Is IRS Giving Employers a Free Pass with The Voluntary Worker Classification Settlement Program? Yes and No…

Is the Internal Revenue Service’s new Voluntary Classification Settlement Program too good to be true? Maybe, maybe not. Introduced on September 21, 2011, the program purports to give a free pass to employers who promise to reclassify any workers incorrectly treated as independent contractors. Here’s what you need to know about the program, in eight bite-sized pieces, from lawyers and law firms on JD Supra:

1. It’s a big deal for employers that need it:

“[The IRS deal] allows a company to dodge all but 10 percent of past employment tax liability, all the interest, and all penalties that it would have owed for prior years if the company had treated individuals as ‘independent contractors, but where the IRS nonetheless had mandated a reclassification as employees.” From An IRS Discount… 90% Off Payroll Taxes; 100% Off Interest and Penalties by Constangy, Brooks & Smith, LLP

2. To be eligible, employers must promise to clean up their act going forward:

“[Employers must] agree to: (1) prospectively treat the class of misclassified workers as employees for future tax periods; and (2) extend the period of limitations on assessment of employment taxes for three years after each of the three calendar years beginning after the date on which it agrees, in the VCSP agreement, to begin treating workers as employees.” From New Worker Classification Procedures Affect IRS/DOL Compliance and Enforcement Efforts by Sutherland Asbill & Brennan LLP 

3. It’s not for everyone:

“… the employer: 1) must have consistently treated its workers as independent contractors; 2) must have issued all required forms 1099 to these workers for the past three years; and 3) [must] not [be] currently under audit by the IRS, the Department of Labor or a state agency…” From New IRS Program Provides Relief to Employers That Have Misclassifed Workers by Joshua Nesser

4. But every employer should be concerned:

“… every company or other organization with an operational model based even in part upon a contingent of independent contractors should anticipate renewed enforcement energy, activity, and assertiveness.”  From “Independent Contractors” Are Again Front-And-Center by Fisher & Phillips LLP

5. It’s one more tool in the government’s effort to stop employee misclassification:

“The DOL also signed or has agreed to sign memorandums of understanding with officials in 11 states to coordinate efforts to crack down on independent contractor misclassification, including Connecticut, Hawaii, Illinois, Maryland, Massachusetts, Minnesota, Missouri, Montana, New York, Utah, and Washington.” From DOL Coordinates With IRS, States On Independent Contractor Misclassification by Franczek Radelet P.C.

6. Federal tax relief is just the tip of the iceberg:

“[The] program … does not address the other employment-related issues related to misclassifying an employee as an independent contractor. For example, employers may still be liable for state tax withholding, unpaid workers’ compensation and unemployment insurance premiums, and penalties for labor law violations such as noncompliance with minimum wage and overtime pay regulations.” From EmployerLinc: Businesses with misclassified workers may find relief under new IRS settlement program by Keith Peters | McAfee & Taft

7. If it sounds too good to be true, it just might be:

But, of course! This is to allow that other agency, the U.S. Department of Labor, which presumably will not be a party to the IRS/employer agreement, to come in and sue the pants off the employer for back benefits and wage-hour violations.” From Employers, don’t be too quick to take that IRS “independent contractor” deal by Constangy, Brooks & Smith, LLP

8. Because the extra attention could lead to unwanted effects:

“Taxpayers filing consolidated returns for income tax purposes as members of an affiliated group should consider the potential risk of drawing attention to worker classification issues for its affiliates… At this point, there is only speculation how the IRS will use this additional information.” From IRS Announces Voluntary Settlement Program to Reclassify Workers as Employees by McDermott Will & Emery

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