Part IV. Items — Internal Revenue Bulletin 2012-51

FICA Taxes on Wages Paid to Residents of the Philippines for Services Performed in the Commonwealth of the Northern Mariana Islands

Announcement 2012–43

This document provides that the IRS will not assert that any taxpayer has understated liability for taxes under the Federal Insurance Contributions Act (FICA) by reason of a failure to treat services performed before January 1, 2015, in the Commonwealth of the Northern Mariana Islands (CNMI) by a resident of the Republic of the Philippines as employment under section 3121(b) of the Internal Revenue Code (Code). Employers must withhold and pay FICA taxes on remuneration paid to residents of the Philippines who do not hold an H–2 status for services performed as employees in the CNMI after December 31, 2014, unless those workers are eligible for FICA exemption based on some circumstances other than the exemption in section 3121(b)(18).

Sections 3101 and 3111 of the Code impose FICA taxes on wages with respect to employment. FICA taxes consist of the Old-Age, Survivors and Disability Insurance tax (social security tax) and the Hospital Insurance tax (Medicare tax). These taxes are imposed on both the employee and the employer. I.R.C. §§ 3101 and 3111. The term “wages” is defined in section 3121(a) for FICA purposes as all remuneration for employment, with certain specific exceptions. Section 3121(b) defines the term “employment” to include any service, of whatever nature, performed within the United States by an employee for the person employing him, irrespective of the citizenship or residence of either, with certain specific exceptions. The CNMI is included in the definition of the United States for FICA purposes. I.R.C. § 3121(e); Article 6, Section 601(c), Covenant to Establish a Commonwealth of the Northern Mariana Islands in Political Union with the United States (Covenant), Pub. L. No. 94–241, 90 Stat. 263 (codified as amended) at 48 U.S.C. § 1801 note (2006); Zhang v. United States, 640

F.3d 1358 (Fed. Cir. 2011), cert. denied, 132 S.Ct. 2375 (2012). Under section 3121(b)(18) of the Code, services that residents of the Philippines perform while temporarily admitted to Guam under section 101(a)(15)(H)(ii) of the U.S. Immigration and Nationality Act (U.S. INA) (H–2 status), 8 U.S.C. § 1101(a)(15)(H)(ii), are excepted from employment for FICA tax purposes. Section 601(c) of the Covenant provides that “[r]eferences in the Internal Revenue Code to Guam will be deemed also to refer to the Northern Mariana Islands, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof or of this Covenant.” Section 606(b) of the Covenant states that “those laws of the United States which impose excise and self-employment taxes to support or which provide benefits from the United States Social Security System. . . will become applicable to the Northern Mariana Islands as they apply to Guam.” Therefore, section 3121(b)(18), in combination with the Covenant, provides an exception from employment for FICA purposes for services performed by residents of the Philippines temporarily in the CNMI in H–2 status.

Prior to November 28, 2009, the CNMI had its own immigration laws with its own immigration categories, and the U.S. INA did not apply in the CNMI (except for very limited purposes not relevant for purposes of FICA tax). However, CNMI immigration laws provided a CNMI temporary work status under the Northern Mariana Islands Commonwealth Code, 3 C.M.C. section 4303(q)(8)(B), which was similar in some ways to H–2 status. Both laws similarly defined a nonimmigrant worker as one temporarily in the United States or the CNMI to perform temporary services or labor. Therefore, the IRS determined that the exemption from FICA under section 3121(b)(18) applied to residents of the Philippines admitted to the CNMI on the similar CNMI temporary status and amended Publication 80, Federal Tax Guide for Employers in the U.S. Vir- gin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mari- ana Islands, to reflect this position.

On May 8, 2008, Congress enacted the Consolidated Natural Resources Act of

2008 (CNRA), Pub. L. 110–229, 122 Stat. 854, which extended federal immigration laws to the CNMI. The transition period for implementation of the United States immigration law in the CNMI began on November 28, 2009, and is scheduled to end on December 31, 2014. As a result of the CNRA, CNMI immigration laws no longer apply and CNMI work permits no longer exist. Nonresidents in the CNMI must apply for a federal immigration status if they wish to remain in the CNMI.

