IRS Grants Amnesty to Illegal... EMPLOYERS!

Employee misclassification is a major problem in Texas and across the country.  I have written several articles on this subject and have been following articles on Construction Citizen referencing employee misclassification. Unscrupulous employers use this unethical and illegal tactic to gain and unfair competitive advantage over employers who properly classify their employees. The IRS is now offering an "amnesty" program to get these employers to go straight and properly classify employees. The program is called the "Voluntary Classification Settlement Program" (VCSP).

Misclassification causes many problems. We are cheated out of tax revenue that should be being paid to federal and state agencies. It allows "deadbeat parents" to hide under the RADAR and avoid paying child support - increasing burden on taxpayers through increased welfare payments. It puts many ethical employers at a major competitive disadvantage. People who should be classified as employees are cheated out of worker's compensation and health insurance benefits which contributes to increased health care costs on taxpayers.  And this practice serves as a vehicle for employers to work people who are not otherwise eligible to work in this country.

Because of these reasons, the IRS developed the VCSP to allow eligible taxpayers to voluntarily reclassify workers as employees with partial relief from past employment taxes.

A taxpayer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer:

• Will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code. See VCSP FAQ 16, for information on how payment under the VCSP is calculated. Also see Instructions to Form 8952;
• Will not be liable for any interest and penalties on the amount; and 
• Will not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

In addition, as part of the VCSP program, taxpayer will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.

The question of who is or is not an employee or independent contractor is sometimes a difficult one to answer.  Many people make an honest mistake and improperly misclassify employees as contractors.  Many more do this intentionally for the reasons states above.  Ohio State University has put together a page that documents the "20 questions" the IRS generally uses to make their determination.

Employers who are "cheating the system" should take a look at this program and find a way to come clean with all of us.  For after all, we all lose when these companies engage in these unethical practices. Want another reason to come clean?  Amnesty programs are often followed by periods of rigorous enforcement. And with the goverment's voracious appetite for tax dollars, you can bet they are looking for ways to increase revenue.

Don't get left with egg on your face!