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By Susan Willey
March 06, 2010
IRS unveils favorable settlement program for worker classification issues
The IRS announced a voluntary compliance initiative to allow employers to reclassify workers as employees rather than independent contractors. If eligible, an employer who elects to reclassify workers will pay only 10% of the tax liability attributable to the reclassification for the prior three years. Under the initiative, the IRS will waive interest and penalties associated with the reclassification of the workers who the employer proposes to reclassify as employees.
To qualify, an employer must have consistently treated workers as independent contractors and filed 1099s reflecting that classification for the past three years. An employer does not need to establish a reasonable basis for treating the workers as independent contractors. An employer may not participate in this program if the IRS is currently auditing the employer’s classification of the same workers.
To participate in the voluntary compliance initiative, an employer should file Form 8952 60 days before the date the employer anticipates treating independent contractors as employees. If the IRS accepts the application, the IRS will draft a closing agreement and require full payment for 10% of the outstanding tax liability for the prior three years. As part of the closing agreement, the IRS will agree not to audit prior years with respect to these workers.
Inter-Agency Cooperation. The IRS also announced a compliance agreement with the U.S. Department of Labor. The Department of Labor has agreed to refer to the IRS any information or other data that might lead to tax compliance issues associated with employee misclassification. The IRS has agreed to share these referrals with state and municipal taxing authorities. This initiative is designed to address the estimated $2.7 billion dollar tax gap associated with unpaid Social Security, Medicare, employment taxes and withheld income taxes attributable to the erroneous classification of workers as independent contractors. State agencies, such as Iowa Workforce Development and the Iowa Department of Revenue, are clearly pursuing their own initiatives regarding compliance programs. With the enactment of mandatory health care coverage for employees, it is foreseeable that the IRS and the U.S. Department of Labor, and state agencies as well will have increased incentive to continue to examine worker classification issues.
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