Carrots and sticks in the IRS worker reclassification program

When the IRS puts out a carrot, it doesn’t necessarily leave it out indefinitely. For example, the agency has rolled out more than one program in recent years regarding the disclosure of previously unreported offshore accounts. But in order to encourage participation, these programs typically come with an ending date.

A similar dynamic is at work regarding employee classification. As we discussed in our June 15 post, federal tax audits questioning the classification of employees have greatly affected many Texas employers.

But the IRS has not only responded with audits. For the last two years, it has also been offering the Voluntary Classification Settlement Program (VCSP).

The VCSP is a program that encourages employers to reclassify their contractors (or freelancers) as employees. One incentive for employers is to avoid payroll or employment tax audits. And participating employers also get large reductions in the past payroll taxes they owe.

Participation in the program also enables these employers to resolve lingering uncertainty about how to proceed regarding how various employees should be classified. That certainty can help a business move more confidently into the future.

The VCSP program definitely asks a lot of employers. If an employer enters the program but falls behind on making payroll tax payments at any time in the next three years, the rules of the program allow the IRS to respond with audits, interest and tax penalties for all previous years. There is unmistakably a stick attached to the carrot in this case.

And one part of the carrot will be removed soon. On June 30, a provision of the VCSP known as TEE will expire. TEE stands for Temporary Eligibility Expansion and applied to employers who had not sent out 1099-MISC statements to freelance workers.

Source: MarketWatch, “Deadline looming for IRS employer amnesty,” Eva Rosenberg, June 25, 2013