The IRS has recognized that it would be impossible to catch every taxpayer with outstanding obligations to the IRS. Therefore, when a significant area of noncompliance is determined by the IRS, it uses Voluntary Disclosure Programs (VDP) as a way to entice taxpayers to voluntarily come forward and disclose non-compliance without the fear of criminal prosecution [1] and/or draconian penalties.
Misclassification of employees (W2) as independent contractors (1099) is a hot button issue. Between federal, state and local taxing agencies, the failure to properly classify workers amounts to billions of dollars in lost revenue[2]. Based on the recommendations of recent internal studies, the IRS has made worker classification a priority. To this point and in an effort to increase compliance, the IRS introduced the latest VDP iteration, the Voluntary Classification Settlement Program (VCSP).
VCSP allows eligible employers to voluntarily reclassify workers treated as independent contractors as employees for future tax periods. In exchange, the employer agrees to pay a highly reduced amount of employment taxes for past periods. The overarching objective is to increase tax compliance while reducing the tax and administrative burdens on employers with misclassified workers.
The current program now available has three parts in its process[3].
1. Determine eligibility.
This process can be completed by establishing the facts and circumstances of the worker classification with a trusted tax adviser.
2. Apply to the program
3. Negotiate an agreement with the IRS to cover the scope of the employment tax liability for past periods due.
Once the scope and amounts are determined, a reduced percentage (10%) of the liability is calculated. Additionally, there are no interest or penalties assessed and the business cannot be subject to an employment tax audit regarding the classification of the workers being reclassified for prior years.
Please note that once the IRS has started an audit of employment taxes against a business that business is no longer eligible to enter into the VCSP.
What Next?
Five Stone Tax Advisers has significant experience and dealings with the IRS regarding all issues relating to employment taxes and worker classification. As your trusted adviser, a tax attorney will walk you through every step of the VCSP process to ensure that you not only benefit from the protections of the program but properly classify your works and pay the lowest tax possible.
Don’t put this off. The IRS could end the program at any time and start cracking down on worker misclassification.
[1] http://www.irs.gov/uac/Revised-IRS-Voluntary-Disclosure-Practice
[2] http://www.nytimes.com/2013/12/16/opinion/victims-of-misclassification.html?_r=0
[3] http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Voluntary-Classification-Settlement-Program
