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IRS Announces Voluntary Classification Settlement Program for Resolution of Independent Contractor/Employer Issues

In Announcement 2011-64, the Internal Revenue Service (“IRS”) recently communicated the kick-off of its new Voluntary Classification Settlement Program (“VCSP”) which allows a business to voluntarily reclassify a worker for federal employment tax purposes from an independent contractor to an employee and obtain meaningful relief from exposure to potential employment tax assessments.  By agreeing to prospectively treat the subject class of workers as employees for future tax periods, the business will receive several substantial benefits:

  1. Pay only 10% of the employment tax liability that may have been due on amounts paid in the most recent tax years;
  2. Receive a waiver of penalties and interest on such liability; and
  3. The involved individuals will not be subject to reclassification as employees for prior years.

 

To participate in the VCSP, a business must meet certain eligibility requirements and file IRS Form 8952, Application for Voluntary Classification Settlement Program.  The name of a company contact or an authorized representative with a valid Power of Attorney should be provided as well.

A determination as to the classification of an individual service provider as an employee or as an independent contractor requires a factually intensive inquiry and detailed analysis applying the common law test for whether an individual is an independent contractor or an employee.  This analysis often turns on whether the service recipient has the right to direct and control the individual as to how to perform the services rendered.  Oftentimes, the determination of the individual’s classification under the common law may not be clear in that the business and the IRS may have different opinions as to the individual’s classification.  Obviously, the potential for a dispute regarding classification arises in situations in which a business treats an individual service provider as an independent contractor.

An initiative like the VCSP often precedes increased audit activity.  Not surprisingly, we have already seen an increase in IRS employment tax audits.

If you have any questions or concerns about the classification of individuals performing services for your company under contract, wish to have your company’s potential independent contractor issues evaluated, or if you are interested in the IRS’ VCSP, please contact Mark Loyd or another member of Greenebaum Doll & McDonald’s Tax and Finance Group, or our Labor and Employment Practice Group.

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