The IRS has announced (Announcement 2011-64) a Voluntary Employee Classification Settlement Program (VCSP). This allows qualifying taxpayers to voluntarily enter into an agreement with the IRS concerning workers who have been treated as independent contractors, who should have, in fact, been classified as employees. The IRS has conducted a national research project on this issue. On September 16, 2011, the Department of Labor and the IRS entered into an agreement to share information between them to further pursue this issue of misclassification of workers.
To participate in this voluntary program, employers must submit an application and must agree to treat their workers, or a class or group of workers, as employees, and to withhold on them in future tax periods. The employers must also agree to extend the statute of limitations for assessment of employment taxes for each of the three calendar years beginning after the date of the agreement.
In exchange, employers will pay 10% of the employment tax liability due for the most recent year. There will be no interest or penalties assessed. Further, the IRS will not conduct an employment tax audit for the prior years. The tax liability will be calculated under the reduced rates provided by section 3509, which is 20% of the normal employee FICA tax. Employers must not currently be under audit by either the IRS, the Department of Labor, or any state agency relating to worker classification. Any employer who has been previously audited as to worker classification, must have complied with the results of the audit. Also, employers must have consistently treated the subject workers as non-employees, which means they must have filed all required forms 1099 in the previous three years.
The application to be filed is Form 8959 Application for Voluntary Classification Settlement Program. The form must be filed at least 60 days before beginning to treat the workers as employees.
The Announcement notes that the IRS “retains discretion” as to whether to accept the application. Accordingly, further evaluation of a taxpayer’s situation may be required. Further, consideration must be given to the impact of Florida’s unemployment tax liabilities. This may be an excellent opportunity for those individuals who are concerned about past treatment of workers, particularly in this environment of increased payroll tax audits and the IRS’s dedication of new resources to this issue.
The IRS has warned taxpayers that any “quiet” or “silent” voluntary disclosure of an offshore account, in an attempt to avoid either the first or second voluntary disclosure programs, would not be considered to be a valid voluntary disclosure, and might be subject to criminal treatment. Apparently, in an effort to show that it is serious, on May 19, 2011 the government filed it’s first criminal prosecution of a taxpayer who made such a silent disclosure (a silent disclosure is parlance among tax practitioners for a taxpayer who simply files the return through normal filing procedures, as opposed to participating in these programs). The defendant was a Mr. Schiavo. The defendant, according to press reports, entered into a plea agreement and is scheduled to be sentenced on January 31, 2012 (see 2011 WTD 98-43, 2011 WTD 99-36).
As a result of a report by the Treasury Inspector General for Tax Administration (TIGTA), the IRS is considering increasing correspondence audits to include both the prior and subsequent tax years for any year selected for audit. A correspondence audit is an audit conducted by mail where the IRS sends a Notice of Intent to Assess a tax liability based upon apparent errors on the taxpayer’s return or upon third party information, such as 1099’s, which are not included on the taxpayer’s return. TIGTA statistics indicate that for fiscal year 2012 the IRS assessed 9.2 billion dollars in additional taxes as a result of 1.1 million correspondence audits. TIGTA concludes that filing checks should be conducted to determine whether the same pattern of non-compliance identified in the original tax year selected for audit are also present on prior and subsequent year returns. Out of 102 returns selected for testing, TIGTA determined that similar tax issues existed on 43 of the 102 taxpayer’s prior and subsequent years returns.