About the Voluntary Classification Settlement Program (VCSP)
The Voluntary Classification Settlement Program (VCSP) is a tax relief program intended to improve compliance with tax law and reduce the burden of penalties on taxpayers who voluntarily want to change the status of independent contractors to employees. The VCSP offers an option for taxpayers to significantly reduce their potential tax penalties and gain immunity from being audited in regards to worker classification.
Under the program, taxpayers who have consistently treated their workers as independent contractors from the start, and who have filed their 1099 forms on time for the past three years may be eligible for the program. The taxpayer cannot be under audit by a state government agency or the IRS. If the taxpayer was audited in the past, the taxpayer must be compliance with the previous audit.
The VCSP allows the taxpayer to pay 10 percent of the liability that would normally have been due, only for the most recent tax year for any workers who are reclassified as employees. Interest and penalties on the amount are both waived as a part of the program. The taxpayer will also gain immunity from being audited for past years in regards to worker classification. In exchange for this relief, the taxpayer must treat the workers as W-2 employees on all future tax returns.
Form 8952 is the application for the VCSP, and the IRS recommends that the application should be filed a minimum of 60 days prior to the date that the taxpayer wants to reclassify its worker(s). The IRS will attempt to have the application processed as quickly as possible. Once the application has been approved the IRS will enter a closing agreement with the taxpayer. If there is a balance due, then payment would be due at the time that the closing agreement is signed.
On December 17, 2012 the IRS announced an expansion of the VCSP called the VCSP TEE (Temporary Eligibility Extension) which offers a modified version of the VCSP to taxpayers who have not filed all of their 1099 forms for the past 3 years on time. There are eligibility requirements that must be met, and the application to the program must be completed by June 30, 2013. Once a taxpayer has been accepted into the program, all 1099 forms that have not been filed must be correctly issued to the contractors and the IRS.
The program does not require the taxpayer to classify all of its workers as employees, only the ones that pass the common law test. Exempt organizations are eligible for the program if they meet the requirements. The IRS will contact taxpayers who are rejected from the program, and rejection does not mean that the taxpayer will be audited.
If a taxpayer has already been contacted by the IRS in regard to an SS-8 determination, they are still eligible for the VCSP since the SS-8 determination process is not an audit. VCSP application information is not shared with state agencies or the Department of Labor. The VCSP offers a convenient option for taxpayers to change independent contractor status to employees on future tax returns and avoid costly potential penalties and interest.
by 
Erich J. Ruth
Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.
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