4.23.6. Classification Settlement Program (CSP)

(1) Purpose: This section explains the Classification Settlement Program (CSP).

(2) Audience: This section contains instructions and guidelines for all Large Business & International (LB&I), Tax Exempt/Government Entities (TE/GE), and Small Business/Self-Employed (SB/SE) employees dealing with employment tax issues. This IRM also applies to Independent Office of Appeals (Appeals) employees working employment tax cases.

(3) Policy Owner: Director, Specialty Examination Policy of the Small Business/ Self-Employed Division.

(4) Program Owner: Program Manager - Employment Tax Policy.

(5) Primary Stakeholders:

• Employment Tax – Workload Selection and Delivery (SE:S:DCE:E:HQ:ECS:S:ETEGCS:EWSD)

• Specialty Examination - Employment Tax (SE:S:DCE:E:SE:ET)

• Examination Specialty Examination Policy, Employment Tax Policy (SE:S:DCE:E:HQ:SEP:EMTP)

(6) Program Scope: The mission of Employment Tax Policy is to establish effective policies and procedures, and to support compliance with employment tax laws.

(1) When an examiner initiates an employment tax exam of a taxpayer who treated certain workers as non-employees, the examiner must first determine whether the taxpayer is entitled to relief from the reclassification of the workers who were treated as non-employees, and resulting liability for employment taxes, under Section 530 of the Revenue Act of 1978 (section 530 relief). To qualify for section 530 relief, the taxpayer must meet three requirements:

1. Reporting Consistency: All Federal tax returns (including information returns) required to be filed by the taxpayer with respect to the individual for the period must have been filed by the taxpayer on a basis consistent with the taxpayer's treatment of the individual as being a non-employee. This test must be applied to each worker separately, since, for example, the taxpayer may have filed a Form 1099-NEC Nonemployee Compensation, for one worker in a class, but not for another worker in the same class.

2. Substantive Consistency: The taxpayer must have treated similarly situated workers consistently. That is, if the taxpayer (or a predecessor) treated a similarly situated worker as an employee, the taxpayer will not be entitled to section 530 relief. This test must be applied to the class of workers having substantially similar job responsibilities and working under substantially similar conditions (for example, supervisors vs. workers being supervised).

3. Reasonable Basis: The taxpayer must have had some reasonable basis for treating the worker as a non-employee. This may consist of reasonable reliance on: a judicial precedent, a published ruling, a private letter ruling or technical advice memorandum issued to the taxpayer; the results of an employment tax audit of the taxpayer that takes place after 1996 (NOTE: An audit prior to 1997 can still qualify the taxpayer for the prior audit safe haven); or a long-standing recognized practice of a significant segment of the industry in which the worker is engaged. Any other reasonable basis could also suffice.

(2) Requirements "b" and "c" above are applied separately to each class of worker.

(3) Refer to IRM 4.23.5.3, Section 530 of the Revenue Act of 1978, for additional guidance.

(4) If the firm clearly meets the reporting and substantive consistency requirements and satisfies the reasonable basis test, the requirements of section 530 are fully met. As a result, no adjustment will be made and the taxpayer may choose to continue treating its workers as non-employees for purposes of its employment tax liability, as long as the facts remain the same and the taxpayer continues to meet the reporting requirement for that class of worker.

(5) If the taxpayer does not satisfy the requirements of section 530, the examiner will determine whether the workers in question are employees under the usual common law rules, as provided by IRC 3121(d)(2) and Treas. Reg. 31.3121(d)-1(c) or other appropriate statutory test, that is:

• Corporate officer, as provided by IRC 3121(d)(1) and Treas. Reg. 3121(d)(1)-(b),

• Statutory employee, as provided by IRC 3121(d)(3) and Treas. Reg. 3121(d)(1)-(d), or

• Persons included under a section 218 Agreement with Social Security Administration, as provided by IRC 3121(d)(4).

(6) Because IRS administrative procedures do not permit examiners to weigh the chances of success in court when proposing adjustments, taxpayers seeking to negotiate a settlement of the issue, including section 530 relief, will generally take their cases to IRS Independent Office of Appeals or to the courts. This increases costs for both taxpayers and the government. The CSP can reduce these costs while preserving the government's interests in certain cases where the IRS determines that the taxpayer is not entitled to section 530 relief.

