By: Richard Ruvelson

I wanted to expand upon a topic that I covered during our last Nonprofit Workshop, on February 19th. The IRS has expanded upon it’s Voluntary Classification Settlement Program (VCSP) for organizations wanting to reclassify workers as employees for future tax periods and has extended the deadline for the expanded eligibility for the program through June 30,2013.

The VCSP was originally described in Announcement 2011-64 and was modified through Announcement 2012-45 (which can be found at issued on December 17, 2012, to permit organizations under audit to participate in the program, clarify the eligibility to participate in the programs by members of affiliated groups, clarify that organizations are not eligible to participate in the program if they are currently contesting the classification and to eliminate the requirement to extend the statute of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

While the program is clearly very beneficial from a federal employment tax perspective, participation and settlement may potentially result in DOL, individual worker and state law issues which should be discussed with labor counsel in advance of participation in the program.

The VCSP is a voluntary program that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements and apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

The VCSP allows eligible taxpayers to obtain relief similar to that currently available through the Classification Settlement Program for taxpayers under examination.

Announcement 2012 -45 provides that the VCSP “….. is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. To be eligible, a taxpayer must have consistently treated the workers as nonemployees, and must have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years with respect to the workers to be reclassified. The taxpayer cannot currently be under employment tax audit by the IRS. A taxpayer that is a member of an affiliated group within the meaning of section 1504(a) is considered to be under employment tax audit for purposes of the VCSP if any member of the affiliated group is under employment tax audit. Furthermore, the taxpayer cannot be currently under audit concerning the classification of the class or classes of workers by the Department of Labor or by a state government agency.” If the results of a prior audit have been complied with and are not currently being contested in court, an organization remain eligible for the VCSP.

The announcement provides that an organization participating in the VCSP and agreeing to prospectively treat the class or classes of workers as employees in future tax periods may pay only 10% of the most recent tax year’s employment tax liability under the reduced tax rates of Internal Revenue Code Section 3509(a), as though those workers were classified as employees, and is not liable for interest and penalties on the liability. Furthermore the organization may not be subject to an employment tax audit on the classification of those workers for prior years.

To participate in the VCSP, eligible organizations must apply for the program on or before June 30, 2013 by submitting Form 8952, Application for Voluntary Classification Settlement Program, accompanied by a valid Form 2848, Power of Attorney. The IRS has the discretion to accept an organization into the program and will notify organizations of acceptance upon review of their application. Payments of any amounts due must be made simultaneously with entering into a closing agreement with the IRS.

Before deciding to participate in the program organizations should discuss the implications beyond employment taxes of a closing agreement regarding employment taxes with the IRS since there may be issues with the Department of Labor, the reclassified workers themselves or state law and agencies.