Tax Law Blog

If your business may have misclassified workers as independent contractors, consider applying for the IRS's temporary Voluntary Classification Settlement Program (VCSP) by June 30th. The VCSP allows eligible taxpayers who have misclassified workers as independent contractors to prospectively reclassify them as employees pursuant to a closing agreement with the IRS. The settlement terms are generous. To qualify for the permanent program, a taxpayer must have filed all required Forms 1099 for the previous three years and must meet other requirements. The temporary version of the VCSP waives the requirement that the Form 1099 filing requirement in exchange for the taxpayer paying a larger percentage of the employment tax liability that would have been due on compensation paid to the reclassified workers during the most recent tax year and paying a reduced penalty for failing to file Forms 1099. A taxpayer may apply for the temporary program by filing Form 8952 with IRS by June 30, 2013, writing “VCSP Temporary Eligibility Expansion” across the top of the form, and striking Part V, Line A3.  See IRS Annotation 2012-45 for details.

Dental, orthodontic, and other professional practices often use management fees to allocate compensation among professionals. This compensation strategy is sometimes tax efficient only if the management fee is tax deductible. The U.S. Tax Court recently ruled that a dental practice was not entitled to deduct purported management fees that the practice paid to a related, ESOP-owned entity because there was no indication that the entity actually performed services in exchange for the fees. Wiley M. Elick, Tax Court Memorandum 2013-139. The court also upheld the IRS's imposition of an accuracy-related penalty. Professionals who use management fees in their compensation plan should ensure that the relationship is properly structured and that services are well documented.