The IRS has recently made it easier for businesses to participate in its worker classification voluntary compliance program, which allows a company that has been misclassifying workers as independent contractors to come forward voluntarily and reclassify the workers as employees.  Under this program, employers pay only a small fraction of the potential payroll tax liability.

The Voluntary Classification Settlement Program (“VCSP”) was rolled out in September 2011.  When the program was announced, the IRS said that in order to be eligible to participate in the VCSP, a company must: (1) consistently have treated the workers in the past as nonemployees; (2) have filed all required Form 1099s for the workers for the previous three years; and (3) not currently be under audit by the IRS, the Department of Labor or a state agency.  In addition, the company had to agree to extend the statute of limitations for payroll tax issues from the normal three years to six years.

The third requirement, that the company not be under an IRS audit, made it virtually impossible to participate in the program even if the audit had nothing to do with worker misclassification issues. The newly revamped program modifies this requirement, and now merely requires that the company not be under an IRS payroll tax audit.

The second requirement, that the company must have filed Form 1099s for the workers, will be temporarily suspended if the company applies for the VCSP by June 30, 2013.

Finally, the announcement says that IRS will no longer require the company to agree to extend the statute of limitations for payroll tax issues from three years to six years.

There still remains one important caveat. Although the VCSP will be binding on the IRS, it is not binding on the Department of Labor, ICE or state tax agencies or state employment agencies, so participation in the VCSP will not resolve all potential issues.