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Tax Court Can Review IRS Voluntary Classification Settlement Program Determinations

(Parker Tax Publishing May 2022)

The Tax Court held that it has jurisdiction to review an IRS determination that the Voluntary Classification Settlement Program (VCSP) does not apply to the computation of a corporation's employment tax liability. The court also denied the corporation's motion for summary judgment on the issue of whether its liability for employment tax and related penalties should be determined under the VCSP since a genuine dispute of material fact existed as to whether the misclassification of the sole corporate officer was uncovered as a result of an employment tax audit, thus making the corporation ineligible to participate in the VCSP. Treece Financial Services Group v. Comm'r, 158 T.C. No. 6 (2022); Treece Investment Advisory Corp. v. Comm'r, T.C. Memo. 2022-38.


The IRS Voluntary Classification Settlement Program (VCSP), released in Announcement 2012-45, provides partial relief from federal employment taxes and penalties for eligible taxpayers that agree to treat workers prospectively as employees. To be eligible for the VCSP, a taxpayer must: (1) have consistently treated the workers as nonemployees; (2) have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years; and (3) not currently be under employment tax audit by the IRS.

In 2018, Treece Financial Services Group and Treece Investment Advisory Corp. (Treece) submitted Form 8952, Application for Voluntary Classification Settlement Program (VCSP). The IRS denied Treece's application, stating: "You're under an employment tax examination by the IRS." In 2019, the IRS sent Treece a Letter 3523, Notice of Employment Tax Determination Under IRC 7436 (notice), reclassifying Dock Treece as an employee instead of an independent contractor for tax years 2015, 2016, and 2017. In the notice, the IRS determined additions to tax under Code Sec. 6651(a) and penalties under Code Sec. 6656. Treece petitioned the Tax Court for review of the notice. Treece asserted that it qualified for participation in the VCSP and that the amount of its employment tax liability should be computed using the VCSP.

In a Stipulation of Settled Issues, Treece and the IRS stipulated that Mr. Treece was the sole corporate officer of Treece, that he was an employee and not an independent contractor, and that Treece was not entitled to relief under Section 530 of the Revenue Act of 1978 with respect to Mr. Treece's treatment as an independent contractor. The sole remaining issue before the Tax Court was the proper amounts of employment taxes.

The IRS filed a Motion to Partially Dismiss, arguing that the Tax Court lacks jurisdiction to review its determination that Treece was ineligible to use the VCSP to compute the proper amount of its employment tax liability. Treece filed a motion for summary judgment, contending that it met all the requirements for participation in the VCSP. The IRS objected on the basis that Mr. Treece's misclassification as a nonemployee was uncovered as the result of an employment tax audit and therefore Treece did not meet the participation requirements of VCSP. Thus, a genuine dispute of material fact existed.


The Tax Court denied the IRS's motion to dismiss after finding that it has jurisdiction to determine whether the IRS's determination that the VCSP didn't apply to the computation of Treece's employment tax liability was correct.

The court noted that under Code Sec. 7436(a), it has jurisdiction to determine: (1) whether an individual providing services to a person is that person's employee for employment tax purposes; (2) whether the person, if an employer, is entitled to relief under Section 530; and (3) the proper amounts of employment taxes which relate to the IRS's determination concerning worker classification. The court also noted that its deficiency jurisdiction includes reviewing administrative determinations that are necessary to determine the merits of the deficiency determinations. For example, in Trimmer v. Comm'r, 148 T.C. 334 (2017), the Tax Court held that it had jurisdiction in a deficiency proceeding to review the IRS's denial of a taxpayer's request for a hardship waiver of the 60-day rollover requirement for distributions from qualified retirement plans. The court further found that under Trimmer, there is a strong presumption that an act of administrative discretion is subject to judicial review.

The court explained that under the VCSP, an eligible employer pays a lesser amount of employment tax than would have been due as to certain employees and is not liable for any interest and penalties. The court also observed that in 2000, Congress amended Code Sec. 7436(a) to provide the Tax Court jurisdiction to determine whether the IRS's determination of employment status is correct and the proper amount employment tax under such determination. In addition, the court found that in Charlotte's Office Boutique, Inc. v. Comm'r, 121 T.C. 89 (2003), supplemented by T.C. Memo. 2004-43, aff'd, 425 F.3d 1203 (9th Cir. 2005), the Ninth Circuit held that the 2000 amendment "indicates that Congress did not intend to limit the Tax Court's jurisdiction under Code Sec. 7436 to determine only whether an individual was an employee." Thus, the court concluded that it has jurisdiction to determine whether an employment tax liability is correct in determinations of employment status. Since the denial of a taxpayer's eligibility for VCSP directly affects the amounts of tax due, the court said that the judicial review procedures for IRS employment status determinations logically contemplate review of such a denial as one element of the determination.

The Tax Court also denied Treece's motion for summary judgment after finding that, if there was an employment tax audit, as the IRS contended, then Treece did not meet the participation requirements of the VCSP, and therefore a material dispute existed as to whether there was such an audit.

For a discussion of the Voluntary Classification Settlement Program, see Parker Tax ¶210,130.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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