The Classification Settlement Program, "CSP" , allows taxpayers and tax examiners to resolve worker classification cases as early in the administrative process as possible, reducing taxpayer burden. The procedures also ensure that the taxpayer relief provisions under section 530 of the Revenue Act of 1978 are properly applied. Under the CSP, Internal Revenue Service (IRS) examiners are able to offer taxpayers under examination a worker classification settlement using a standard closing agreement.

CSP agreements are closing agreements that bind the IRS and the taxpayer to prospective tax treatment for future tax periods. Therefore, it is important that CSP agreements be reviewed and approved by employment tax specialists who have the necessary expertise in dealing with worker classification issues.

Except as otherwise provided in situations listed in IRM 4.23.6.6, Eligible CSP Employment Tax Cases, and IRM 4.23.6.8., Cases Excluded from CSP, it is mandatory that the examiner present a CSP offer to a taxpayer. The taxpayer has the option of either accepting or rejecting the offer.

Employment tax provisions are found at Internal Revenue Code Subtitle C:

The Employment Tax Program is governed by Policy Statements and other internal guidance that apply to all IRS personnel regardless of operating division. The Policy Statements found in IRM 1.2.1, Servicewide Policy Statements, apply to all employment tax issues and examinations. Examiners should review these Policy Statements to properly perform their examination duties.

A website, Search Servicewide Delegation Orders, located at https://irm.web.irs.gov/imd/del/search.aspx provides a searchable list of Servicewide Delegation Orders issued by the Commissioner of the Internal Revenue, or on their behalf by either of the deputy commissioners. Delegation Orders pertaining to each IRS business process can be found in IRM 1.2.2, Servicewide Delegations of Authority.

IRM 4.23 provides Servicewide instructions for all operating divisions with employees involved with the correct filing, reporting, and payment of employment taxes. IRM 4.23 serves as the foundation for consistent administration of employment taxes by various IRS operating divisions. By providing one source of authority for all operating divisions, the IRS greatly reduces philosophical and procedural inconsistencies.

Director, Specialty Examination Policy is responsible for the procedures and updates addressed in this IRM.

Director, Specialty Examination is the executive responsible for Specialty examination operational compliance.

Program Goals: The processes and procedures provided in this IRM are consistent with the objectives or goals for Employment Tax - Examination that are addressed in IRM 1.1.16.5.3.3, Employment Tax Examination, and for Employment Tax Policy, found in IRM 1.1.16.5.5.2.2, Employment Tax Policy.

Program Effectiveness: Program goals are measured with Employment Tax Embedded Quality Performance Reports that monitor whether quality attributes are applied uniformly and consistently.

Annual Review: Program Manager of Employment Tax Policy is responsible for reviewing the information in this IRM annually to ensure accuracy and promote consistent tax administration.

The following table lists Terms and Definitions found in this IRM:

The following table lists commonly used acronyms and their definitions:

The following table lists the primary sources of guidance:

Other helpful information sources include:

The Taxpayer Bill of Rights (TBOR) lists rights that already existed in the IRC, putting them in simple language and grouping them into 10 fundamental rights. Employees are responsible for being familiar with and acting in accord with taxpayer rights. See IRC 7803(a)(3). For additional information about the TBOR, see www.irs.gov/taxpayer-bill-of-rights or https://irssource.web.irs.gov/SitePages/TaxpayerBillOfRights.aspx.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS, led by the National Taxpayer Advocate. Its job is to protect taxpayers’ rights by striving to ensure that every taxpayer is treated fairly and knows and understands their rights under the TBOR. TAS offers free help to taxpayers, including when taxpayers face financial difficulties due to an IRS problem, when they are unable to resolve tax problems they have not been able to resolve on their own, or when they need assistance to address an IRS system, process, or procedure that is not functioning as it should. TAS has at least one taxpayer advocate office located in every state, the District of Columbia, and Puerto Rico.

Examiners should consider the disclosure and privacy provisions when preparing agreed and unagreed case reports. For further information, see the Privacy, Government Liaison and Disclosure (PGLD) maintained knowledge base at https://irsgov.sharepoint.com/sites/ETD-KMT-KB003.

