IRS Launches New Voluntary Classification Settlement Program for Worker Classification

Worker classification issues have been the focus of an increasing amount of attention from the IRS within recent months. While these issues have been around for decades, the attention they receive has significantly increased. In September of 2011, the IRS established a new Voluntary Classification Settlement Program, also known as "VCSP," providing "partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat workers as employees." IRS Announcement 2011-64(Sept. 21, 2011).

The IRS also entered into a memorandum of understanding with the Department of Labor to share information with regard to the classification, and more importantly, the "misclassification" of employees and independent contractors. Finally, President Obama included a worker classification provision in his plan "Living within our Means and Investing in the Future: The President's Plan for Economic Growth and Deficit Reduction."

Worker classification issues tend to boil down to one thing - is the worker an employee or an independent contractor? Determining the status of a worker depends on common law facts and circumstances test regarding whether the service recipient has the right to direct and control how the services are provided. Too often, the results of this test are unclear. To resolve these issues, the IRS is now offering taxpayers a program that allows for the voluntary reclassification of workers as employees. To participate in the program, a taxpayer must meet certain eligibility requirements; submit an application; and enter into a closing agreement with the IRS.

To be eligible, the taxpayer must: (1) have consistently treated its workers in the past as nonemployees; (2) have filed all required Forms 1099 for the workers for the past three years; and (3) not currently be under audit by the IRS, the DOL, or a state agency concerning worker classification matters. A taxpayer who was previously audited for these issues will be eligible only if the taxpayer has complied with the results of such audit.