Form 12661: How to Apply for the VCSP

An employer’s decision to classify workers as independent contractors carries ongoing tax implications. The Internal Revenue Service (IRS) offers the Voluntary Classification Settlement Program (VCSP) for businesses that wish to change that classification for future tax periods. This program allows eligible taxpayers to prospectively reclassify their workers as employees. In exchange for this change, the IRS provides partial relief from the federal employment taxes that would have otherwise been due for prior years.

VCSP Eligibility Requirements

To participate in the VCSP, a business must satisfy several conditions. The employer must have consistently treated the workers in question as nonemployees and cannot have previously treated them as employees for any period. The employer must also have filed all required Forms 1099 for the workers it seeks to reclassify for the previous three years.

Eligibility also depends on the employer’s current standing with government agencies. The business cannot currently be under an employment tax audit by the IRS. Similarly, if the Department of Labor or a state agency is auditing the business regarding the classification of these same workers, the employer is ineligible.

A business is also barred from the program if it is actively contesting the classification of the workers in court following a previous audit by the IRS or Department of Labor. If a business was previously audited on this issue, it can only be eligible for the VCSP if it has fully complied with the results of that prior audit.

Information and Documentation for Your Application

The primary application document is Form 8952, Application for Voluntary Classification Settlement Program. Before filling out this form, you should collect your Employer Identification Number (EIN), business name and address, and the contact information for a person the IRS can speak with about the application. If you designate a representative, a Form 2848, Power of Attorney and Declaration of Representative, may also be required.

The application involves providing details about the workers you intend to reclassify. You must determine the total number of workers, provide a description of the class or classes of workers performing similar services, and calculate the total compensation paid to this group for the most recently completed calendar year. Once you have gathered this information, you can complete Form 8952, where you must certify under penalties of perjury that you meet all eligibility requirements.

Submitting the VCSP Application Package

After you have completed and signed Form 8952, it must be mailed to the designated IRS office that handles VCSP applications. Do not include any payment with your initial application, as this can cause processing delays. The IRS recommends filing the application at least 120 days before you wish to begin treating the workers as employees.

Upon receiving your application, the IRS will review it to verify your eligibility. An IRS representative may contact you or your designated power of attorney if there are questions about the information provided. If the application is accepted, the IRS will prepare a closing agreement and send it to you for your signature.

You must sign and return the closing agreement to the IRS. At that time, you will also be required to make a payment for the amount due under the agreement. This payment is a reduced figure, representing a percentage of the employment tax liability that would have been due on the workers’ compensation for the most recent tax year.