In Announcement 2011-64, the Internal Revenue Service (“IRS” ), which provided taxpayers with a chance to change the status of their workers from independent contractors to employees for future tax periods. If the program was elected by a taxpayer, then the IRS would apply minimal tax liability to the employer for the past nonemployee treatment of its workers. This effective tool went into effect in September 2011, and has been used by a number of small businesses throughout Florida and nationwide. Further, Announcement 2012-45 has announced that the program would run until the end of the month, June 2013.
Digging into the Announcement, the IRS allows businesses who have treated its workers as independent contractors by filing all required Form 1099’s for the prior 3 year period. While an eligible taxpayer (or a member of a 1504(a) affiliated group) can be under audit, the taxpayer’s business cannot be under an employment tax exam by the IRS, the Department of Labor, or by a state government agency. If a business has been previously audited by the IRS, the taxpayer must be compliant with the results of that audit in order to be eligible.
If the VCSP Form 8952 is accepted, the taxpayer agrees to prospectively treat the workers or class of workers as employees for future tax periods. In exchange for the future treatment of its employees, the taxpayer is assessed a reduced percentage tax on the liability that would have been due. In addition, the taxpayer will not be liable for any interest or penalties and will not be audited for employee classification for prior periods. The business must also make a full payment subject to a closing agreement.
If you or your business is interested in participating in the program, it must start by filing or having its tax attorney or other representative complete a Form 8952, Application for Voluntary Classification Settlement Program. The filing should be coordinated to treat the employees at least 60 days prior to the reclassification date. Following the form submission, the IRS will contact the taxpayer or its attorney / representative to complete the process following the application review.
If you or your client’s business has been incorrectly classifying its workers as independent contractors, the VCSP is an excellent opportunity. Not only does it save the risk of having a costly audit down the road, but it also mitigates the tax liability for the past three years. If you or your client’s business believes the VCSP is a viable solution to its classification problem, then please contact an experienced tax attorney / professional to file for eligibility before June 30, 2013.
About the author: Mr. Donnini is a multi-state sales and use tax attorney and an associate in the law firm Moffa, Gainor, & Sutton, PA, based in Fort Lauderdale, Florida. Mr. Donnini’s primary practice is multi-state sales and use tax as well as state corporate income tax controversy. Mr. Donnini also practices in the areas of federal tax controversy, federal estate planning, Florida probate, and all other state taxes including communication service tax, cigarette & tobacco tax, motor fuel tax, and Native American taxation. Mr. Donnini is also a co-author in the CCH Expert Treatise Library, an author for SalesTaxSupport.com, and he is currently pursuing his LL.M. in Taxation at NYU. If you have any questions please do not hesitate to contact him via email or phone listed on this page.