The IRS Voluntary Compliance Settlement Program (VCSP): Does it Offer Employers Amnesty or Put a Target on Their Backs? The Answer … Probably a Little Bit of Both

By Porter Wright on February 22, 2012

We first introduced you to the Voluntary Compliance Settlement Program (VCSP), a program launched on the on the heels of the IRS announcing its three-year plan to increase audits of independent contractors (Announcement 2011-64), last September. In that post, we discussed the potential advantages and pitfalls of the VCSP. This post takes another look into the VCSP in light of the IRS’s FAQs, which answers a lot of taxpayers’ concerns but not all of them.

By way of background, the VCSP was designed to provide eligible employers partial relief from the federal employment taxes and penalties that typically result from misclassifying workers as independent contractors. The VCSP is supposed to work like an amnesty program. It offers eligible taxpayers a one-time chance to come forward and reclassify their improperly-classified independent contractors as employers for future tax periods with limited federal employment tax liability for the past nonemployee treatment. Employers accepted into the program pay an amount 10% of the employment tax liability (calculated at reduced rates) effectively equaling just over 1% of the wages paid to the reclassified workers for the most recent tax year – a substantial savings – due with the signed VCSP closing agreement to the IRS. The kicker… no interest or penalties and no audit on payroll taxes related to the reclassified workers.

Many taxpayers quickly lost faith in the VCSP when they learned that the IRS and the Department of Labor (DOL) entered into a Memorandum of Understanding (MOU) agreeing to share information and other data relating to worker misclassification. The MOU also provided for information-sharing agreements between the IRS and state taxing authorities and raised a huge red flag for employers: Is the IRS going to share my information with the DOL and/or state/local taxing authorities and open up a whole new can of worms for me?

Taxpayers Can Breathe a Little Easier, But Don’t Go Getting Too Comfortable: Well, the answer to this all-important question, among 21 others, was provided in a FAQ sheet on the VCSP concerns. Some of the high points are:

Despite the MOU, the IRS will not share information about VCSP applicants with the DOL or state agencies. So, while the IRS will share some information about employee misclassification with the DOL and state taxing agencies, it will not share applicant information.
Taxpayers who apply to the VCSP but who are rejected will not automatically trigger initiation of a Federal audit. Mind you, taxpayers may be audited for something else, but not for applying for the VCSP.
By signing the VCSP closing agreement, a taxpayer is not admitting liability for wrong during past years. The VCSP addresses future years only.

The Drawbacks: While the FAQ is helpful, it does not necessarily calm taxpayers’ fears about future ramifications of applying for the VCSP. The program still has many unanswered questions, and some taxpayers will rather roll the dice in hopes that any questionable independent contractor classifications can be justified. One very big fly in the ointment is that the VCSP and the FAQs do not guarantee that an applicant’s information will remain confidential from the allegedly misclassified workers who may pursue matters on their own. Some of the shrapnel could include claims for unemployment, workers’ compensation, health, disability and retirement benefits, and worse, state/federal wage lawsuits, just to name a few.

So, at the end of the day, each taxpayer should evaluate its own circumstances to determine whether the potential benefits of the VCSP outweigh the potential risks. Employers who are concerned about potential misclassification issues under the IRS’s standards can review the IRS’s three-factor degree of control test, its Independent Contractor or Employer Training Manual, and if they are left still scratching their heads, fill out an IRS Form SS-8, Determination of Worker Status of Federal Employment Taxes and Income Tax Withholding. But, keep in mind that the IRS test has not been universally adopted by other federal and state agencies, whose tests for independent contractor status may yield different results. Taxpayers that choose to participate in the VCSP can apply for the program can do so using IRS Form 8952 and IRS Form 2848.