IRS eases fears about voluntary classification settlement program

If you feel there’s a chance you’ve misclassified an employee as an independent contractor, you’ll want to pay attention to this. The IRS has set out to reassure employers its Voluntary Classification Settlement Program (VCSP) won’t come back to bite them.
You remember the VCSP — it is the IRS’ initiative designed to help businesses clear up their tax problems associated with employee misclassification. It was introduced last fall.
Under the VCSP, employers that’ve misclassified employees as independent contractors can reclassify those workers — while potentially saving them a ton in back payroll taxes.
Sounds great, right? Not so fast, employers have had their concerns about the program, namely:

  • Would participation in the VCSP lead the IRS to share info about a company’s classification practices with the Department of Labor and state labor agencies? Just prior to the VCSP introduction, the IRS, DOL and several states announced they’d be teaming up to find wage and hour violators, and possibly assess them multiple fines.
  • Will an employer’s participation in the VCSP essentially amount to admitting that it misclassified workers — and thus denied them overtime pay and benefits? If so, it could prove very costly should the employer ever get sued by previously misclassified employees.

FAQ clears the air
Here’s what the IRS had to say about those issues in an FAQ it released recently:

  • The IRS says it will not share information about VCSP applicants with the DOL or state agencies.
  • Signing the VCSP closing agreement is not an admission of any liability or wrongdoing for prior years.
  • Rejection of a VCSP application will not automatically trigger a federal audit.
  • An employer that has been contacted by the IRS regarding an SS-8 determination letter is not under audit — therefore it is still eligible for the VCSP.
  • An audit of a parent, subsidiary or another member of an applicant’s consolidated group is considered an audit of the applicant — thus making the employer ineligible for the VCSP.

Info: To apply for the VCSP, employers must submit Form 8952 at least 60 days before they want to begin treating the workers as employees.