Overall responsibility for civil penalty programs is assigned to Office of Servicewide Penalties (OSP). OSP is charged with coordinating policy and procedures concerning the civil penalty program administration, ensuring consistency with the penalty policy statement, reviewing and analyzing penalty information, researching penalty effectiveness on compliance trends, and determining appropriate action necessary to promote voluntary compliance. For further understanding of the civil penalty program and penalty relief refer to the Penalties Knowledge Base Homepage (https://irsgov.sharepoint.com/sites/ETD-KMT-KB015).

Examiners may encounter situations where the taxpayer timely filed Forms 1099 for some years but not others. CSP is only available for years in which the taxpayer timely filed Forms 1099. The year in which the taxpayer did not timely file Forms 1099 should not be included in the CSP agreement.

Examiners should discuss these situations with their group manager to determine how to proceed. For additional guidance, examiners and group managers should contact the Employment Tax Policy Analyst responsible for CSP at Employment Tax Policy Contacts.

If a taxpayer is no longer operating as a business, a CSP agreement is not available.

Where the taxpayer has merely changed the name or form of the business entity, CSP is available to the taxpayer and to the new entity. An example of a change in the form of the business entity is where the taxpayer previously operated the business as a sole proprietorship and converted the sole proprietorship into a corporation in a subsequent year to operate the business.

A CSP agreement will be prepared to include both the taxpayer and the new entity. The examiner must contact Tax Exempt/Government Entities Division Counsel (TEGEDC) to prepare this type of CSP agreement.

The examiner will prepare a memo to TEGEDC requesting approval to make a CSP offer to both business entities and explaining and/or identifying:

If approved, TEGEDC will provide guidance on how to refer to the current and prior entity in the CSP agreement and provide it to the examiner for completion.

Under CSP, a series of graduated settlement offers are available:

A taxpayer may qualify for more than one CSP offer if several classes of workers are at issue. For example, a taxpayer may receive a 25% CSP Offer for one class of workers and a 100% CSP Offer for another class. The same taxpayer may not have timely filed Forms 1099 for another class of workers, and therefore, may not qualify for any CSP offer for this class of workers. On yet another class, the taxpayer may satisfy all the requirements of section 530 and would therefore be permitted to continue to treat those workers as independent contractors.

Taxpayer participation in the CSP is entirely voluntary. 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 CSP will retain all rights to an administrative appeal that exist under the IRS current policies and procedures and all existing rights to judicial review.

Before a settlement offer can be considered, section 530 must be evaluated separately for each class of worker. See IRM 4.23.5.3, Section 530 of the Revenue Act of 1978. An examination that includes the workers' activities and the degree of direction and control by the taxpayer must also be completed to determine whether the workers are employees. See IRM 4.23.5.4, Independent Contractor or Employee and subsequent sections. When the worker reclassification issue is reviewed in conjunction with section 530, there are a number of possible outcomes. The type of CSP offer is based on the results of the examination.

Exhibit 4.23.6-1, CSP Analysis Chart, summarizes the possible outcomes of an examination and the CSP offer applicable to each outcome. It can be used as a reference guide throughout IRM 4.23.6.

Various CSP offers, or no offer, apply to worker classification adjustments:

The CSP agreement will provide that the taxpayer begins to treat the workers correctly as employees and agrees to an employment tax adjustment.

An employment tax adjustment will be made for the latest year open for audit, computed using IRC 3509(a), if applicable. Full rates can be used if the examiner determines that there is intentional disregard under IRC 3509(c). All usual case processing procedures apply.

The taxpayer should begin treating the worker as an employee effective the first day of the quarter following the agreement date.

If a taxpayer is willing to agree but cannot comply until the second or third quarter, examiners should discuss this situation with their group managers.

The following subsections provides an overview and examples of the types of CSP offers available.

If the taxpayer timely filed required Forms 1099 and has a colorable argument for the substantive consistency test and reasonable basis test, it may be determined that the taxpayer is eligible for section 530 if litigated. In other words, the cases falling into the 25% CSP category are cases where there may be some flaws with the taxpayer’s substantive consistency or reasonable basis argument, or with both arguments. The 25% CSP Offer in these circumstances includes prospective compliance and agreement to an employment tax adjustment equal to 25% of the latest audit year. See Items 8, 10, and 11 on the "CSP Analysis Chart" in Exhibit 4.23.6-1. As described in IRM 4.23.6.14.4 (4), the taxpayer should begin treating the worker as an employee effective the first day of the quarter following the agreement date.

