James F. Mahoney, Attorney

November 2011

The IRS and the Voluntary Worker Classification Settlement Program

Finally, a totally useless self-confessing tax program for the trucking industry, brought to you by the
nice people at the Internal Revenue Service

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Just days ago the U.S. Department of Labor and the IRS announced a new amnesty program called the Voluntary Worker Classification Settlement Program or “VCSP.” This new program is offered to enable employers to resolve past worker classification issues and achieve certainty under the tax law at low cost by voluntarily reclassifying their workers.

This new program would allow employers the opportunity to get into “compliance” by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

This is part of a larger Fresh Start initiative at the IRS to help taxpayers and businesses address their tax responsibilities.

But – and this is where the other shoe silently drops - several states are joining in this massive effort. So far, the states that have joined are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington. Several more states are in the process of joining forces with the Department of Labor as well.

What does this mean for you: Invariably, all government agencies believe that too many people classified as independent contractors should really be employees. That means withholding, unemployment insurance and possibly benefits - if available to other workers – will be obligations for employers, if they enter the Settlement Program. Obviously, this means increased labor costs and further scrutiny by more agencies and your Worker’s Comp insurers, who can audit payroll for three years, generally, after a policy ends.

The entire classification system is extremely confusing to the business community; but it is even more confusing to the many taxing authorities.

The definition of “employee” versus “contractor” always depends on the jurisdiction. It is entirely possible for Social Security, the IRS, Department of Labor and various state and local authorities to classify the same worker differently. The IRS alone has classifications for independent contractor, employee, statutory employee and statutory nonemployee. The FMCSR’s have meanings for “employees” at variance with common law terms.

As mentioned in prior newsletters and client alerts, in general, the tests look at three factors - behavioral, financial and the nature of the relationship. The more control exerted by the employer, the theory goes, the more likely it is the worker is an employee. But there are so many exceptions and inaccuracies to be pointed out to all.

The “control” issue is specifically at odds with motor carriers’ obligations under the FMCSA regulations, which mandate non-delegable responsibility for safe operations. The IRS, states, agencies and insurers have and will continue to confuse the control issue and unilaterally attempt to charge assessments.

As we often remind ourselves, so many transportation companies benefit by using contractors as capacity providers; and the tradition and expediency of such is well-established and proven. This success mandates that we safeguard this model and strongly oppose this new wave.