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The IRS has modified its Voluntary Classification Settlement Program, which allows employers to reclassify workers as employees.

IRS Modifies and Expands Employee Reclassification Program

  • 12/19/2012

IRS Modifies and Expands Employee Reclassification Program

The IRS has made modifications to its Voluntary Classification Settlement Program (VCSP) and implemented a new, temporary initiative to expand eligibility for the program.

The VCSP permits eligible taxpayers to voluntarily reclassify workers as employees for federal employment tax purposes. To participate, an employer must meet certain requirements, apply, and enter into a closing agreement with the IRS.

The IRS has modified the VCSP to:

  • Permit taxpayers under IRS audit, other than an employment tax audit, to be eligible to participate in the program.
  • Clarify that a taxpayer is not eligible to participate in the VCSP if the taxpayer is a member of an affiliated group (defined by Code Sec. 1504(a)) and any member of the affiliated group is under employment tax audit.
  • Clarify that a taxpayer is not eligible to participate in the VCSP if the taxpayer is contesting the classification of the class or classes of workers from a previous audit by the IRS or the Department of Labor.
  • Eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement.

The IRS has also expanded eligibility for the VCSP. The temporary eligibility expansion makes a modified VCSP available to taxpayers who would otherwise be eligible for the current VCSP but have not filed all required Forms 1099 for the previous three years for the workers to be reclassified.

Eligible taxpayers that take advantage of this limited, temporary eligibility expansion agree to prospectively treat workers as employees and will receive partial relief from federal employment taxes. The temporary expansion is available through June 30, 2013.

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