The CNRA authorized nonresidents to work in the CNMI for a two-year period beginning November 28, 2009, and ending November 27, 2011, if they had received a transitional conditional permit (commonly referred to as an “umbrella permit”) from the CNMI government as of November 28, 2009. Additionally, the CNRA established a new Commonwealth Only Transitional Worker (CW) nonimmigrant visa classification for workers in the CNMI. The CW visa classification enables workers who are ineligible for other employment-based nonimmigrant U.S. visa classifications ( e.g., H–2 status) to continue working in the CNMI through the end of the transition period on December 31, 2014 (or longer if the U.S. Secretary of Labor extends the CW program, as is authorized by the CNRA).

Section 3121(b)(18) provides an exception from “employment” for temporary services that residents of the Philippines perform only in H–2 status. Residents of the Philippines temporarily present in the CNMI under any immigration status other than H–2 status, including the CW visa classification, are not eligible for the FICA exemption in section 3121(b)(18). Unless an individual is eligible for FICA exemption based on some other circumstances, FICA taxes will apply to remuneration paid to residents of the Philippines performing services as employees.

However, many residents of the Philippines currently employed in the CNMI have been seeking to determine their proper immigration status. As a result, these workers and their employers have been or are uncertain about their immigration status. For this reason, and in order to ease the CNMI’s transition to federal immigration law, the IRS will not assert

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allows for voluntary reclassification of workers as employees outside of the examination context and without the need to go through normal administrative correction procedures applicable to employment taxes. Accordingly, the VCSP was established on September 21, 2011, through Announcement 2011–64.

The VCSP has been well-received and the IRS has received many applications to date. Taxpayers and taxpayer representatives have provided feedback regarding certain requirements that limit or discourage participation in the program. In particular, they requested that the IRS reconsider the requirement that a taxpayer not currently be under any IRS audit in order to be eligible and the requirement that a taxpayer agree to extend the period of limitations on assessment as part of the VCSP closing agreement with the IRS. The IRS is modifying these VCSP requirements for future applications.

III. ELIGIBILITY

The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. To be eligible, a taxpayer must have consistently treated the workers as nonemployees, and must have filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years with respect to the workers to be reclassified. The taxpayer cannot currently be under employment tax audit by the IRS. A taxpayer that is a member of an affiliated group within the meaning of section 1504(a) is considered to be under employment tax audit for purposes of the VCSP if any member of the affiliated group is under employment tax audit. Furthermore, the taxpayer cannot be currently under audit concerning the classification of the class or classes of workers by the Department of Labor or by a state government agency.

A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the class or classes of workers is eligible for the VCSP if the taxpayer has complied with

that any taxpayer has understated liability for FICA taxes by reason of a failure to treat services performed before January 1, 2015, in the CNMI by a resident of the Republic of the Philippines as employment under section 3121(b) of the Code. However, employers must withhold and pay FICA taxes on wages paid to residents of the Philippines who do not hold an H–2 status for services performed in the CNMI after December 31, 2014, unless those workers are eligible for FICA exemption based on some circumstances other than the exemption at section 3121(b)(18).

The principal author of this announcement is Don Parkinson of the Office of Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this announcement, contact Mr. Parkinson at (202) 622–6040 (not a toll-free call).

Voluntary Classification Settlement Program

Announcement 2012–45

This document provides notice and information regarding the revised Voluntary Classification Settlement Program (VCSP) that provides partial relief from federal employment taxes for eligible taxpayers that agree to prospectively treat workers as employees.

I. PURPOSE

This announcement modifies and supersedes Announcement 2011–64, 2011–41 I.R.B. 503. In light of feedback received from taxpayers and taxpayer representatives, the Internal Revenue Service (IRS) has modified the VCSP, described in Announcement 2011–64. The VCSP has been modified to: (1) permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP; (2) clarify the current eligibility requirement that a taxpayer that is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit; (3) clarify that a taxpayer is not eligible to

participate in the VCSP if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or the Department of Labor; and (4) eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

The VCSP permits eligible taxpayers to voluntarily reclassify workers as employees for federal employment tax purposes and obtain relief similar to that obtained through the current Classification Settlement Program (CSP). The VCSP is optional and provides taxpayers with an opportunity to voluntarily reclassify their workers as employees for future tax periods with limited federal employment tax liability for the past nonemployee treatment. To participate, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP, and enter into a closing agreement with the IRS.

