Presented By: VCSP Overview. Introduction. Who is Eligible for the VCSP? VCSP Eligibility

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1 From Both Sides of the Table: Analyzing the IRS' New Worker Classification Settlement Initiative Presented By: ANITA F. BARTELS Internal Revenue Service SB/SE Employment Tax ANTHONY P. DADDINO Tax Partner with Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P. Introduction VCSP Overview As of March 31, 2012, the IRS had received 479 applications by taxpayers for participation in the VCSP. Should your client be next? Released 9/21/2011. Announcement Relief Similar to CSP. Simple Application and Process. VCSP Eligibility Who is Eligible for the VCSP? Eligible businesses: Must be currently treating workers as nonemployees. Must have filed 1099s for nonemployees. Cannot be under audit. Can be tax-exempt organizations or government entities. What about a taxpayer previously audited? Previous IRS audit not involving worker classification not a disqualifying factor. Prior audit involving worker classification taxpayer must have complied with audit results..

2 Who is Eligible for the VCSP? Who is Eligible for the VCSP? What about audits of related taxpayer? Can affect eligibility, especially if the related taxpayer is part of the same affiliated group. What about a Form SS-8 determination? Not an examination and thus not a disqualifying factor. Must the Form 1099s be timely filed? What about inconsistent treatment of the worker for prior years? Is the consistent treatment requirement applied on a worker by worker basis or an entire worker class? Participating in the VCSP VCSP Settlement Terms Complete Form 8952, Application for Voluntary Classification Settlement Program. File 60 days prior to treating workers as employees. IRS will review application. If eligible, IRS will prepare closing agreement. Payment is made after closing agreement is received. Prospective treatment of workers as employees. Businesses pay 10% of tax computed on favorable rates (Section 3509(a)). Six year SOL for three years beginning after the date of closing agreement. No interest or penalties. Benefits of the VCSP Audit protection. No penalties or interest on the liability for the VCSP. Tax certainty. Why (in the World) Might Your Client Participate? Liability Exposure Taxes Only Description Liability Exposure IRC Sec 3509 Relief w/o 1099s IRC Sec 3509 Relief w/ 1099s FIT Withholding 28% 3% 1.5% 0.15% VCSP Liability Employee SS 6.2% 2.48% 1.24% 0.124% Employee Medicare 1.45% 0.58% 0.29% 0.029% Employer SS 6.2% 6.2% 6.2% 0.620% Employer Medicare 1.45% 1.45% 1.45% 0.145% Totals 43% 14% 10.7% 1.068%

3 Why (in the World) Might Your Client Participate? Additional Liability Exposure - Tax Additions. Failure to file Form % (civil fraud is up to 75%). Failure to pay Form 941 taxes 25%. Failure to deposit Form 941 taxes 10%. Failure to file Form W-2 $50, up to 10% of reported amount. Failure to furnish Form W-2 - $50, up to 10% of reported amount. Note: The above penalties are stackable. Accuracy related penalties: 20% (fraud penalty is up to 75%). Accrued Interest (often more than the taxes). Versus VCSP NO penalties and NO interest. Not a Voluntary Disclosure The VCSP is designed to resolve the taxpayer s civil tax liability exposure. It does not address a taxpayer s potential criminal tax liability exposure. Consult with a qualified tax professional to determine whether a formal voluntary disclosure with the IRS Criminal Division should precede any disclosure made pursuant to the VCSP. Why a Settlement Program for Employment Taxes? Stated Reasons for VCSP. Offer CSP-type settlements to taxpayers that are not currently under examination. Perception of Tax Practitioners: The IRS experienced tremendous success in luring taxpayers back into compliance through its two recent offshore voluntary disclosure initiatives. Worker Classification: Why the Hubbub? Survey Says: Revenue. Generating revenue through enforcement rather than raising taxes. Current estimates by the Government Accountability Office (GAO) reveal that misclassification results in an annual loss of $2.72 billion to the federal government. The New York example: Task force on worker misclassification. Over a 3 year period, the Task Force conducted 67 sweeps which identified nearly 35,000 cases of misclassification and $457 million. Worker Classification: Why the Hubbub? Other examples: Targeted audits in Ohio resulted in reclassification of 47% of workers. Similar effort in Colorado revealed 33.9% of employers misclassified workers. At least 20 states have undertaken an effort to combat worker misclassification. Worker Classification: Why the Hubbub? The Power of Statistics. Misclassification: IRS: 15% of businesses have misclassified workers approximately 3.4 million workers. DOL : 30% of businesses. Compliance: 99+% of workers who receive a Form W-2 report income. Only 77% of workers who receive Form 1099 report income. Less than 30% report income when Form 1099 is not issued.