Cases in which no valid reasonable basis argument or substantive consistency argument is offered can be settled under Items 4, 5, 6, 7, or 9 in Exhibit 4.23.6-1.

Section 530(a)(2) provides three safe havens establishing a "reasonable basis" for not treating a worker as an employee. See IRM 4.23.5.3, Section 530 of the Revenue Act of 1978. "Reasonable basis" exists if the taxpayer reasonably relies on:

In addition, section 530 provides that a taxpayer who fails to meet any of the above safe havens may demonstrate some other reasonable basis for not treating the worker as an employee.

The courts have addressed reasonable basis in several cases. The legislative history of section 530 also indicates that reasonable basis should be construed liberally in favor of the taxpayer. See H.R. Rep. No. 95–1748, 95th Cong., 2d Sess., 5 (1978), 1978–3 C.B. 633.

When reviewing the reasonable basis argument presented by a taxpayer, examiners should first determine if it is one of the safe havens described in section 530(a)(2). If it is, the taxpayer is entitled to section 530 relief (if the other section 530 requirements are met). No adjustment should be made, but an offer under Item 1 of Exhibit 4.23.6-1 may be considered.

If the taxpayer’s position does not clearly fall within one of the safe harbors of section 530(a)(2), examiners should consider whether the taxpayer has demonstrated some other reasonable basis. In cases where the taxpayer’s position is without a reasonable basis, an offer under Items 4, 7, or 9 of the "CSP Analysis Chart," in Exhibit 4.23.6-1, should be made. A taxpayer is not eligible for section 530 relief if the taxpayer fails to satisfy the reasonable basis requirement of section 530. Examples of reasons that are not considered reasonable are:

Examples of applying reasonable basis requirement of section 530.

If the taxpayer presents a reasonable basis argument that has some merit, the examiner should verify any facts upon which it is based. In determining if a position has merit, examiners should consider any rationale that is genuine. The objective of the CSP is to recognize a taxpayer’s potential reasonable basis argument and efficiently resolve the contention with a settlement. Common arguments which may fall in this category include prior state determinations. Industry practice arguments will also be presented frequently. This applies to cases where the taxpayer does not clearly meet the industry practice safe haven. For additional information on the industry safe haven, see IRM 4.23.5.3.3.6, Safe Haven - Industry Practice.

The settlement offer for taxpayers who have a colorable reasonable basis argument requires prospective treatment of the workers as employees and an employment tax adjustment of 25% of the employment taxes for the latest audit year. The 25% will be determined by computing the proposed adjustment for Federal Insurance Contributions Act (FICA) and federal income tax withholding (FITW) with respect to the workers at issue for the entire year, using IRC 3509(a), if applicable, and multiplying it by .25. Note that the tax for the Federal Unemployment Tax Act (FUTA) is still computed at 100%. The adjustment will be made for the quarter ending December 31.

Once the group manager approves the CSP Settlement Memorandum, examiners will make the settlement offer to the taxpayer, allowing 30 days for acceptance. See IRM 4.23.6.15.1, CSP Settlement Memorandum.

Examiners should remember that the settlement offer is optional for the taxpayer. The examiner should explain the normal audit and appeals process, including the policy to expand examinations to include other open years.

If the examination is expanded to other open years, the taxpayer may not be entitled to the same, if any, CSP offer. For example, an examiner may discover that in a prior year the taxpayer may not have timely filed required Forms 1099, and therefore, would not be eligible for a CSP offer for the prior year.

The taxpayer retains the right to an administrative appeal. The taxpayer should be advised that if the CSP offer is not accepted at the examination level, the CSP offer will remain available throughout the appeal process.

It is possible that the taxpayer will qualify for several CSP offers because several classes of workers may be at issue. In other words, the taxpayer may qualify for one offer on a particular class of workers and for a different offer relative to another class of workers. The same taxpayer would not qualify for any CSP offer on an additional class of workers if required Forms 1099 were not timely filed for such class.

