The Employee Versus Independent Contractor Game

An age-old issue which seems to never go away.

In an effort to bring “employers” out of the shadows, however, IRS has a deal for you.  It’s called the Voluntary Classification Settlement Program (VCSP) and may be just what the doctor ordered for your business despite the fact that the Treasury Inspector General for Tax Administration (TIGTA) isn’t thrilled about how IRS is managing the deals.

The VCSP allows businesses and tax exempt organizations which presently treat their workers as nonemployees or independent contractors to prospectively reclassify workers as employees in return for promising not to audit prior years’ treatment which, in the egregious cases, could subject employers to prior years’ payroll taxes on these workers (not to mention penalties and interest).

Taxpayers must meet a few requirements to enable their participation in the program:

  • They must have consistently treated the workers in the past as nonemployees
  • They must have filed all required 1099 forms for the workers for the previous three years
  • They must not be currently under audit for employment taxes by IRS
  • They must not be currently under audit by the Department of Labor or any state agency regarding the classification of these workers

Employers accepted into the program are required to pay an amount which equals just over 1% of the wages paid to the reclassified workers for the past year.

So far, so good.  But TIGTA reports that IRS does not obtain the information that it needs to verify the accuracy of applications and payments.  In particular, employers aren’t sufficiently hounded to identify the workers who are being reclassified, such as the workers’ names and social security numbers.  Without the specific worker identification numbers, IRS can’t determine if the applicant meets the VCSP eligibility requirements.  Further, IRS is unable to verify the accuracy of the compensation amount reported on the application and, therefore, the applicant’s calculation of the VCSP payment amount.  Also, IRS doesn’t have an effective process to monitor VCSP agreements to ensure employer compliance.

And from our third grade English department comes word – also via TIGTA – that IRS isn’t too good at ensuring that its letters and notices are understandable to taxpayers!

Recall that Congress enacted the Plain Writing Act of 2010 (to enhance common folks’ access to government information and services by ensuring that government documents issued to the public are written clearly.)

A noble Act – don’t you think?

TIGTA notes, however, that the process for reviewing letters and notices does not always ensure that such documents are written in plain language.  TIGTA’s statistical sample found that for Fiscal Year 2013, 50% of letters to taxpayers and 66% of notices are not clearly written and structured, or do not provide sufficient info to enable taxpayers to figure out just what, exactly, is IRS’ problem!

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, welcomes comments at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes.

 

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