Independent Contractor or Employee? – IRS Classification Settlement Program

This is the tenth post in the Independent Contractor/Employee series. This series is dedicated to presenting individuals, sole proprietorships, and small to large businesses with a basic understanding of independent contractor issues.

Under the Classification Settlement Program (CSP), IRS examiners will offer worker classification settlements to taxpayers under examination using a standard closing agreement developed in the IRS National Office. Generally, these closing agreements will provide businesses that filed Forms 1099, but do not meet all the requirements of Section 530, with an opportunity to reclassify workers prospectively, combined with a specified tax assessment not exceeding one year’s tax liability.

The amount of the tax assessments made under the standard closing agreements will depend on the extent to which the taxpayer has satisfied the requirements of Section 530. For example, in general, the IRS will not assess a business for more than one year’s liability when the business has complied with information reporting requirements, but does not meet any of the other Section 530 requirements. A business that has come closer to meeting all Section 530 requirements would have a smaller tax assessment. By contrast, under the usual IRS examination procedures, a business would generally have a tax assessment for all open tax years.

Taxpayer participation in the CSP will be entirely voluntary, and a taxpayer may accept a CSP settlement offer at any time during the examination process. A taxpayer’s rejection of a CSP offer will in no way affect the outcome of the examination. Moreover, a taxpayer declining to accept a settlement offer under the CSP will retain all rights to administrative appeal that exist under the IRS’ current policies and procedures.