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IRS Allows Employers to Correct Payroll Fraud with Minimal Penalty

Some employers who have been paying employees as independent contractors have now been given a chance to reclassify these workers and move forward without paying the penalties and interest which they previously would have owed for payroll taxes not collected.  In an effort to stop the widespread practice of payroll fraud in the United States, the Internal Revenue Service has offered a new program under which companies who qualify may voluntarily correct the way they pay their workers, and move forward with a clean slate.

On September 21 the IRS announced the Voluntary Classification Settlement Program (VCSP) for employers who meet certain criteria.  An article posted on the IRS’s website explains how a company may qualify for the program: 

“To be eligible, an applicant must:

  • Consistently have treated the workers in the past as nonemployees,
  • Have filed all required Forms 1099 for the workers for the previous three years
  • Not currently be under audit by the IRS
  • Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers”


The article quotes IRS Commissioner Doug Shulman:

“This settlement program provides certainty and relief to employers in an important area.  This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

The IRS will continue to audit companies and penalize those found to be committing payroll fraud.  Employers who fail to voluntarily take advantage of the new Worker Classification Settlement Program may find themselves facing more penalties than in the past now that the IRS is working with the Department of Labor to identify violators, punish them more aggressively and end this unethical practice.

To apply for the program, fill out Form 8952, Application for Voluntary Classification Settlement Program, 60 days or more before making the responsible change.


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