The Internal Revenue Service (IRS) has modified its Voluntary Classification Settlement Program (VCSP), which lets employers change the tax treatment of their employees to reclassify workers as employees for federal employment tax purposes. The VCSP permits eligible taxpayers to voluntarily reclassify workers as employees for future tax periods with limited tax liability for past non-employee treatment.
To participate, an employer must meet certain eligibility requirements, apply to participate, and enter into a closing agreement with the IRS.
The modifications do the following:
- They permit a taxpayer under IRS audit, other than an employment tax audit, to participate in the VCSP.
- They clarify the current eligibility requirement that a taxpayer that is a member of an affiliated group is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit.
- They clarify that a taxpayer who is contesting in court the classification of the class or classes of workers from a previous IRS or Department of Labor audit is not eligible to participate in the VCSP.
- They eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of a VCSP closing agreement.
In addition, the program has been given a temporary eligibility expansion through June 30, 2013. This expansion makes a modified VCSP available to taxpayers who would otherwise be eligible, but who have not filed all required Forms 1099 for the previous three years for the workers to be reclassified. Eligible taxpayers who take advantage of this expansion agree to prospectively treat workers as employees in order to receive partial relief from federal employment taxes.
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