(1) Chief, Employment Tax: The Chief, Employment Tax, is responsible for overall direction, coordination, and communication for policies and procedures concerning the administration of employment tax programs, including the overall operation of the CSP. Program Managers in each division of TE/GE are responsible for the operation of the CSP within their respective divisions and are responsible for ensuring CSP requirements and procedures are communicated to its compliance staff as appropriate.

(2) Compliance Group Managers: Authority to execute CSP agreements is designated to all compliance group managers. For further information see Delegation Order 7-13 located in IRM 1.2.2.8.13, Delegation Order 7-13 (Rev. 2) (formerly DO-248, Rev. 1), Authority to Accept Classification Settlement Program (CSP) Offers and to Execute the Pro Forma Closing Agreements on CSP Issues. This includes SB/SE, TE/GE, and LB&I team managers with employment tax cases dealing with worker classification issues under their jurisdiction. For the role of the compliance group manager, see IRM 4.23.6.4, Role of the Compliance Group Manager.

(3) Employment Tax - Workload Selection and Delivery (ET-WSD): With the exception of agreements secured in TE/GE, the Employment Tax - Workload Selection and Delivery Unit (ET-WSD) is responsible for receiving all executed CSP agreements, CSP memorandums, and executed full examination report. The agreements will be filed for annual follow-up to determine if taxpayers are adhering to the provisions of their respective CSP agreements. If there is an indication that a taxpayer is not following the provisions of the CSP agreement, ET-WSD will forward a copy of the agreement, the CSP memorandum, and the full examination report to the field for necessary actions. See IRM 4.23.6.17, Monitoring CSP Agreements, for a listing of the documents required to be sent.

(1) Compliance group managers are delegated the authority to sign the CSP closing agreements originating in their respective groups. This authority should be exercised with care to ensure correct and consistent determinations are made. As used in IRM 4.23.6, the term "compliance group manager" means any group manager whose group conducts employment tax return examinations, regardless of operating division.

(2) CSP settlements are intended to simulate the results that would be obtained under current law if the taxpayers accepting those offers had instead exercised their right to an administrative and/or judicial appeal. In addition, all group managers must ensure that settlement offers are not made in an effort to induce taxpayers to change worker status when independent contractor status is correct or when the taxpayer is clearly entitled to section 530 relief.

(3) Group managers must ensure that the evaluation of whether the taxpayer was entitled to section 530 relief and the examination of the worker classification issue for any year was completed and fully developed to support the change in classification. A CSP offer should not be made until the worker classification issue is fully developed and the examiner has determined that section 530 relief does not apply. If section 530 relief is appropriate, no adjustment would be proposed and a CSP offer would not be made (no determination on worker status would have been made) unless the taxpayer asks for a CSP agreement.

(4) It is crucial that taxpayers are treated consistently under CSP. Group managers are responsible for assuring that examiners make offers in appropriate cases, explaining the terms and conditions clearly to taxpayers, and correctly applying the settlement provisions so that taxpayers who are similarly situated receive the same CSP offer.

(1) The examiner will first determine whether the taxpayer qualifies for section 530 relief for the examination year. Where the taxpayer does not qualify for section 530 relief, the examiner will develop the worker classification issue for the most current period that is already open for examination.

(2) If the examiner determines that the workers were treated properly and no classification issue exists, CSP procedures will not apply. The examiner should explain this determination on the appropriate administrative lead sheet in the examination workpapers.

(3) If a worker classification issue does exist, the examiner will consider whether CSP applies. If the examination includes a proposal to reclassify workers as employees and the taxpayer has timely filed required Forms 1099, it is mandatory that the examiner make a CSP offer unless an exclusion applies. See IRM 4.23.6.8, Cases Excluded From CSP.

(4) To determine which CSP offer, if any, is appropriate, examiners should follow the procedures in IRM 4.23.6.14, Procedures for CSP. The examiner must consider the facts and circumstances of each case and make a CSP recommendation to the group manager for approval. The recommendation will be made on a Settlement Memorandum. See IRM 4.23.6.15.1, CSP Settlement Memorandum. If the examiner is unsure of which offer to propose to the taxpayer, the examiner should discuss the issues with the group manager and/or contact the Employment Tax Policy Analyst responsible for CSP for advice and assistance. See the listing at Employment Tax Policy Contacts.

(5) Before offering a CSP agreement to a taxpayer, the examiner and group manager will take the following steps:

1. The examiner must discuss the case with the group manager and record the discussion on the case activity record or in the workpapers. After the discussion with the examiner and a thorough review of the case, the compliance group manager will make the final decision regarding whether a CSP offer is appropriate. If necessary, the compliance group manager should consult with the CSP policy analyst or an employment tax group manager.

