Agencies, 11 States Join Forces to Fight Misclassification; IRS Launches Program

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The heads of the Labor Department, the Internal Revenue Service, and 11 state agencies Sept. 19 signed an agreement to coordinate their efforts to fight employee misclassification.

Meanwhile, IRS Sept. 21 launched a settlement program to allow employers to reclassify their workers and come into compliance with the tax system at a low cost.

DOL's Wage and Hour Division, IRS, and agency leaders from Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah, and Washington entered into memoranda of understanding Sept. 19, under which they work together to combat the practice by which some employers incorrectly classify their workers as independent contractors rather than as employees to avoid paying payroll taxes and workers' compensation expenses. Some of the state agencies also signed agreements with DOL's Employee Benefits Security Administration, Occupational Safety and Health Administration, Office of Federal Contract Compliance Programs, and Office of the Solicitor.

DOL's Wage and Hour Division also will enter into memoranda of understanding with New York's attorney general and the state labor agencies of Hawaii, Illinois, and Montana, Labor Secretary Hilda Solis announced Sept. 19.

The memoranda of understanding will enable the federal Labor Department to share information and coordinate law enforcement with IRS and participating states to level the playing field for law-abiding employers and to ensure that employees receive the protections to which they are entitled under federal and state law.

Voluntary Classification Settlement Program Launched

IRS' Voluntary Classification Settlement Program (VCSP) is intended to help taxpayers struggling with the complexity of outdated worker classification rules and give them a fair chance to straighten things out, IRS Commissioner Douglas Shulman said in a Sept. 21 news briefing.

Under the new initiative, unveiled in Announcement 2011-64, employers that prospectively treat their workers as employees can make a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit, Shulman said. Instead of facing back taxes, penalties, and interest for three years of misclassification, taxpayers will be able to pay about 10 percent of the taxes for the most recent of those years, he said.

“For us, this is about doing the right thing,” Shulman said. In answer to questions from reporters, he said that while IRS is targeting small businesses with the new program, it is open to everyone.

Shulman said the program is intended to offer a simpler solution to a complicated problem. IRS has been legally prohibited from writing new rules since a test to determine a worker's status became law in the late 1970s, he noted.

Text of IRS Announcement 2011-64 can be accessed at .


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