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The IRS Voluntary Classification Settlement Program (VCSP)

A Change in the Application for Voluntary Settlement Program (VCSP)

iStock_000003856094_ExtraSmallThe Internal Revenue Service has made taxpayers eligible for relief from past payroll taxes. By expanding its Voluntary Classification Settlement Program (VCSP), more employers are now given a low-cost option for achieving certainty under the law by reclassifying their workers as employees for future tax periods.

This means that employers who are currently paying employees under Form 1099 are given a chance to change their ways on their own. Among the many classifications of using a 1099 to pay an employee, they are used for employers to pay employees as an independent contractors, instead of under a corporation, leaving the employee responsible for their own taxes at the end of the year.

By modifying several eligibility requirements, the IRS is making it possible for many more interested employers to apply for this program. This provides partial relief from federal payroll taxes for eligible employers who are treating their workers or a class/group of workers as independent contractors or other non-employees and now want to treat them as employees.

This is seen as a liability to employers, because if the IRS were to catch you, you may get penalized. Doing this well ensure that you will pay a lot less in penalties, if things were to go wrong; and the IRS won’t bother you.

For more information on this program, feel free to give us a call or read this.

What is the Voluntary Classification Settlement Program (VCSP)?

The VCSP is a program developed by the IRS that allows taxpayers to voluntarily reclassify their workers for future tax periods for employment tax purposes. Under this program, a taxpayer will 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, which is calculated under the reduced rates of section 3509(a) of the Internal Revenue Code.

For an employer to pay an employee as a non-employee, there is great risk involved. It has to do with the level of control you have over your employee. If it is mandatory for them to come into a workplace, at a certain time, being told what to do, etc; then you are put at a higher risk if you were to receive an IRS classification audit. This proves as a safe solution.

The taxpayer 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 worker classification of the workers. This program permits taxpayers to reclassify some or all of their workers. But, once a taxpayer chooses to reclassify some of its workers as employees, all workers in the same class as those workers must be treated as employees for employment tax purposes.

Which Taxpayers Are Eligible for VCSP?

Taxpayers who want to voluntarily change the classification of their workers going forward and who meet certain requirements are eligible for the VCSP. A taxpayer must be treating the workers to be reclassified as independent contractors or other non-employees, including having filed any required forms 1099, consistent with the non-employee treatment, for the previous three years with respect to the workers to be reclassified. The taxpayer may not be currently under employment tax audit by the IRS. A taxpayer who is a member of an affiliated group within the meaning of section 1504(a) is considered to be under employment tax audit for purposes of the VCSP if any member of the affiliated group is under employment tax audit. Additionally, the taxpayer cannot be under audit by the Department of Labor or any state agency regarding the classification of workers as well.

Changes in The VCSP

Since the program has been revamped, here are the new terms. Employers who are under IRS audit, other than employment tax audit, can qualify for the VCSP. Also, employers accepted into the program will no longer be subject to a special six-year statute of limitations, rather than the usual three years that normally applies to payroll taxes. Taxpayers may apply for this program using Form 8952, Application for Voluntary Classification Settlement Program. This must be at least 60 days before they want to begin treating the workers as employees.

Typically, employers are barred from the VCSP if they failed to file required Forms 1099 with respect to workers they are seeking to reclassify for the past three years. Yet, for the next few months, until June 30, 2013, the IRS is waiving this eligibility requirement.

According to the IRS, employers accepted into this program will generally pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year; which is quite a deal. No interest or penalties will be due, and, great news—the employers will not be audited on payroll taxes related to these workers for prior years; a winning solution.

If you think you might benefit from this program and want to talk more about it, give us a call, or send us an e-mail here.

[author] [author_image timthumb=’off’][/author_image] [author_info]Michigan tax lawyer, Venar R. Ayar, founder of Ayar Law Group, holds ten years of experience as an accounting specialist and tax lawyer. He earned his Juris Doctor at the University of San Diego School of Law, receiving a Master of Laws in Taxation—the highest degree available in tax. His main focus has become Michigan tax resolution as well as IRS tax resolution, including individual and business tax matters; tax planning, tax compliance and white-collar criminal defense. His business background has helped him to become personable and understanding in his work. Representing clients before the IRS, Ayar’s practice and experience has proved him as an honest and dedicated leader in the realm of Michigan tax lawyers. Click here to contact your Michigan tax lawyer, Venar Ayar. [/author_info] [/author]

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.