The Internal Revenue Service introduced a new voluntary compliance program Wednesday to convince employers to resolve their past issues with classifying employees as independent contractors.

The new Voluntary Classification Settlement Program is part of the IRS’s larger “Fresh Start” initiative to get more businesses and individual taxpayers into tax compliance and help close the tax gap.

“This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman in a statement. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

Shulman and Secretary of Labor Hilda Solis signed an agreement earlier this week to improve their coordination on preventing businesses from misclassifying employees as independent contractors (see IRS to Team with Labor Department on Employee Classification).

Under the program, eligible employers can obtain substantial relief from federal payroll taxes they may have owed in the past, if they prospectively treat workers as employees. The VCSP is available to many businesses, tax-exempt organizations and government entities that currently erroneously treat their workers or a class or group of workers as non-employees or independent contractors, and now want to correctly treat these workers as employees.

A taxpayer who participates in the program will agree to prospectively treat the class 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 of the Tax Code; will not be liable for any interest and penalties on the liability; and will not be subject to an employment tax audit with respect to the worker classification of the workers for prior years.

In addition, a taxpayer participating in the VCSP 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.

To be eligible, an applicant must consistently have treated the workers in the past as nonemployees, have filed all of the required Forms 1099 for its workers for the previous three years, and not currently be under audit by the IRS, the Department of Labor, or a state agency concerning the classification of workers

Employers can apply for the new program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will pay an amount effectively equaling just over 1 percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

Full details, including FAQs, are available on the Employment Tax pages of IRS.gov, and in Announcement 2011-64, which the IRS posted Wednesday.

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