2. If the group manager agrees with the reclassification of workers, the examiner will prepare the CSP memorandum as described in IRM 4.23.6.15.1 below.

3. The examiner will also prepare an employment tax examination report on Form 4666, Summary of Employment Tax Examination, Form 4667, Examination Changes - Federal Unemployment Tax, Form 4668, Employment Tax Examination Changes Report, and Form 2504-T, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment (Employment Tax Adjustments Subject to IRC 7436).

4. The examiner is also responsible for preparing the CSP agreement on the appropriate agreement form. See IRM 4.23.6.15.3, CSP Standard Closing Agreement, for appropriate agreement form. Also see Exhibit 4.23.6-3, General Instructions – To Be Used for All CSP Agreements, for definitions and instructions for completing the three standard CSP closing agreements.

5. For additional TE/GE procedures refer to IRM 4.70.14.2.1.4.4, TE/GE - Classification Settlement Program.

(6) Authority to sign the CSP agreement is delegated to the compliance group manager, who indicates final approval of the CSP settlement by signing the CSP agreement after the agreement has been signed by the taxpayer or an authorized representative. A power of attorney does not authorize a taxpayer representative to sign a CSP agreement for the taxpayer unless the CSP agreement is specifically listed on the Form 2848, Power of Attorney and Declaration of Representative. See IRM 4.23.6.15.3, CSP Standard Closing Agreement.

(1) CSP is available to taxpayers with an open employment tax examination in SB/SE, TE/GE, LB&I, and Appeals. As described in IRM 4.23.6.7, Cases Included in CSP, if a taxpayer has timely filed all required Forms 1099, and satisfies other requirements described herein, it is mandatory that the examiner present a CSP offer to a taxpayer. The taxpayer has the option to accept or reject the offer. Taxpayers that have not timely filed the required information returns are not entitled to participate in the CSP with respect to any years for which such returns were not timely filed. For further information see IRM 4.23.6.6.1, Forms 1099 Not Filed for All Years.

(2) The requirement to timely file required information returns is applied separately to each class of workers for each period. However, an inadvertent de minimis failure to timely file Forms 1099 should not affect the taxpayer’s eligibility for CSP. Examiners need to carefully consider all the facts in determining whether the failure to timely file Forms 1099 is an inadvertent de minimis failure. Factors to consider include, (but are not limited to):

• The taxpayer’s reason for failing to file Forms 1099,

• The number of Forms 1099 not filed compared to the total number of Forms 1099 required to be filed for the workers in the class of workers being examined,

• The amount of compensation required to have been reported on the non-filed Forms 1099 compared to the total compensation paid to the workers in the class of workers being examined,

• Whether the Forms 1099 filed contain material errors such as significantly underreporting the amount paid to the workers in the class of workers being examined unless the taxpayer can demonstrate reasonable cause for failing to include the proper amounts paid to the workers on Forms 1099.

  Note: If the taxpayer is not entitled to participate in the CSP, the IRS will follow traditional methods of seeking compliance. These taxpayers will be able to use the traditional administrative and judicial appeal processes.

(1) If the taxpayer has timely filed all required Forms 1099, it is mandatory that the examiner present a CSP offer, including the following situations:

• Form 940/941 Non-filers: Taxpayers who have not filed a Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return or a Form 941, Employer's Quarterly Federal Tax Return, because of their treatment of the workers as non-employees are eligible for a CSP offer. Often, the non-filing of the forms is consistent with the taxpayer’s reasonable basis argument.

• Statutory Employees: If a taxpayer treated workers as independent contractors and the examiner determines the workers are statutory employees, as defined in IRC 3121(d)(3), the taxpayer is eligible for a CSP offer.

• Household Employees: Household employers are often eligible for a CSP offer even if they have not filed Forms 1099, since a Form 1099 may not have been required (due to the payment being under $600).

• Certain Government Employers: The CSP program is available to federal, state, and local government employers, including state and local government employers whose employees are covered under a section 218 agreement. See IRM 4.70.14.2.1.4.4, TE/GE - Classification Settlement Program, for specific instructions on section 218 taxpayers and CSP offers.

• Corporate Officers: If a taxpayer treated a corporate officer as an independent contractor and timely filed all required Forms 1099, the taxpayer is eligible for a CSP offer. For additional guidance on addressing corporate officer compensation issues for CSP purposes see paragraph (8) "Corporate Officer Wage Issues:" in IRM 4.23.6.8, Cases Excluded from CSP and IRM 4.23.6.9, CSP & Officer Compensation Procedures.

