In 2011, the IRS announced a special amnesty program, the Voluntary Classification Settlement Program, or VCSP, to help employers admit that their freelancers should have been classified as employees. Employers can convert the status of freelancers to employees, and avoid payroll or employee audits for their last three years of operation — as long as they have been filing 1099-MISCs for those employees. Until June 30, 2013, there’s a special loophole available to businesses that haven’t met that standard.

First, let’s look at highlights of the original program and how it has changed since it was unveiled in the fall of 2011. These were some of the original provisions:

The employer must have consistently treated all employees as freelancers for at least the past three years. The employer must have issued 1099-MISCs to each freelancer. The employer can’t currently be under an audit by the IRS, state, or Department of Labor. The employer must agree to extend the statute of limitations on payroll tax audits to six years, instead of the current three years.

The third provision was revised to permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP. The fourth provision was eliminated, so employers won’t be forced to keep their payroll records open to audit for six years.

However, if a company faces a payroll audit or Department of Labor audit and is in court contesting the results, they won’t be eligible for this VCSP amnesty program.

And in situations where the same owner (or group of owners) owns several businesses, none of those businesses can be under payroll audits.

There are several rewards for companies accepted into this program:

The IRS agrees not to audit any prior years for payroll tax violations.

The IRS waives all interest and penalties on the final VCSP assessment.

The employers only have to pay 10% of the taxes they would have owed for one year’s worth of payroll, instead of 100% for all the prior years when these workers should have been employees.

The bad news: There is a major obligation required of participants. They must stay current on all their payroll tax filings and payments for the next three years (or 12 quarters). If they default at any time, they would lose this deal and open themselves up to an audit, penalties and interest on all the prior years.

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The good news: As I noted in my October 2011 article on this subject, an employer who paid their 1099-MISC worker $100,000 would owe the IRS only $1,068, instead of more than $50,000. Think of companies that have been treating dozens of workers as freelancers instead of putting them on payroll. The savings for coming forward would be in the six figures.

Why bring this up right now? Because there’s a little-known provision that will expire soon — on June 30, 2013. The IRS has provided a Temporary Eligibility Expansion to the Voluntary Classification Settlement Program (VCSP TEE).

This special temporary amnesty is for employers who have not been issuing 1099-MISCs to their freelancers. The deal isn’t as good as it is for employers who have issued 1099-MISC forms. But it’s still much better than running the risk of facing IRS payroll audits for all the years in which employers have been misclassifying workers.

Why? Because there’s no statute of limitations on an audit if someone has not filed a tax return at all. Employers who never filed forms 940, 941, and W-2, or have substantially understated the payroll numbers on those forms, are open to an audit forever, instead of just for three years. And when you lose that audit, you pick up hefty penalties for not filing payroll tax forms and for not paying payroll taxes. To make things worse, you get hit with interest on all the taxes and penalties, starting with the date each of those forms should have been filed — more than doubling the total potential assessment.

What if an employer doesn’t apply? The IRS is apt to learn about the employer’s misclassifying anyway. Workers receiving 1099-MISCs instead of W-2s are turning in their (usually former) employers by using a Form 8919 when they file their tax returns. This saves workers 50% of their self-employment taxes — so they have some incentive to rat out employers.

The VCSP TEE gives employers an alternative:

Pay 25% of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509 (b) of the Internal Revenue Code

Avoid being on the hook for any interest and penalties on the liability

Pay a reduced, graduated penalty for unfiled Forms 1099 for the previous three years for the workers being reclassified (see the worksheet provided with Announcement 2012-46 instead of using Part IV of Form 8952)

Avoid being subject to an employment tax audit with respect to workers being reclassified for prior years.

Once the employer is accepted into the VCSP TEE, it must file a 1099-MISC for each of the workers who should have been employees — for the last three years. The employers must certify that they have done so.

This could be a deal-breaker for some employers, for a variety of reasons. For instance, they may not have the Social Security numbers of the affected workers. Or even their addresses. The employees will be subject to an audit if they have not reported this income during the past three years. The employer may not want to subject some, or all, of these workers to an audit.

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On the other hand, even with the 25% fee and the reduced penalties for the late-filed 1099-MISCs, this is a lucrative deal for the employers. In addition, they can stop losing sleep, waiting for the IRS or state to audit them.

Oops….the state! There is no similar deal with the state. The IRS hasn’t solicited any states to participate in this program, and won't be giving states any information about the employers or their deals. So, as far as the state is concerned, the employer is either just filing a new application for payroll tax filings, or is increasing the size of its payroll. But there’s no assurance that the state won’t initiate an audit once it sees these changes. Employers should take that into account before applying for the VCSP TEE — or the VCSP.

You can see the benefits to the IRS if more employers come clean. The IRS doesn’t need to waste time on audits or chase after current taxes required for amnesty participants. The employer stays in compliance for at least three years. And, as a bonus, the IRS learns specific information about individuals who have not reported taxable income (via the 1099-MISC) — and can probably collect millions of additional dollars that way.

There is some urgency here. The temporary amnesty is only open until the end of June. However, if you’ve been filing 1099-MISCs all along, you can apply for the regular VCSP anytime. Or…you can start filing 1099-MISCs this year and for the next two years — and apply in 2016.

Eva Rosenberg, EA is the publisher of TaxMama.com , where your tax questions are answered for free. Eva is the author of several books and e-books, including Small Business Taxes Made Easy. Eva teaches tax courses at IRSExams.com and CPELINK.