If a taxpayer accepts the offer, the standard closing agreement will be completed in accordance with procedures in IRM 4.23.6.15.3, CSP Standard Closing Agreement. This document must be prepared without any modification of the terms. (However, see IRM 4.23.6.7.1, CSP & Entity Change, for CSP offers in situations where the type of business entity has changed.) The authorized group manager will execute the agreement on behalf of the Commissioner after the CSP agreement is signed by the taxpayer.

If a taxpayer rejects the offer or the taxpayer does not qualify for CSP, normal examination procedures should be followed, the audit completed and an unagreed employment tax examination report prepared (if appropriate). This may result in expanding the examination to include all other open tax years in accordance with the examination cycle.

Since the CSP is intended to provide greater consistency in resolving worker classification cases, it is critical that examiners remain consistent in initiating the prior and subsequent years examinations when a CSP offer is not involved.

A taxpayer who rejects the CSP offer when it is initially proposed may reconsider the offer and accept it later in the examination. The CSP offer will remain open even if later year returns have been examined. If the audit is expanded to other years and the taxpayer subsequently accepts the CSP offer, the tax adjustment will be computed and assessed on the payments made to the class of workers in the most current year opened for the examination. The CSP offer will not apply to years in which the taxpayer has not complied with reporting requirements.

100% CSP Offer: Follow regular tax calculation procedures using Form 4668 for a single year calculation adjusting all four quarters of the CSP year. If there are other periods open, close no-change with a disposal code of "01" unless other issues have been developed and adjusted. In this situation, the disposal code for the other, non-CSP years will depend on whether or not the taxpayer signs the employment tax examination report for the other issues.

25% CSP Offer:

In cases involving other returns, such as Form 943, Employer's Annual Tax Return for Agricultural Employees, or Form 944, Employer's ANNUAL Federal Tax Return, examiners should follow the same procedures outlined above for the Form 941. Where appropriate, references to Form 941 should be replaced with the correct form number and the corresponding Master File Tax (MFT) Code.

Federal Unemployment Tax Act (FUTA): FUTA tax is included in the CSP offer and is calculated at 100% of the full year for both 100% and 25% cases; FUTA is not subject to any reduction.

Household Employment Taxes: May be reported on the Form 1040 using Schedule H. Examiners will need to follow updated procedures for assessing these taxes on the Form 1040. As noted above, form references and MFTs could change. See IRM 4.23.10.10.5, Household Employment Taxes, for more information.

A 100% CSP Offer or 25% CSP Offer satisfies the employment tax liabilities for the periods included in the CSP agreement.

Examiners will not solicit Form(s) W-2 or W-3 for any accepted CSP offer since the taxpayer has agreed to prospective treatment. Therefore, the section located at the bottom of Form 4668 regarding filing Form W–2/W–2c should be noted "N/A."

Usual guidelines regarding the statute of limitations apply to CSP. If a statute is imminent and procedures require an extension, the taxpayer should sign the consent to extend the statute before a CSP agreement is executed.

Examiners should make every effort to collect the balance due at the time the CSP agreement is executed. If the taxpayer is unable to make full payment, the examiner should follow Accounts Receivable Dollar Inventory (ARDI) procedures to ensure the taxpayer makes payment arrangements.

Each case file in which a CSP settlement offer is made must contain a memorandum explaining it. The settlement memorandum is required whether or not the offer was accepted. The settlement memorandum documents the examiners determination and will be used by the group manager, the CSP review teams, a follow-up examiner, and Appeals if the case is not agreed.

The settlement memorandum should contain the following:

The CSP Settlement Memorandum is prepared by the examiner and submitted to the examiner’s group manager for approval before a CSP offer is made to the taxpayer. TE/GE EO group managers are required to consult with the Area CSP Reviewer before approval.

The settlement memorandum is not part of the employment tax examination report and should not be provided to the taxpayer.

Form 3198, Special Handling Notice for Examination Case Processing, or for TE/GE, the RCCMS 3198-A Checksheet. Note in the "Other" section the appropriate offer:

Form 5344, Examination Closing Record, or for TE/GE, the RCCMS Closing Record tabs. The Disposal Code "01" , "No Change with Adjustment, for LB&I, TE/GE, and SB/SE," or Disposal Code "01" , "Regulatory/Revenue Protection for TE," will be used for any periods that have been examined but accepted as filed as a result of a CSP offer.

