NOVEMBER 2011 Compliance Matters

Just in time for the holiday season, the IRS recently gave employers the perfect gift. It launched a new voluntary compliance program to give businesses that misclassified workers as independent contractors the opportunity to come into compliance for just short of a song.

Employers underpay the government by treating workers as employees, but not classifying them as such in order to avoid paying payroll taxes. These workers would have to be reclassified as employees under the program.

Employers accepted into the program will pay a surprisingly small amount, equal to just over one percent of the wages paid to the reclassified workers for the past year. Not only will they not have to pay interest or penalties, but they will avoid being audited on payroll taxes related to these workers for prior years. For the first three years of the program, employers will however be subject to a special six-year statute of limitations, rather than the usual three years that applies to payroll taxes.

The program, announced Sept. 21, is part of the agency’s larger “Fresh Start” initiative to help taxpayers and businesses resolve their tax problems. As employers and taxpayers struggle with a down economy, the goal of the new Voluntary Classification Settlement Program (VCSP) is to increase tax compliance while reducing the tax burden for employers. The government hopes the program will also provide some added security for businesses, employees and the government. Rather than wait for an IRS audit, employers are allowed to come into compliance with a minimal payment to cover past payroll tax debts.

To be eligible for the program, the employer must have consistently treated workers as non-employees in the past, and filed all required Forms 1099 for the workers for the previous three years. In addition, the employer cannot be in the midst of an audit by the IRS, Department of Labor or a state agency related to the classification of these workers.

To apply, eligible employers must file Form 8952, the Application for Voluntary Classification Settlement Program, at least 60 days before they would like to begin treating the workers as employees.

As with any voluntary disclosure program that requires the participant to admit wrongdoing and pay what they owe, it is safe to say that many people do not take the government up on its offer. They gamble on the future with the argument that they haven’t been caught so far. On the other side of that argument is common sense. The opportunity to pay just over 1 percent of what you owe in payroll taxes for the previous year is quite a deal. It also presents an opportunity to get your financial and legal house in order.

In fiscal year 2011, dozens of employers, including many from Florida bet on their luck holding out and lost. The IRS initiated 153 investigations and recommended 110 prosecutions. Of that number 79 were sentenced, an incarceration rate of 81 percent, while the average time served was 24 months.

Florida convictions included the case of Victor Manuel Amaya, owner of Amaya Contracting and Stucco Inc. Amaya was sentenced to 24 months in prison and ordered to pay $319,585 in restitution to the IRS. From 2004 through 2007, he filed fraudulent employment tax returns, while his company failed to pay federal employment taxes. Amaya ultimately failed to report more than $2 million in wages, resulting in the tax loss to the government of $319,585.

If Amaya and others like him had the choice of a “fresh start,” today, they would no doubt call an attorney and a CPA who specialize in these cases, and take the government’s offer – just in time for the holidays.