, if the taxpayer is otherwise eligible to participate in the program.

In exchange, the taxpayer must pay 25% (rather than 10% under the 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 had been classified as employees for such year, determined under the reduced rates in Code Sec. 3509(b). Participants will pay a reduced penalty for unfiled 1099 forms for the previous three years with respect to the workers being reclassified. They will not be liable for any interest and penalties on the liability. They will not be subject to an employment tax audit for prior years with respect to the worker classification of the class or classes of workers. Participants must certify as part of the VCSP Temporary Eligibility Expansion closing agreement with IRS that they have furnished to the workers, and have electronically filed, all required 1099 forms for the previous three years with respect to the workers being reclassified.

Taxpayers can apply for the temporary program by submitting Form 8952, Application for Voluntary Classification Settlement Program (VCSP) to IRS by June 30, 2013, and writing “VCSP Temporary Eligibility Expansion” across the top of the form. On the form, taxpayers should put a line through Part V, Line A3, to indicate that the Form 1099 requirement has not been satisfied, and should not complete Part IV, Payment Calculation. They should instead use the worksheet provided in Ann. 2012-46, 2012-51 IRB 725.

Taxpayers may still apply for the VCSP (i.e., not the temporary version of the program) beyond June 30.