Classification settlement program.

• Author: Fay, Joanne

On Mar. 5, 1996, the Service announced a two-year test of a Classification Settlement Program, designed to resolve worker classification cases as early in the administrative process as possible, as well as to ensure that relief under Section 530 of the Revenue Act of 1978 is properly applied. IRS examiners will be permitted to negotiate a settlement based on the strength of the taxpayer's Section 530 case.

The Classification Settlement Program is based on Section 530, which can grant relief from a reclassification of an independent contractor as an employee, if the taxpayer meets a three-factor test:

1. Reporting consistency: All Federal tax returns required to be filed by the taxpayer with respect to the individual must have been filed on a basis consistent with the worker's classification.

2. Substantive consistency: The taxpayer must have consistently classified similarly situated workers.

3. Reasonable oasis: The taxpayer must have had a reasonable basis for the worker's classification.

If the Service determines that a worker has been misclassified as an independent contractor, the examiner must determine whether Section 530 relief would apply. If Section 530 relief applies, despite the fact that workers have been misclassified, the employer is not subject to assessment of any employment taxes that would result from reclassification, and the workers need not be reclassified prospectively. If Section 530 relief does not apply, the examiner and group manager will determine whether the taxpayer is eligible for a settlement offer.

To qualify for the Classification Settlement Program, the taxpayer must meet the "reporting consistency" requirement. If the, taxpayer "clearly cannot meet" either of the other factors of the test, the settlement will be for prospective treatment plus a full employment tax assessment of one tax year computed using Sec. 3509, if applicable. If the taxpayer has a "colorable argument" that it meets the substantive consistency test and the reasonable basis test, settlement will be for prospective treatment...