The Internal Revenue Service announced a new Voluntary Classification Settlement Program yesterday. This program will allow employers to avoid costly IRS audits over classification of their workers as employees or independent contractors by voluntarily reclassifying their workers (or classes of workers) as employees for federal employment tax purposes and paying a portion of the prior year's employment tax. This follows on the heels of a joint announcement by the IRS and the Department of Labor earlier this week that both departments would be working more aggressively to prevent, detect, and remedy employee misclassifications.
For federal tax purposes, payments to employees are subject to income tax and employment tax withholding, while payments to independent contractors are not. The determination of whether a worker is an employee or a contractor is based on all the facts and circumstances, and it is often difficult to make this distinction. This state of affairs has led to numerous IRS audits and high-stakes disputes with employers over the proper classification of their workers.
The new Voluntary Classification Settlement Program allows employers to avoid IRS audits and obtain substantial relief from federal payroll taxes they may have owed in the past if they agree to treat their workers (or a class of workers) as employees prospectively. Employers who participate in the program will pay 10 percent of the employment tax liability that may have been due on compensation paid to those workers for the most recent tax year but will have to treat those workers as employees and withhold taxes on their wages going forward. Participating employers will not be subject to interest or penalties on past-due employment tax liabilities attributable to those workers and will not be subject to an IRS audit with respect to those workers. In addition, participants in the program will have to agree to extend the statute of limitations for assessments of employment taxes for the following three years.
To be eligible for the Voluntary Classification Settlement Program, an employer must
Application for the program will be made by filing Form 8952 with the IRS at least 60 days before the employer proposes to reclassify the workers as employees.
The new Voluntary Classification Settlement Program (IRS form available here) may offer some employers welcome relief from the risk of an IRS audit and a potential significant liability for prior years' withholding taxes. Employers thinking of entering the program, however, should study the FAQs that the IRS will publish on its website so that they can be sure they understand all the federal employment tax ramifications of voluntarily entering this program. Employers should also consider other possible ramifications of entering into this program, including state employment tax liabilities, state unemployment insurance liabilities, exposure to income taxes in other states, the potential impact on employee benefit plans and nontax legal concerns. The reclassification of an independent contractor as an employee under this program is likely to result in classification of the individual as an employee for all legal purposes. As a result, once such reclassification occurs, the employee will be subject to the protection of federal and state wage and hour laws, anti-discrimination laws, unemployment compensation benefit laws and other laws and regulations applicable to employees.
Dina Kapur Sanna and Carl A. Merino co-authored an article, "Long Arm of the Law: The Risk to U.S. Practitioners of Prosecution for Facilitating Foreign Tax Offenses," (subscription required) in the June 2017 issue of Trusts & Estates Magazine.
On June 15, Dina Kapur Sanna and Carl A. Merino moderated a discussion panel at the Cambridge International Wealth Advisors Forum 2.0 held in Lisbon about the role of wealth advisors as "gatekeepers" to the financial system and measures being implemented by different jurisdictions to combat money laundering and tax evasion, including obligations imposed on lawyers and other advisors.
Angela Titus McEwan and Stacey Valentine Fielding authored an article for Bloomberg BNA's Daily Tax Report entitled "A Death Sentence for the Federal Estate Tax? States Watching Closely," in which they considered the repeal to the Federal Estate Tax and how it may impact, if at all, individual states.
On May 25, Dina Sanna and Carl Merino were panelists at an event hosted by Citco.
Day Pitney Alert
Von Sanborn was featured in an article, "Five Questions: Von Sanborn on Art Law, Insurance and the IRS," published in the Connecticut Law Tribune.
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Stephen Ziobrowski was quoted in an article, "10 states millionaires might be fleeing," in LifeHealthPro. In the article, Ziobrowski discusses how several states—including Massachusetts—are considering raising their taxes on their wealthiest residents. He says that the concern with taxing the wealthy is that it causes them to leave.
Stephen Ziobrowski was quoted in an article, "7 Tips For Simplifying Tax Writing," in Law360. The article outlines best practices for tax lawyers to draft contracts and court documents. "Tax law is a foreign language, so you have to do some translation if you’re putting it into written documents," said Ziobrowski in the article. "If you’re aiming for a particular tax result in a transaction, it won’t do any good to have all the right magic words on the document and then people don’t understand what they’re supposed to do."
Chris Stracco was quoted in an article,"Will Veto Spark Litigation Over Nonprofit Hospitals' Tax Status?" in New Jersey Law Journal. In the article, Stracco discusses Governor Chris Christie's veto of S3299 in connection to the controversial New Jersey Tax Court decision of AHS Hospital v. Morristown. Stracco says the decision in the case, in which Morristown Memorial Hospital lost its tax-exempt status because it had for-profit business attributes, is unique. Given that case's uniqueness, he expects that the ruling and Christie's veto of S3299 will not likely result in a flood of nonprofit hospitals being hit with tax bills and suits to challenge them.