The quarters in which the adjustments are made will be closed using Disposal Code "03" , Agreed, for LB&I, SB/SE, and TE/GE. Generally, when the 25% CSP Offer is applied, the adjustment will be made on the 4th quarter Form 941 and the most current examination year for Form 940. For the 100% CSP Offer, examiners should follow all usual case processing procedures, adjusting all four quarters of the CSP year. If there are other periods open, they would be closed no-change with a disposal code of "01" , unless other issues were developed and adjusted requiring a higher priority disposal code for the period.

Form 2504-T: When using the 100% CSP Offer, examiners will follow the usual procedures for completing the Form 2504-T. However, the adjustment summary will need to be entered manually when the adjustment includes a 25% CSP Offer.

Form 4666: When examiners are using the 100% CSP Offer, they will follow the usual procedures for completing the Form 4666. However, the adjustment summary will need to be entered manually when the adjustment includes a 25% CSP Offer.

Form 4667: All CSP offers will include a single year 100% adjustment for FUTA. Usual processing procedures apply. For TE/GE, generally FUTA taxes are not applicable to eligible organizations and governmental entities.

Form 4668: For the 100% CSP Offer, usual processing procedures apply. For the 25% CSP Offer, attach a cover sheet to Form 4668 showing the 25% calculation of tax due. See IRM 4.23.6.14.10, Calculation of CSP Tax Due and Procedures.

Attach a list of reclassified workers with their entire Social Security Numbers to the Form 4668. Separate the workers by class if more than one class of worker is involved.

One of three standard closing agreements must be used for CSP, based on which of the following situations applies:

No changes will be made to any of the terms and conditions of the agreement. Examiners will insert certain taxpayer and return information when preparing the standard closing agreement, which may be found at the Product Catalog Information at https://publish.no.irs.gov/catlg.html#tab=tab1.

Prepare each standard closing agreement in triplicate and secure the taxpayer’s signature on all three copies of the agreement. (See paragraph (5) for information on fax submissions.) After the agreements are signed by the approving official, examiners will provide one copy to the taxpayer using Letter 5155, CSP Transmittal. The second copy will be forwarded to the ET-WSD Unit with the required attachments. See IRM 4.23.6.17, Monitoring CSP Agreements. The final copy will be retained in the case file.

Examiners should exercise caution if authorized representatives wish to execute the closing agreements for the taxpayer. If the authorization form, Form 2848, Power of Attorney and Declaration of Representative, only authorizes the representative with respect to the tax years under examination, the examiner must obtain the taxpayer’s signature on the CSP agreement to avoid any confusion with respect to future compliance. If the Form 2848 contains appropriate language, then the representative’s signature is acceptable. Language authorizing the representative to represent the taxpayer "with respect to employment tax issues arising in [years under examination] and all related specific items affecting other taxable periods" would be appropriate.

Examiners may accept consents to assess additional tax (various Forms 2504, Form 870, and others) and taxpayer closing agreements (for example, Form 906 or CSP agreements) received by fax. The following conditions must be met and documented for a faxed CSP agreement to be considered an original CSP agreement with original signature(s):

If a CSP agreement is entered into and the case meets the referral criteria (see IRM 4.23.2-1, Employee Plans (EP) Referral Checksheet) examiners will follow IRM 4.23.2.2.3.1, Referrals to Employee Plans and Exempt Organizations / Government Entities, for EP and EO referrals.

The examiners will provide the following information with the referral:

If it appears from internal research that the taxpayer is not following the provisions of the CSP agreement, the ET-WSD Unit will prepare a memorandum to the field stating that it appears the taxpayer is not complying with the provisions of the agreement and that follow-up actions are necessary. With the memo, the ET-WSD office will send a copy of the CSP agreement, a copy of the examination reports, and a copy of the CSP Settlement Memorandum to the field.

When conducting a CSP follow-up exam, examiners should:

VCSP monitoring and follow-up activities will be centralized in ET-WSD for agreements secured in SB/SE for SB/SE or LB&I taxpayers; TE/GE will monitor any agreements secured for taxpayers within their BOD.

VCSP agreement monitoring and follow-up will be based on the procedures in IRM 4.23.6.18.1, CSP Non-Compliance Procedures.