II. BACKGROUND

Whether a worker is performing services as an employee or as an independent contractor depends upon the facts and circumstances and is generally determined under the common law test of whether the service recipient has the right to direct and control the worker as to how to perform the services. In some factual situations, the determination of the proper worker classification status under the common law may not be clear. For taxpayers under IRS examination, the current CSP is available to resolve federal employment tax issues related to worker misclassification if certain criteria are met. The CSP permits the prospective reclassification of workers as employees, with reduced federal employment tax liabilities for past nonemployee treatment. The CSP allows businesses and tax examiners to resolve the worker classification issues as early in the administrative process as possible, thereby reducing taxpayer burden and providing efficiencies for both the taxpayer and the government.

In order to facilitate voluntary resolution of worker classification issues and achieve the benefits of increased tax compliance and certainty for taxpayers, workers and the government, the IRS determined that it would be beneficial to provide taxpayers with a program that

2012–51 I.R.B. 724 December 17, 2012

the results of that audit and is not currently contesting the classification in court.

IV. EFFECT OF THE VCSP

A taxpayer who participates in the VCSP agrees to prospectively treat the class or classes of workers identified in the application as employees for future tax periods. In exchange, the taxpayer pays 10 percent of the employment tax liability that would have been due on compensation paid to the workers being reclassified for the most recent tax year if those workers were classified as employees for such year, determined under the reduced rates of section 3509(a); is not liable for any interest and penalties on the liability; and is not subject to an employment tax audit with respect to the worker classification of the class or classes of workers for prior years.

V. APPLICATION PROCESS

Eligible taxpayers who wish to participate in the VCSP must submit an application for participation in the program using Form 8952, Application for Voluntary Classification Settlement Pro- gram (VCSP). Information about the VCSP and the application is available on www.irs.gov . Along with the application, the taxpayer may provide the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848). The IRS retains discretion whether to accept a taxpayer’s application for the VCSP. The IRS will contact the taxpayer or authorized representative to complete the process once it has reviewed the application and verified the taxpayer’s eligibility. Taxpayers whose application has been accepted enter into a closing agreement with the IRS to finalize the terms of the VCSP and must simultaneously make full and complete payment of any amount due under the closing agreement.

VI. DRAFTING INFORMATION

The principal author of this announcement is Ligeia M. Donis of the Office of the Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this announcement, contact

Don Parkinson at 202–622–6040 (not a toll-free call).

Voluntary Classification Settlement Program

— Temporary Eligibility Expansion

Announcement 2012–46

This document provides notice and information regarding a temporary expansion of eligibility for the Voluntary Classification Settlement Program (VCSP) that will be available through June 30, 2013. The temporary eligibility expansion makes a modified VCSP available to taxpayers who would otherwise be eligible for the current VCSP but have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified. Eligible taxpayers that take advantage of this limited, temporary eligibility expansion agree to prospectively treat workers as employees and will receive partial relief from federal employment taxes.

I. PURPOSE

The Internal Revenue Service (IRS) has developed a new, temporary initiative to permit taxpayers who are otherwise eligible for the VCSP, but have not filed all required Forms 1099 for the previous three years with respect to the workers to be reclassified, to apply for a modified version of the VCSP, the VCSP Temporary Eligibility Expansion. The VCSP Temporary Eligibility Expansion is available through June 30, 2013.

Like the VCSP, the VCSP Temporary Eligibility Expansion permits eligible taxpayers to voluntarily reclassify their workers as employees for federal employment tax purposes and obtain relief similar to that obtained through the current Classification Settlement Program (CSP). The VCSP Temporary Eligibility Expansion is optional and provides taxpayers with an opportunity to voluntarily reclassify their workers as employees for future tax periods with limited federal employment tax liability for the past nonemployee treatment. Payment under the VCSP Temporary Eligibility Expansion is higher than the payment under the VCSP, but the benefits are otherwise the same for taxpay

ers that want to voluntarily reclassify their workers but have not filed all required Forms 1099 for those workers. To participate, the taxpayer must meet certain eligibility requirements, apply to participate in the VCSP Temporary Eligibility Expansion, and enter into a closing agreement with the IRS.

