Reflections On The IRS Voluntary Worker Classification Settlement Program – Its Impact On The EDD
By Robert S. Schriebman
In September 2011, the IRS announced a new program for employment tax amnesty – the IRS Voluntary Classification Settlement Program (VCSP). The program was designed to increase employer compliance by offering a “fresh start” to those employers who improperly treated employees as independent contractors. If an employer was eligible to enroll in the program the reward offered was substantial relief for past federal payroll taxes. The employer, once enrolled in the program, had to treat workers as employees from the time of enrollment forward.
In 2011, to be eligible for the VCSP, the employer must have treated workers in the past as nonemployees and filed all required 1099s for the previous three years (2008, 2009, and 2010). The employer must not currently be under any type of employment tax audit by the IRS, EDD, or Department of Labor.
The 2011 law provided that in addition to enrolling in the VCSP program the employer was required to pay ten percent of the employment tax liability determined under IRC Code 3509, and had to agree to extend the statute of limitations on assessment of employment taxes for three years. For more information see IRS Announcement 2011-64.
Shortly after the VCSP program was announced in 2011, the IRS announced that no one participating in the new program would under go an employment tax audit.
In December 2012, the IRS modified the VCSP program in IRS Announcements 2012-45 and 2012-46. These new announcements relaxed some of the rules required for participation. A requirement of filing 1099s for the past three years was dropped providing the employer enrolls in the program no later than June 30, 2013. In exchange for this waiver the IRS requires that the employer pay twenty-five percent of the tax liability due instead of ten percent for those who properly and timely filed 1099s. The new enrollee does not have to extend the statute of limitations for assessment as required by earlier participants.
All of this IRS “amnesty” had a purpose – to encourage employers to get back on the withholding tax system. After all, the federal government would stand to gain substantially by a mass participation of non-complying employers.
My take on this so-called amnesty is not so rosy. I have a basic distrust for any tax amnesty program especially after my observations with the so-called IRS foreign bank account amnesty known as FBAR. My fellow tax practitioners who were encouraged by IRS FBAR “deals” regretted putting their clients into that program. They complained to me that the IRS began very aggressive audits of those who filed for amnesty and assessed additional stiff penalties and interest that resulted in essentially legal confiscation of the monies in these foreign accounts.
While the IRS announced it would not conduct employment tax audits, not much was said about information sharing with state employment tax agencies such as the EDD. Will the IRS inform the EDD of California employers taking advantage of the VCSP? What information has been given so far? I have no way of knowing, but I am not comfortable in recommending to my clients currently undergoing EDD audits that they immediately take advantage of the VCSP.
The EDD does not have a California VCSP program. With the EDD it is business as usual. While the IRS has recently waived the 1099 filing requirements, the EDD has no such waiver. Employers who failed to timely file and report 1099s for the years 2008, 2009, 2010, 2011, and now 2012 face very stiff penalties of almost ten percent of worker compensation pursuant to CUIC Sections 13052 and 13052.5. I know of no more devastating penalty in all of tax law!
If a taxpayer is currently contesting an EDD worker-status audit, the future is not clear. If the taxpayer has a hearing before an administrative law judge and prevails on the worker-status issue, is the taxpayer safe from a future IRS audit? If so, it would be foolish to win the EDD case and apply for the VCSP program.
On the otherhand, a taxpayer currently contesting an EDD worker-status audit who elects to take advantage of the EDD settlement program must agree to treat workers as employees beginning at a fixed future date. In that case, taking advantage of the VCSP program would be prudent.
©Robert Schriebman 2013.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.