New IRS Amnesty Program For Misclassified Workers

September 27, 2011

Cox Smith E-Alert
New IRS Amnesty Program For Misclassified Workers

Last week, the Internal Revenue Service (IRS) launched a very favorable amnesty program that will provide substantial relief to employers who have misclassified some employees as independent contractors for federal tax purposes. The amnesty program is an excellent opportunity for employers to resolve past worker classification issues at a minimal cost.

The amnesty program is available to for-profit businesses, tax-exempt organizations, and government entities which are currently treating some workers as independent contractors and which want to voluntarily reclassify them as employees, starting at least 60 days in the future. To be eligible, a taxpayer:

  • Must have consistently treated the workers as non-employees;
  • Must have filed Forms 1099 for the workers for the previous three taxable years; and
  • May not currently be under audit by the IRS, or under audit regarding the classification of workers by the

Department of Labor or by a state government agency. Taxpayers who have previously been audited for worker classification issues will be only eligible if they complied with the results of the audit.
Under the terms of the amnesty program, the IRS will agree to prospectively classify workers as employees for employment tax purposes in exchange for a greatly reduced tax. Under the program, a participating employer:

  • Need pay only 10% of the employment tax liability otherwise due on compensation paid to the workers for the most recent tax years;
  • Will not be liable for interest and penalties, and will not be subject to employment tax audit for worker classification issues for prior years; however,
  • Must agree to extend by three years the period of limitations on assessment of employment taxes for each of the first three calendar years beginning after the date an agreement is accepted by the IRS.

Many times a worker classification audit will not only create payroll tax liability, but will open an employer up to an audit of its overall federal tax compliance. The amnesty program offers an excellent opportunity to minimize that larger tax audit risk. However, if workers are reclassified in conjunction with a reduction in force, care must be taken to avoid any discrimination.

Our Firm’s Employment section is available to consult with you regarding any worker misclassification issues and assist you in implementing changes internally. If a problem is identified, our Tax Section can assist with the necessary IRS application and closing agreement. Please contact any of the attorneys listed to discuss the amnesty program.

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