II. BACKGROUND

In order to facilitate voluntary resolution of worker classification issues and achieve the benefits of increased tax compliance and certainty for taxpayers, workers, and the government, the IRS determined that it would be beneficial to provide taxpayers with a program that allows for voluntary reclassification of workers as employees outside of the examination context and without the need to go through normal administrative correction procedures applicable to employment taxes. Accordingly, the VCSP was established on September 21, 2011, through Announcement 2011–64, 2011–41 I.R.B. 503. In response to feedback from taxpayers and taxpayer representatives, the VCSP is modified under Announcement 2012–45, 2012–51 I.R.B. 724, to (1) permit a taxpayer under IRS audit, other than an employment tax audit, to be eligible to participate in the VCSP; (2) clarify the current eligibility requirement that a taxpayer

December 17, 2012 725 2012–51 I.R.B.

for prior years. The taxpayer must certify as part of the VCSP Temporary Eligibility Expansion closing agreement with the IRS that it has furnished to the workers and has electronically filed all required Forms 1099 for the previous three years with respect to the workers being reclassified.

Under the VCSP Temporary Eligibility Expansion, the penalty for unfiled Forms 1099 is graduated, based on the number of required Forms 1099 that were not filed for the previous three years with respect to the workers being reclassified, up to a maximum amount. The worksheet provided with this announcement provides further details regarding how the penalty is calculated.

V. APPLICATION PROCESS

Eligible taxpayers who wish to participate in the VCSP Temporary Eligibility Expansion must submit an application on or before June 30, 2013, for participation in the program using Form 8952, Application for Voluntary Classification Settlement Program (VCSP) . However, taxpayers seeking to participate in the VCSP Temporary Eligibility Expansion should write “VCSP Temporary Eligibility Expansion” at the top of Form 8952.

Taxpayers seeking to participate in the VCSP Temporary Eligibility Expansion must complete all parts of Form 8952, with the following modifications:

(1) Taxpayers should put a line through Part V, Line A3, to indicate that Taxpayer has not satisfied all Form 1099 requirements for each of the workers for the 3 preceding calendar years ending before the date of the application; and

(2) Taxpayers should not complete Part IV, Payment Calculation, of Form 8952. Instead, taxpayers should use the worksheet provided in this announcement to calculate their payment under the VCSP Temporary Eligibility Expansion. Taxpayers should attach the completed worksheet provided in this announcement to Form 8952. Information about the VCSP Temporary Eligibility Expansion and the application is available on www.irs.gov . Along with the application, the taxpayer may provide the name of a contact or an authorized representative with a valid Power of Attorney (Form 2848). The IRS will contact the taxpayer or authorized representa

that is a member of an affiliated group within the meaning of section 1504(a) is not eligible to participate in the VCSP if any member of the affiliated group is under employment tax audit; (3) clarify that a taxpayer is not eligible to participate in the VCSP if the taxpayer is contesting in court the classification of the class or classes of workers from a previous audit by the IRS or the Department of Labor; and (4) eliminate the requirement that a taxpayer agree to extend the period of limitations on assessment of employment taxes as part of the VCSP closing agreement with the IRS.

To be eligible under the VCSP, a taxpayer must meet certain requirements, including having consistently treated the workers as nonemployees and having filed all required Forms 1099, consistent with the nonemployee treatment, for the previous three years with respect to the workers to be reclassified. Taxpayers that do not qualify under the VCSP because they have not filed all required Forms 1099 for the previous three years requested a similar program. The IRS decided to provide this limited, temporary eligibility expansion through June 30, 2013, to permit taxpayers that have not filed all required Forms 1099 to agree to voluntarily reclassify their workers prospectively and file and furnish any required Forms 1099 with respect to the workers being reclassified for the previous three years.

III. ELIGIBILITY

The VCSP Temporary Eligibility Expansion is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees. To be eligible, a taxpayer must have consistently treated the workers as nonemployees. The taxpayer cannot currently be under employment tax audit by the IRS. A taxpayer that is a member of an affiliated group within the meaning of section 1504(a) is considered to be under employment tax audit for purposes of the VCSP Temporary Eligibility Expansion if any member of the affiliated group is under employment tax audit. Furthermore, the taxpayer cannot be currently under audit

concerning the classification of the class or classes of workers by the Department of Labor or by a state government agency.

A taxpayer who was previously audited by the IRS or the Department of Labor concerning the classification of the class or classes of workers is eligible for the VCSP Temporary Eligibility Expansion if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.

