IRS Voluntary Classification Program – New Program the Employers – Q & A’s – Fresh Start Tax LLC

by steve | Sep 26, 2011 | IRS Tax Advice

 IRS has a new program out to help tax compliance on the employment tax front. The Program is called the Voluntary Classification Settlement Program.

The program is designed to help companies comply with their responsibilities for employer/ employee  payroll taxes. It is likened to IRS tax amnesty.

The following is written from the IRS regarding the questions and answers about the new tax program.

 Voluntary Classification Settlement Program (VCSP) Frequently Asked Questions

Q1. What is the Voluntary Classification Settlement Program (VCSP)?

A1. The VCSP is a new program developed by the IRS that allows taxpayers to voluntarily reclassify their workers as employees for future tax periods for employment tax purposes. Under the VCSP, a taxpayer will pay 10 percent of the amount of employment taxes calculated under the reduced rates of section 3509 of the Internal Revenue Code for the compensation paid for the most recent tax year to the workers being reclassified under the VCSP. In addition, the taxpayer will not be liable for any interest and penalties on the payment under the VCSP, and will not be audited for employment tax purposes for prior years with respect to the worker classification of the workers. Taxpayers may apply for the VCSP using Form 8952, Application for Voluntary Classification Settlement Program. For more information on the VCSP, see Announcement 2011-64 (PDF)

Q2. Do all workers have to be reclassified as employees?

A2. No. The VCSP permits taxpayers to reclassify some or all of their workers. However, once a taxpayer chooses to reclassify certain of its workers as employees, all workers in the same class must be treated as employees for employment tax purposes.

Example: ABC Company is a construction firm that currently contracts with its drywall installers, electricians and plumbers to perform services at housing construction sites. ABC Company determines it wants to voluntarily reclassify its drywall installers as employees. ABC Company submits an application, is accepted into the VCSP and enters into a closing agreement with the IRS. Once the VCSP closing agreement is executed, ABC Company must treat all drywall installers as employees for employment tax purposes.

Q3. Which taxpayers are eligible for the VCSP?

A3. Taxpayers who want to voluntarily change the classification of their workers going forward and who meet certain requirements are eligible for the VCSP. Specifically, a taxpayer must be treating the workers as independent contractors or other non employees and must have consistently treated the workers as non-employees, including having filed any required Forms 1099 with respect to each of the workers for the past 3 years. In addition, the taxpayer cannot be currently under audit by the IRS and cannot be under audit by the Department of Labor or any state agency regarding the classification of the workers.

Q4. Are exempt organizations eligible for the VCSP?

A4. Yes, exempt organizations are eligible if all eligibility requirements are met.

Q5. Are government entities eligible for the VCSP?

A5. Yes, government entities are eligible if all eligibility requirements are met.

Q6. Is the VCSP available to state and local government agencies for workers covered under a Section 218 agreement?

A6. No, the VCSP is not available to state and local government employers for workers covered under a Section 218 agreement. However, the VCSP is available to state and local government employers for workers not provided Social Security coverage under a section 218 agreement.

Q7. Is an exempt organization that is currently under a Form 990 series examination considered to be “currently under audit by the IRS” such that the exempt organization is not eligible for the VCSP?

A7. Yes, an exempt organization that is currently under a Form 990 series examination is considered to be “under audit by the IRS” and is not eligible to participate in the VCSP.

Q8. Can a taxpayer who is not currently under audit but who was previously audited be eligible for the VCSP?

A8. A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the workers may be eligible for the VCSP if the taxpayer has complied with the results of the IRS or Department of Labor audit.

Q9. How does a taxpayer take part in the VCSP?

A9. In order to participate in the VCSP, an eligible taxpayer must complete and submit an application, using Form 8952, Application for Voluntary Classification Settlement Program (which will be available in early October). The application should be filed at least 60 days from the date the taxpayer wants to begin treating its workers as employees.

Q10. Should payment be submitted with the application?

A10. No, taxpayers should not submit payment with the VCSP application.

Q11. What happens once the VCSP application has been submitted?

A11. Once submitted, the IRS will review the application and verify the taxpayers eligibility. Once the IRS accepts the taxpayer into VCSP, the IRS will contact the taxpayer (or the taxpayers authorized representative if an executed Power of Attorney is included with the application) to enter into the VCSP closing agreement with the IRS.

Q12. When does the taxpayer pay the amount due under the VCSP?

A12. Taxpayers must make full and complete payment of any amount due under the VCSP when they return the signed VCSP closing agreement to the IRS.

Q13. What are the results of participating in the VCSP?

A13. A taxpayer who participates in the VCSP agrees to treat the class or classes of workers as employees for future tax periods for employment tax purposes and will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years. The taxpayer will pay 10% of the employment tax liability that may have been due on the compensation paid to the workers, calculated at the reduced rates of IRC section 3509, for the most recent year, with no liability for any interest or penalties. In addition, the taxpayer will extend the period of limitations on the assessment of employment taxes for three years for the first, second and third calendar years beginning after the date the taxpayer has agreed under the VCSP closing agreement to begin treating the class or classes of workers as employees.

Q14. Will I be contacted if my application is rejected?

A14. Yes, if you are not eligible, the IRS will contact you to inform you that your VCSP application has not been accepted.

Q15. If my application is rejected, can I apply again at a later point in time?

A15. Yes, if your VCSP application has been rejected because you are not eligible, you may reapply.

Q16. How is the amount of the VCSP payment calculated?

A16. Payment under the VCSP is 10% of the amount of employment taxes calculated under the reduced rates of section 3509 of the Internal Revenue Code for the compensation paid for the most recent tax year to the workers being reclassified under the VCSP. Under section 3509, the effective tax rate for compensation up to the Social Security wage base is 10.68% in 2010 or 10.28% in 2011, and 3.24% for compensation above the Social Security wage base.

The amount due under the VCSP is calculated based on compensation paid in the most recently closed tax year, determined at the time the VCSP application is being filed. Accordingly, the 10.68% effective rate applies under the VCSP in 2011 since the most recently closed tax year is 2010. The 10.28% effective rate applies under the VCSP in 2012 since the most recently closed tax year is 2011. The rate of 3.24% applies to compensation above the Social Security wage base in both situations.