Worker classification issues on Washington agenda.

• Author: Goldstein, Benson S.

WORKER CLASSIFICATION ISSUES BECOME a major tax administration focus in our nation's capital over the past few months. First, on September 21,2011, the IRS issued Announcement 2011-64 establishing a new voluntary classification settlement program (VCSP) "that provides partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat workers as employees." Second, in the same month, the IRS and the Department of Labor (DOL) signed a memorandum of understanding (MOU) to share information regarding employee "misclassification." And should those actions not prove sufficient, President Barack Obama included a worker classification provision in the September 2011 release of his plan "Living Within Our Means and Investing in the Future: The President's Plan for Economic Growth and Deficit Reduction."

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Worker classification cases have been a significant bone of contention for the IRS for decades. Businesses that hire workers as independent contractors save money on federal employment taxes, and the independent contractors may view themselves as "entrepreneurial" small-business persons. Determining whether a worker should be treated as an employee or as an independent contractor depends upon a facts-and-circumstances test revolving around a common-law test of whether the service recipient has the right to direct and control how the worker performs the services provided.

IRS revenue agents often take the position that these workers are misclassified and that a business utilizing the skills of these workers owes a large federal employment tax bill. Sometimes the IRS wins such cases against business taxpayers based on the common law; under other circumstances, the Service finds itself stymied from pursuing a case due to Section 530 of the Revenue Act of 1978.

Robert W. Wood, a California attorney, calls Section 530 "a veritable gct-out-of-jail-free card that forgives many instances of worker misclassification" (Wood, "Independent Contractor or Employee? The 100-Year War," 132 Tax Notes 199 (July 11, 2011)). As long as a taxpayer has a reasonable basis for treating a worker as an independent contractor, Section 530 may permit the worker to be treated as a nonemployee.

Under the VCSP, taxpayers may voluntarily reclassify workers as employees for federal employment tax purposes and obtain relief similar to that offered under the current classification settlement program (CSP). To be eligible for...