The IRS Voluntary Classification Settlement Program

The VCSP is an IRS program that allows businesses to voluntarily reclassify workers as employees for future tax periods, offering partial relief from past federal employment taxes.

Eligibility Requirements:

To qualify, the taxpayer must:

  1. Have consistently treated workers as nonemployees.
  2. Filed all required Forms 1099 for the past three years.
  3. Not be under current audit (by the IRS for employment taxes, the Department of Labor, or a state agency regarding worker classification).

Note: If any member of an affiliated group is under employment tax audit, the whole group is ineligible. Prior audits are allowed only if the taxpayer complied with the outcome and isn’t currently disputing the classification in court.

Program Benefits:

Participants must:

  • File Form 8952 at least 60 days before reclassifying workers.
  • Sign a closing agreement with the IRS.
  • Pay 10% of the employment tax liability for the most recent year (calculated under reduced Code Sec. 3509(a) rates).
  • Avoid interest and penalties on that amount.
  • Be protected from prior year employment tax audits for those workers.

Additional Notes:

  • Exempt organizations and government entities can participate if eligible.
  • The IRS may deny eligibility if reclassification issues arose during an employment tax audit, as shown in Treece Financial Services Group v. Comm’r.

Compliance Tip:

Only the taxpayer may sign Form 8952, though a representative with a valid POA (Form 2848) may be listed. Full payment must accompany the signed closing agreement.

Let me know if you’d like this turned into a handout or letter template for clients!