What? The IRS is actually giving businesses a break? Is hell freezing over? Well, I don’t know about the latter, but the former is certainly true. On the 21st of September, the IRS announced program Fresh Start.
If you have been (deliberately) misclassifying employees as contractors, you should immediately consider this plan. To be eligible, you must have consistently treated these workers as contractors, filed all required 1099’s (non-employee compensation) for the past three years, and NOT under current audit by the IRS, the Department of Labor, or any state agency specifically about the classification of these workers.
If these qualifications apply, you can apply for VCSP (voluntary classification settlement program) status. Why would you do it? Well, instead of owing the 15% of wages PLUS penalties and interest, this one time Fresh Start will subject you to a single catchup payment of 10% of the taxes you owe for these employees. Yes, you read that right- you will be forgiven for 90% of that indebtedness that you (know you) owe.
Why would the IRS do this? Because, instead of playing policeman and searching for all these companies (a task they actually do fairly well, especially when employees complain to the IRS that they don’t understand why they owe all these taxes), they can focus on receiving the funds in the future. The GAO (Government Accountability Office) reported to the new Obama administration in 2009 that there were at least $ 2.7 billion in unpaid federal taxes, plus funds for unemployment insurance and workers compensation funds at the state level. Some 10% to 30% of US companies are playing fast and loose with this mis-classification.
What’s the downside? Don’t ever try to misclassify workers again. And, note that on Monday (this was announced on Wednesday), the IRS, the Department of Labor and seven states stepped up joint enforcement to find these companies. And, if they find you first, you are NOT eligible for VCSP. The first target- construction companies- where “sub-contractors” are routinely employed.
We have Form 8952,the official application form, available for you on our website, along with the official instructions. Feel free to call us with your questions about this program. )
Shoot – this makes me wish I had workers whom I had misrepresented to the government!
Tor, you could always hire your family!:-)
Of course, the rules for family employees already leave a loophole for the employment taxes…
Roy
Very interesting, Roy! I have never had an employee but this looks like a good deal for businesses. I know there are many people who work as “independent contractors”. Maybe this will bring some much-needed changes.
Janette:
It has been a big issue for the IRS and the Department of Labor (which protects people- there are no benefits afforded independent contractors, including unemployment insurance) for several decades. This was one of the big reasons the health insurance reform act had incorporated the issuance of 1099’s to ANY entity receiving more than $ 600 a year. A way to detect who is an employee, as well as who is making money and not reporting it.
Roy
And I thought our rules were confusing. At least the IRS is trying to save some businesses or they will go under and that could be disasterous to the economy
Actually, they are banking that they will now collect a lot more money from these companies in the future, Roberta. And, it IS better PR!
Roy
Thanks Roy for the information. It amazes me all the offices, departments, groups, divisions…. no wonder it costs so much to run our government! But it is good news that they seem to be thinking with a little bit more common sense.
Always appreciate you keeping us up to date with things like this that is helpful for our business.
Thanks for dropping in AND for your comments, Lynn.
It’s better to prevent this than to deal with it. But, this is a tremendous opportunity for those who have either played fast and loose- or did it once and then got sucked in, fearful of a change that would alert the IRS. A chance to fix things for pennies on the dollar!
Roy
Wow! Good to know that the government is giving somebody a break on something. Oh, no, though. Won’t this count as a tax cut, which is not ever to be allowed if one is on the Grover Norquist Vow of Never List?
Seriously, it’s a really great offer, and a way to dig out of a self-made hole of potential trouble. If I were in that boat, I’d take it! You can’t beat 90% Off!
Darn right, Paula:
And, tax cuts ARE allowed by the idiot Norquist- who believes we can obtain the services we need for no cost. It’s paying for what you want that he outlaws.
Roy