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The Tax Prophet Newsletter   Issue #103 December 2012
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In This Issue:
Introduction
The Basics
Eligibility
Consequences
Procedure
Conclusion


IRS Settlement Program - Independent Contractors vs. Employees

Introduction

Employers who determine that they are misclassifying workers as independent contractors should take advantage of a new IRS Voluntary Classification Settlement Program (the "VCSP").


The Basics

In essence, VCSP prospectively treats workers as employees instead of independent contractors at a cost of approximately 1% of the compensation paid to the workers reclassified during the most recent tax year.

Example: Company paid $100,000 to four independent contractors during tax year 2011. If the Company applies for VCSP, it pays a penalty of about $1,000 and agrees to classify the workers as employees from tax year 2012 forward.


Eligibility

To participate in VCSP, the company:
    1. must have consistently treated the workers as nonemployees;

    2. must agree to treat all workers in the same class as employees;

    3. must have filed all required Forms 1099 for the workers for the previous three years;

    4. cannot currently be under audit by the IRS; and

    5. cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.


Consequences

As stated above, the penalty will amount to about 1% of the amount paid to the reclassified workers, but no interest or additional penalties will be asserted and the company will not be audited on the issue for prior years.

The statute of limitations for assessment is extended to six years for the first three years under the program.


Procedure

To participate in VSCP a company:

(i) must submit an application to IRS which must be approved;

(ii) sign a closing agreement documenting the reclassification; and

(iii) pay the penalty when the closing agreement is signed.

Evidently, there is no deadline for participation.


Conclusion

Companies with questionable worker classifications should strongly consider VCSP as a cost-effective way to avoid potentially huge taxes and penalties.



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All contents copyright 2011 Robert L. Sommers, attorney-at-law. All rights reserved. This newsletter provides information of a general nature for educational purposes only and is not intended to be legal or tax advice. This information has not been updated to reflect subsequent changes in the law, if any. Your particular facts and circumstances, and changes in the law, must be considered when applying U.S. tax law. You should always consult with a competent tax professional licensed in your state with respect to your particular situation. The Tax Prophet is a registered trademark of Robert L. Sommers.