IRS launches voluntary misclassification settlement program

November 3 2011

The Internal Revenue Service has launched a new program “that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers,” the agency said.

The program, dubbed the Voluntary Classification Settlement Program (VCSP), is part of a new “Fresh Start” initiative to help businesses deal with tax responsibilities. It will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The IRS explained how the VCSP will work. “Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed for the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as nonemployees or independent contractors, and now want to correctly treat these workers as employees.”

To be eligible, an applicant must:

• Consistently have treated the workers in the past as nonemployees


• Have filed all required Forms 1099 for the workers for the previous three years


• Not currently be under audit by the IRS


• Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers.

Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

“Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year,” the IRS added. “No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.”

For more information, go to www.irs.gov.