Important Update on the IRS Voluntary Worker Classification Settlement Program (VCSP) for Companies That Use Independent Contractors

By Nancy E. Joerg, Esq., Senior Attorney and Shareholder, Wessels Sherman Joerg Liszka Laverty Seneczko P.C., www.wesselssherman.com

Recently the IRS published a new Frequently Asked Questions document about its Voluntary Worker Classification Settlement Program (VCSP).  It covers many of the worries expressed by clients to me since the VCSP was announced by the IRS on September 21, 2011.

Under the VCSP program, a company can obtain substantial relief from federal payroll taxes it may have owed for the past if the company voluntarily reclassifies its independent contractors who currently receive 1099s to employee status.

VCSP participants benefit from the fact that they pay the IRS an amount equal to 10% of the applicable employment taxes for reclassified workers that would have been due for the most recent tax year. No other interest or penalties apply. It is tempting bait!

NEW FREQUENTLY ASKED QUESTIONS ISSUED BY IRS: Some of the new information issued by the IRS in its updated Frequently Asked Questions publication includes:

1. No, the IRS will not share information about VCSP participants with the U.S. Department of Labor or state agencies. (Of course, workers reclassified from independent contractor status to employee status under VCSP can themselves bring private lawsuits against the company entering VCSP).
2. No, if the IRS should reject your company’s VCSP application, your company will not be put on a list for audit leads by the IRS.
3. No, by entering into a VCSP closing agreement, your company is not admitting liability or wrong doing with regard to independent contractor usage for prior years; the VCSP closing agreement applies to future years only.
4. No, all workers do not have to be reclassified from independent contractor status to employee status under VCSP; VCSP permits taxpayers to reclassify some or all of their workers. Companies can do it piecemeal. Keep in mind that all workers in the same class (for example, all drywallers) must be treated as employees for employment tax purposes.
5. Taxpayers who are not currently under an audit but who were previously audited can be eligible for VCSP as long as the taxpayer has complied with the results of the IRS or Department of Labor audit.
6. The taxpayer must make full and complete payment of any amount due under VCSP when the taxpayer returns the signed VCSP closing agreement to the IRS.
7. If your VCSP application is rejected, the IRS will contact you to inform you that your VCSP application has not been accepted. Yes, you can reapply at a later point in time.
8. Your company can still apply for VCSP if one of your independent contractors requested an IRS SS-8 Determination on his or her status. The SS-8 Determination process by the IRS is not an IRS audit and therefore it does not prevent a company from being eligible for VCSP.
9. If your parent company or subsidiary or another member of your consolidated group is under audit by the IRS, your company cannot participate in VCSP.  An audit of one of the members of the consolidated group or subsidiary is treated as an audit of the applicant for purposes of VCSP.

VCSP APPLICATION: Eligible companies who wish to participate in VCSP must file a special application with the IRS. The application is Form 8952 (Application for Voluntary Classification Settlement Program). It requires a company to divulge a lot of detailed information regarding independent contractor usage.

COMPANIES MUST CONSIDER IMPACT OF VCSP ON EMPLOYEE BENEFIT PLANS: Companies should be aware that, depending upon the manner in which an employee benefit plan is drafted, there could be retroactive liability under the employee benefit plan if a company enters into a VCSP closing agreement with the IRS and voluntarily reclassifies its independent contractors to employee status for the future.

The VCSP program does not address the impact on employee benefit plans when a company reclassifies its independent contractors to employee status. Therefore, a company must consider the impact that worker reclassification would have on all employee benefit plans. For example, corrective contributions may be required or minimum coverage violations could arise with regard to a qualified retirement plan. An experienced employee benefits attorney should be consulted on this issue.

VCSP DOES NOT RESOLVE POTENTIAL EMPLOYMENT RELATED CLAIMS: Another potential problem with entering into a VCSP is that the IRS settlement agreement under VCSP will not resolve potential employment related claims (for example, minimum wage or overtime violations which may come from the Department of Labor or from a reclassified employee). In addition, VCSP will not prohibit a state agency (such as the Illinois Department of Employment Security) from coming after its share of employment taxes.

COMPANY COULD BE EXPOSED TO LITIGATION INCLUDING POTENTIAL CLASS ACTION CLAIMS: Another warning about VCSP is that entering into the VCSP program could expose a company to litigation including potential class actions by reclassified employees.

Also be aware that if a company enters into a VCSP agreement, the company must comply with employment laws such as minimum wage and overtime laws, company sponsored employee benefits, workers’ compensation and unemployment insurance laws.

NO ANNOUNCED TERMINATION OF PROGRAM: Note that the VCSP appears to have no deadline and no announced date of termination. The IRS will presumably see how it goes and decide later as to how long VCSP should be offered to the public.

PROCEED WITH CAUTION: The VCSP program involves taxpayers voluntarily giving up independent contractor status for its workers prospectively in exchange for immunity in the past. Weighing the pros and cons thoughtfully can be a complex process.

There are many sophisticated issues to be considered before a company enters into a VCSP agreement with the IRS. What will the company gain, and what will the company lose? What worries will the company no longer have, but what new legal obligations will the company be voluntarily accepting?

Questions or concerns? Call Attorney Nancy E. Joerg of Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com. If your company wishes assistance in evaluating VCSP issues or filling out the VCSP application, contact Nancy Joerg.

Areas of Practice: Nancy Joerg represents employers in administrative actions and audits before the Equal Employment Opportunity Commission, the Illinois Department of Human Rights, the Cook County Commission on Human Rights, the Illinois Department of Employment Security, the Illinois Department of Labor, and the U.S. Department of Labor.

She represents employers in all types of independent contractor legal challenges, discrimination charges, unemployment insurance hearings, Illinois Employee Classification Act complaints, IDES audits, employee termination issues, and wage & hour issues (including exempt/non-exempt status for overtime, deductions from wages, and state and federal wage claims). Nancy Joerg effectively counsels and advises clients concerning preventive efforts such as the preparation and review of severance and release agreements, independent contractor owner-operator agreements, independent contractor-based manuals and websites, employee handbooks and personnel policies, anti-harassment training, sex harassment investigations, and the development of strategies to help ensure exemptions from overtime. She is the author of a published book entitled Welcome to the World of Independent Contractors and Other Contingent Workers.

Nancy Joerg is the Managing Shareholder of the St. Charles, Illinois office of Wessels Sherman Joerg Liszka Laverty Seneczko P.C.