IRS loosens criteria for VCSP eligibility

March 26, 2013

The IRS has made several permanent and temporary changes to its Voluntary Classification Settlement Program (VCSP).

Under VCSP, you can voluntarily reclassify independent contractors as employees for future tax periods on favorable tax terms. You’ll be liable for just over 10% of the wages paid to those reclassified workers for the past year; no penalties or interest will be due. Plus, the IRS will back off on audits related to those workers for earlier years.

Permanent changes. Two key requirements of VCSP are that you must not currently be under audit by the IRS, the Department of Labor (DOL) or a state agency with respect to those workers. For your first three years in the program, you will be subject to a special six-year statute of limitations, rather than the usual three-year limit. These permanent changes clarify the original program and apply to future VCSP applications.

  • Employers under audit for anything other than payroll taxes are eligible for VCSP.
  • Employers that are members of an affiliated group for tax purposes aren’t eligible if any member of the group is undergoing a payroll tax audit.
  • Employers that are contesting in court the results of a previous worker classification audit performed by the IRS or the DOL aren’t eligible to participate in VCSP.
  • The requirement that employers agree to extend the statute of limitations is eliminated. (Announce­­ment 2012-45, IRB 2012-51)

Temporary relief. Another key VCSP requirement is that you must have filed Forms 1099-MISC for the previous three years. Temporary relief, which is available through June 30, 2013, applies to employers that failed to file those forms, but that are otherwise eligible to participate in VCSP. Under this relief, you will be liable for 25% of the wages paid to reclassified workers for the past year, instead of 10%. However, VCSP’s benefits are otherwise the same. You must also provide your workers with Forms 1099-MISC, e-file those delinquent forms and pay a reduced failure-to-file penalty. The penalty is graduated, depending on how many forms you file.

You must still file Form 8952, but must write “VCSP Temporary Eligibility Expansion” at the top of the form. In addition, these changes to Form 8952 must be made:

  • To show that the Form 1099 filing requirement wasn’t met, cross out Part V, Line A3.
  • Instead of completing Part IV, Payment Calcu­­la­­tion, complete and attach a worksheet, which is available through this IRS bulletin; scroll down to page 728.

The IRS will contact you with instructions on how to e-file your Forms 1099-MISC. You must then confirm to the IRS that your forms were e-filed and furnished to employees. (Announcement 2012-46, IRB 2012-51)