Stick or Carrot? New IRS Program Allows Reclassification of Independent Contractors

Posted on October 26, 2011 by Michael Walker

A newly-announced IRS program allows businesses to prospectively reclassify independent contractors as employees, and in doing so, may allow some businesses to avoid certain tax penalties which could possibly exceed 40% of the reclassified worker’s compensation for the prior 3 years. However, the program, dubbed the Voluntary Classification Settlement Program or “VCSP”, does have its drawbacks.

To be initial eligible to participate in the VCSP, the taxpayer must:

  • Have consistently treated the workers (or class of certain workers) as non-employees;
  • Have filed all appropriate 1099s for the workers;
  • Not be currently under audit with the IRS, the Department of Labor, or a state-level agency regarding the classification of the workers in question; and
  • Complete the IRS’ form to apply for the VCSP benefits.

If eligible and the IRS accepts the taxpayers application, the taxpayer must prospectively agree to treat the class of workers to be reclassified as employees. Under the VCSP, the taxpayer: (1) will pay 10% of the employment tax liability that may be due for the most recent tax year; (2) will not be liable for any interest or penalties; (3) will not be subject to an employment tax audit for prior years with respect to the reclassified workers; and (4) will agree to extend the statute of limitations on employment taxes for the three years after the VCSP program begins.

The VCSP is not for everyone. Often, a business’ classification of a worker as an independent contractor is appropriate and entirely supported by federal and state law. In such instances, it would not be appropriate for a business to reclassify a worker as an employee, and doing so would unnecessarily increase the business’ costs and taxes. However, if a business determines that it may have inappropriately classified workers as independent contractors in the past but is fearful of the significant tax penalties if it changes the workers’ employment classification, the VCSP may offer a significant benefit.

The bottom line – we recommend a careful analysis of independent contractors in light of the parameters of existing law in order to determine whether a worker should be classified as an employee or independent contractor.

One final caveat – the VCSP is a federal program only. If a business has exposure to state-level taxes, the VCSP will offer no relief.
 

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IRS Extends Deadline for Disclosing Hidden Account

Posted on September 22, 2009 by Jeffrey Cheyne

On September 21, 2009, the IRS announced a one-time extension of the special voluntary disclosure program to October 15, 2009.  Until this announcement the program was set to close on September 23, 2009.

Taxpayers who elect to participate in this program and disclose hidden accounts will have to pay taxes, interest and some penalties.  Taxpayers who don't participate are likelty to face harsher civil penalties and possible criminal prosecution.

Some taxpayers have accounts over which they have signature authority but no financial interest, or a financial interest in a foreign commingled fund.  The deadline for these taxpayers has been extended to June 30, 2010. 

There are two reporting requirements for each year that have to be met.  One is the amended federal income tax return and the other is Report of Foreign Bank and Financial Accounts (Form TD F 90-22.1) which must also be filed.  Unless all foreign bank accounts have a combined value of less than $10,000, this report is an annual requirement in addition to the federal income tax return.

If you have offshore accounts of any kind, you should take this opportunity to review your tax returns for 2003 through 2008 and any reports that you have filed to determine whether or not you are fully compliant. 

The IRS also announced that there would be no further extensions.

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