Classification Settlement Program

If you are a small business owner and you misclassified your workers an independent contractors instead of regular employees and you got caught by the IRS, you got some options.  Under the Classification Settlement Program (“CSP”), the IRS will allow you to come clean with your mistake and work out a deal to save back taxes and penalties.

To qualify for CSP, you must satisfy the following requirements:

  1. You must be a business owner
  2. Have a open case with the IRS either in an audit or appeal
  3. You made a request for a CSP deal
  4. You are in compliance with Section 530 of the Revenue Act.

Revenue Act Section 530 states that the employer must file all tax returns including 1099 forms showing independent contractor payments, treated all similarly situated workers as independent contractors and had a reasonable basis for the misclassification (like relied on written IRS advice, court decision, past audit and etc).

Those small business that qualify will be offered one of three types of settlement: (1) no tax assessment; (2) pay the most recent year of taxes for the missed classified workers and ignore prior years; or (3) pay 25% of the latest audit year deficiency.

Which settlement offered will depend on the facts of your case.  If you didn’t classify all similar situated workers the same way then don’t try to qualified.  You can’t really argue that you accidentally missed classified if you have two workers in the same situation and you classified one as a general worker and the other as an independent contractor.