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IRS Expands Eligibility for Misclassification Amnesty Program

The Internal Revenue Service (IRS) announced expanded eligibility for its Voluntary Classification Settlement Program (VCSP).  Some of the changes are permanent, while others are temporary.

The VCSP allows employers to reclassify their independent contractors as employees and avoid nearly all the liability they would have owed if the IRS had uncovered the misclassification through an audit.  However, not all employers are eligible.  Until this latest change, employers who were under any kind of IRS audit were ineligible to participate in this program.  This is no longer true.  Moreover, to participate, an employer must have consistently treated the workers as independent contractors (or other nonemployees, such as interns) and must have filed all required 1099s for the previous three years for the workers to be reclassified.

The permanent changes allow employers to participate even if they are being audited by the IRS, as long as it is not an employer tax audit.  The new guidelines clarify that an employer may not participate if it is involved in litigation contesting the classification of the class or classes of workers from a previous audit by the IRS or Department of Labor.  Finally, the new guidelines permit employers to participate without agreeing to extend the audit limitations period.

The temporary changes offer a modified version of the VCSP to employers who would otherwise be eligible for the current VCSP, but who have not filed all required 1099s for the previous three years.  These employers will be required to pay a higher percentage of their unpaid tax liability than they would if they were eligible under the permanent rules.  The employer also must apply on or before June 30, 2013 to be eligible.

All employers using independent contractors should carefully evaluate whether these workers would be considered employees by state or federal taxing authorities or departments of labor.   The Obama Administration has made prosecuting misclassification cases a high priority.  Re-evaluating your determinations as to who is an employee and participating in the VCSP, if eligible, can help shield your business from major liability.

Brody and Associates regularly advises management on complying with state and federal employment laws including wage and hour laws.  If we can be of assistance in this area, please contact us at info@brodyandassociates.com or 203.965.0560.