4 What about Section 530 Relief? What about Section 530 Relief? The ultimate relief available to taxpayers is Section 530 relief. If a taxpayer qualifies for Section 530 relief, then The taxpayer owes nothing to the IRS. The taxpayer may continue to treat the worker as an independent contractor even though, under the common law analysis, the worker is appropriately treated as an employee. Three Requirements: Tax Return Test. Did the taxpayer file Form 1099s? Position Test. Did the taxpayer consistently treat the workers, and substantially-similar workers, as independent contractors? Reasonable Basis Test. Did the taxpayer rely on legal authority, a prior audit, industry custom, or professional advice in making the classification decision? What about Section 530 Relief? Considerations on VCSP Participation Difficulties of Section 530 Relief: Reasonable Basis Test require actual reliance. No dumb luck protection. Industry Custom is hard to prove. Proof requires more than direct testimony. Cooperative competitors (or undercover action) is often required. Contemporaneous documentation is often lacking. Reclassification Risk Exposure Common-law 20-factor analysis the overarching issue being the degree of control exercised over how the work is performed Whether the client is involved in an industry being targeted. Mitigation Strategies Possible qualification for Section 530 relief Employee payment of self-employment taxes. Level of protection needed Does the client have a potential criminal tax risk? United States vs. Everson. Considerations on VCSP Participation Considerations on VCSP Participation Ability to stay competitive in marketplace. Additional costs associated with employee treatment. State tax issues. Potential vicarious tort liability. Employment discrimination statutes. Provision of employee benefits. Wrinkles with respect to qualified retirement plans. Classification risks with respect to workers not being disclosed. Risk of IRS scrutiny of classification of workers not being disclosed. Remember: IRS will contact the taxpayer to finalize disclosure and there is a 6-year SOL on the next three years returns. Worker reaction. Nothing prevents the reclassified worker from taking action against the employer for past actions. VCSP settlement would be discoverable and could have adverse effect in a non-tax civil liability lawsuit.

5 Considerations on VCSP Participation Identifying Candidates for VSCP Tax Certainty. No waiting game for IRS contact. Avoid undergoing (and cost of defending) investigation. Known financial costs. Quickest route to closure. Complete absolution for all prior years. Potentially good candidates: Businesses in a targeted industry, especially home building, hospitality, janitorial services, agriculture, health care and restaurant industries. Businesses with workers who are treated as independent contractors but perform the same or substantially similar functions as other workers who are treated as employees. Businesses with part time or seasonal staff that perform the same work as full time staff. Businesses who recently resolved a TWC dispute over classification. Conclusion Conclusion (cont d) The IRS voluntary classification settlement program provides the quickest and most direct route to tax compliance at a price that is a tiny fraction of the taxpayer s potential tax exposure. The time is now to visit with your clients about their potential worker classification risks and to determine whether they should consider making an application. Resources Form 8952 and instructions. VCSP pages of IRS.gov, including FAQs. Announcement To ensure compliance with U.S. Treasury Regulations governing tax practice, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under U.S. Federal tax law, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

6 Anthony P. Daddino Partner Anita F. Bartels phone (214) toll-free (800) fax (214) Mr. Daddino is a partner with the firm who specializes in resolving federal tax controversies. He has extensive experience representing taxpayers in a wide variety of tax disputes, ranging from income tax and employment tax matters, to estate and gift tax, and employee benefit and exempt organization matters. Mr. Daddino routinely represents taxpayers administratively before IRS Exam and IRS Appeals, as well as in litigation before the Tax Court and federal district court. As a trial attorney, his recent experiences include trying to verdict partnership tax cases before the Court of Federal Claims and the federal district court for the Western District of Texas, as well as arguing a civil tax case before the Ninth Circuit Court of Appeals. Mr. Daddino is a law professor at SMU Dedman School of Law, where he teaches Corporate Taxation. He is a frequent speaker on tax controversy and ethics issues and an author in the area of international tax compliance. Mr. Daddino has also been quoted in numerous articles published by BNA Daily Tax Report. Anita F. Bartels Senior Program Analyst SBSE Employment Tax Policy (321) [email protected] Mr. Daddino was admitted to practice in Texas in He is married and has three children. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP