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Voluntary worker reclassification, part 2: eligibility and audits

In the first part of this post, we began discussing the Voluntary Classification Settlement Program (VCSP).

As we noted, the IRS has been offering this program as an incentive to reclassify workers as employees rather than as contractors or some other non-employee status.

Employers who do not participate and are found to have misclassified employees do not only face paying the full amount of payroll taxes that the IRS says they owe. They also face tax penalties and interest on those amounts, as well as further tax audits for preceding years focusing on misclassification issues.

In this part of the post, let’s look in more detail at the eligibility requirements for the VCSP, focusing on the role of audits.

First of all, it should be noted that to be eligible for the VCSP, an employer cannot currently be under an audit that focuses on employment tax compliance issues.

The reason for this requirement is certainly not difficult to see. The VCSP is intended to nudge employers toward reclassification without the IRS having to force the issue. When an audit is already underway, however, the pressure on an employer has become palpable – and this undercuts the “voluntary” element of the program.

Of course, it isn’t only the IRS that does classification audits. The U.S. Department of Labor does its own version of these as well, focusing on wage-and-hour issues.

What if an employer was audited in previous years by either the IRS or the Labor Department? Previous audits by either agency are not necessarily a bar to participation in the VCSP, as long as an employer has taken any required steps to comply with the findings of those earlier audits.

Source: IRS.gov, "Voluntary Classification Settlement Program (VCSP) Frequently Asked Questions," Accessed March 14, 2014

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