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IRS Voluntary Classification Settlement Program Eligibility Not Validated

tigtaTIGTA, or the U.S. Treasury Inspector General for Tax Administration, recently did an audit to determine if the IRS was validating the eligibility of certain employers in the Voluntary Classification Settlement Program (VCSP).

The IRS over the last few years has stepped up its effort to enforce employment tax laws. Specifically, the IRS has been targeting employers who misclassify employees as independent contractors. As a result, the IRS rolled out VCSP in 2011 in an effort to get employers to voluntarily come forward and correctly reclassify workers as employees as opposed to independent contractors. By employers doing so, they would get relief for employment taxes and penalties that would have been owed on those workers that were misclassified as independent contractors. The benefits are worth knowing:

  • Only 10% of prior year employment taxes  for misclassified workers would need to be paid
  • Tax penalties and interest would not be owed on the liability
  • The employer will not be subjected to an employment tax audit regarding worker classification for previous years

TIGTA discovered the IRS was not specifically verifying the employees (using names and Social Security Numbers) who were being reclassified. Therefore, the IRS really had no way to validate whether a taxpayer who took advantage of VCSP benefits were in compliance or maintaining compliance.

As a result, TIGTA made five recommendations which the IRS agreed to:

  • Require that employers provide employee names and Social Security Numbers for those being reclassified with the VCSP application
  • Improve IRS internal procedures for evaluating employer eligibility and confirm the accuracy of worker compensation and the VCSP payment due
  • Devise follow-up procedures to ensure VCSP compliance
  • Create one system for tracking inventory and monitoring program performance
  • Make sure accepted agreements are sent to the IRS business units responsible for monitoring compliance