The IRS has revised and temporarily expanded its Voluntary Classification Settlement Program (VCSP) (Announcements 2012-45, 2012-46). The VCSP provides relief to employers who may be liable for employment taxes on workers that they may be misclassifying as independent contractors instead of employees. The changes to the VCSP make it accessible to a greater number of employers, although they are subject to a relatively short deadline of June 30, 2013.

VCSP program

A taxpayer in the VCSP agrees to prospectively treat workers as employees. The taxpayer pays 10 percent of the employment tax liability that would have applied if the workers were reclassified for the most recent tax year. The taxpayer is not liable for interest or penalties on the liability and will not be audited for employment taxes on the workers for prior years.

Generally, the employer must be currently and consistently treating its workers as independent contractors or other nonemployees. The employer must have filed all required Forms 1099 for the previous three years for the workers to be reclassified.

Announcement 2012-45 expands eligibility for the program to taxpayers under any kind of audit, other than an employment tax audit, and eliminates the requirement that the taxpayer extend the period of limitations for assessing employment taxes another three years.

Temporary Expansion

Announcement 2012-46 expands the VCSP temporarily to employers who have not filed all Forms 1099 for the previous three years and were not previously eligible for the VCSP. The VCSP Temporary Eligibility Expansion applies through June 30, 2013. Other eligibility requirements are the same.

The taxpayer must pay 25 percent of the employment tax liability that would have applied for the most recent tax year, and pay a reduced penalty for unfiled Forms 1099 for the previous three years for the reclassified workers. The penalty is based on the number of unfiled Forms 1099 for the past three years.

The relief provided in Announcements 2012-45 and 46 together provides significant concessions on the part of the IRS, designed to encourage employers to "come forward" and rectify worker misclassification.

Please contact this us if you would want further information about this expanded VCSP opportunity and how it might relate to your business.