In addition, in order to be eligible to participate in the VCSP Temporary Eligibility Expansion, a taxpayer must furnish to the workers and electronically file all required Forms 1099, consistent with the nonemployee treatment, with respect to the workers being reclassified for the previous three years prior to executing the VCSP Temporary Eligibility Expansion closing agreement with the IRS. Taxpayers must electronically file such Forms 1099 in accordance with IRS instructions, which will be provided once the IRS has reviewed the application and verified that the taxpayer is otherwise eligible for the VCSP Temporary Eligibility Expansion, as indicated in Section V, Application Process.

Taxpayers seeking to participate in the VCSP Temporary Eligibility Expansion must submit an application, as indicated below in Section V, Application Process, on or before June 30, 2013.

IV. EFFECT OF THE VCSP TEMPORARY ELIGIBILITY EXPANSION

A taxpayer who participates in the VCSP Temporary Eligibility Expansion agrees to prospectively treat the class or classes of workers identified in the application as employees for future tax periods. In exchange, the taxpayer pays 25 percent of the employment tax liability that would have been due on compensation paid to the workers being reclassified for the most recent tax year if those workers were classified as employees for such year, determined under the reduced rates of section 3509(b); pays a reduced penalty, as discussed below, for unfiled Forms 1099 for the previous three years with respect to the workers being reclassified; is not liable for any interest and penalties on the liability; and is not subject to an employment tax audit with respect to the worker classification of the class or classes of workers

2012–51 I.R.B. 726 December 17, 2012

of the Division Counsel/Associate Chief Counsel (Tax Exempt & Government Entities). For further information regarding this announcement, contact Ligeia Donis at 202–622–6040 (not a toll-free call).

tive with instructions on how to electronically file Forms 1099 once it has reviewed the application and verified that the taxpayer is otherwise eligible. The IRS retains discretion whether to accept a taxpayer’s application for the VCSP Temporary Eligibility Expansion. The taxpayer must contact the IRS to provide confirmation that the taxpayer has electronically filed Forms 1099 and furnished the forms to the workers being reclassified. The IRS will then contact the taxpayer to complete

the process. Taxpayers whose application has been accepted enter into a closing agreement with the IRS to finalize the terms of the VCSP Temporary Eligibility Expansion and must simultaneously make full and complete payment of any amount due under the closing agreement.

VI. DRAFTING INFORMATION

The principal drafter of this announcement is Ligeia M. Donis of the Office

December 17, 2012 727 2012–51 I.R.B.

2012–51 I.R.B. 728 December 17, 2012

Corrections and an Addition to Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns

Announcement 2012–48

The following announcement lists corrections and one addition for items in Publication 1179, General Rules and Specifi- cations for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Informa- tion Returns, Revised November 26, 2012.

Corrections

Title of Form 1099–K in subsection 1.1.2 — Which Forms are Covered? (page 577)

The correct title of the 2012 Form 1099–K is “Payment Card and Third Party Network Transactions.”

Measurements under Exceptions in Part 2.1.7 (page 585)

The first sentence in the first complete paragraph should read “There is a .33 inch top margin from the top of the corrected box, and a .2 to .25 inch right margin, with a +/- 1/20 (0.05) inch tolerance for the right margin.”

The first sentence in the third complete paragraph should read “The depth of the individual trim size of each form on a page must be 3 2/3 inches, the same depth as the official form.”

Specification for Typography in Part 3.2.1 (page 587)

The second sentence should read “All rules on the document are either 1/2 point (.007 inch), 1 point (0.015 inch), or 3 point (0.045).”

Form 1099–B in Part 4.1.2 (page 589)

In section 4.1.2, the 3rd sentence in the first paragraph of the Form 1099–B section should read “For 2012 dispositions,

the substitute Forms 1099–B may have up to five separate sections, each with a heading identifying which securities are included in the list, and each separately totaled.”

Subsection numbers for Section 4.6

— Electronic Delivery of Recipient Statements (page 597)

The Consent subsection under Section 4.6 should be numbered “4.6.2.” The Format, Posting, and Notification subsection under Section 4.6 should be numbered “4.6.3.”

Addition

Addition to OMB requirements under subsection 5.2.1 (page 600)

The following 3 numbered statements are added after the second bullet:

(1) Why the IRS needs the information, (2) How it will be used, and (3) Whether or not the information is required to be furnished to the IRS.

December 17, 2012 729 2012–51 I.R.B.