Should Businesses Use the IRS’ Voluntary Classification Settlement Program (VCSP)?

Improper classification of employees as independent contractors can lead to big problems with the Internal Revenue Service (IRS). But, the IRS also offers some options for businesses that want to voluntarily come into compliance. One of these options is the Voluntary Classification Settlement Program (VCSP). In this article, Washington D.C. tax attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, explains when businesses might (and might not) want to use the VCSP.

What is the Voluntary Classification Settlement Program (VCSP)?

The VCSP is, “a voluntary program that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods . . . .” It is a program that the IRS established specifically for the purpose of promoting compliance with regard to the proper classification of employees and independent contractors.

What are the Benefits of Using the VCSP?

By enrolling in the VSCP, eligible businesses can receive, “partial relief from federal employment taxes.” Specifically, businesses that participate in the VCSP can:

• “Pay 10 percent of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year . . . ;”
• “Not be liable for any interest and penalties on the amount; and,”
• “Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for proper years.”

When Can a Business Enroll in the VCSP?

Not all businesses are eligible to enroll in the VCSP. In order to enroll, a business must:

• Apply using IRS Form 8952, Application for Voluntary Classification Program, at least 60 days prior to the date the business wants to begin treating its workers as employees;
• “[H]ave consistently treated the workers to be reclassified as independent contractors or other nonemployees, including having filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years . . . ;”
• Have complied with the results of any prior audit concerning worker classification;
• Not currently be the subject of an IRS employment tax audit;
• Not currently be the subject of a U.S. Department of Labor (DOL) or state agency audit concerning worker classification; and,
• Not currently be contesting the classification of its workers in court based on a prior IRS or DOL audit.

When Might a Business Not Want to Enroll in the VCSP?

Given the benefits of using the VCSP, when might an eligible business choose not to participate in the program? As with all federal tax matters, voluntarily disclosing information regarding worker misclassification to the IRS inherently carries risks. If the IRS determines that a business is ineligible for the program, or if information disclosed during participation sheds light on other federal tax law violations, this could lead to a costly audit or investigation. If you have questions about enrolling your business in the VCSP, we encourage you to contact us for a confidential consultation prior to applying.

Request a Consultation with Washington D.C. Tax Attorney Kevin E. Thorn

Washington D.C. Tax Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, represents businesses of all sizes in IRS matters. To request a confidential consultation with Mr. Thorn, please call 202-349-4033, email ket@thornlawgroup.com or inquire online.