• Railroad Employees: If a railroad taxpayer treated workers as independent contractors and the examiner determines the workers are railroad employees, as defined in IRC 3231(b), the taxpayer is eligible for a CSP offer.

(2) Use of full rates under IRC 3509(c) to compute the tax in worker classification adjustments does not exclude the taxpayer from a CSP offer.

(3) The assessment of penalties in worker classification adjustments, other than the fraud penalty, does not exclude the taxpayer from a CSP offer.

(1) Other Issues: CSP is not available for issues other than worker classification.

(2) 7436 Wage Issues: CSP is not available for wage issues subject to IRC 7436. Wage issues subject to IRC 7436 generally arise in situations where a taxpayer treated a worker as an employee, but did not include all remuneration as wages and raises either a worker classification or a section 530 relief argument with respect to a wage issue. In cases involving IRC 7436 wage issues where a taxpayer claims the workers at issue perform separate and distinct services both as an employee and as an independent contractor and Forms W-2 and Forms 1099 have been issued, examiners should contact the Employment Tax Policy Analyst responsible for CSP or TEGEDC for assistance in determining whether a CSP offer is proper.

(3) Prior Closing Agreement: A taxpayer that has previously entered into a closing agreement to resolve classification of the workers at issue in the year under examination is not eligible for CSP. The prior closing agreement provides the final resolution regarding treatment of these workers.

(4) CSP Non-Compliance: A taxpayer that is not in compliance with the terms of an existing closing agreement relating to worker classification issues is not eligible for CSP. See IRM 4.23.6.18.1, CSP Non-Compliance Procedures, for CSP follow-up procedures.

(5) Prior Coverage: The CSP program is not available if the misclassified workers are employed by a business that is owned, operated or controlled by a business, or the principals of a business, that previously entered into a closing agreement resolving the classification of the workers if the newer business was incorporated or established after the closing agreement was signed. Ownership for purposes of CSP will mean that at least 80% of the value of the new business is directly or indirectly owned or controlled by the business or the principals of the business that previously entered into a closing agreement resolving the classification of workers.

(6) Three-Party Arrangements: If the examination requires identifying the correct employer, the taxpayer is not eligible for a CSP offer unless this issue is agreed at the examination level. If the identity of the employer cannot be resolved at the examination level, any settlement of worker classification issues must occur through normal appeals procedures. Examples include cases in which the issue is whether the worker was employed by the taxpayer or by the worker’s corporation as well as cases in which one business "leases" workers to another. Examiners should contact TEGEDC for assistance with determining whether a taxpayer is eligible for a CSP offer in a three-party arrangement situation.

(7) Information Returns Other Than Forms 1099: Worker classification cases in which only information returns other than Forms 1099 were timely filed will not be included in CSP. Thus, for example, if only Schedules K-1 (Form 1120S) were filed treating the workers as non-employees, CSP does not apply.

(8) Corporate Officer Wage Issues: Cases which involve only recharacterizing officer/shareholder distributions, constructive dividends, loans, or other payments not reported on Forms 1099, will not be included in CSP. This is most often seen in Form 1120 S-Corporations. Also, see IRM 4.23.6.9, CSP & Officer Compensation Procedures, for additional guidance on addressing corporate officer compensation issues for CSP purposes.

(9) Administrative or Judicial Proceeding: If prior year employment tax returns are the subject of an ongoing administrative or judicial proceeding, the taxpayer will not be eligible for a CSP offer. If prior year returns are in litigation for the worker classification issue, consult with the Department of Justice or TEGEDC attorney handling the case.

(10) Litigation: A CSP offer should not be made in subsequent year examinations of taxpayers for which the worker classification issue has been resolved through litigation.

(11) Criminal Investigation (CI): If an income tax or other related return is part of an on-going criminal investigation, the CSP offer should not be made without consulting the Special Agent assigned to the investigation.

1. Fraud Cases: Cases which have adjustments that include either the Civil Fraud or Criminal Fraud penalty will not be eligible for CSP.

2. Cases which have adjustments that reasonably have the potential to include either the Civil Fraud or Criminal Fraud penalty should be developed in full before any decision is made regarding CSP.

(12) Taxpayer No Longer in Business: By their very nature, CSP agreements apply only to taxpayers still in existence. Therefore, if the taxpayer is no longer in business, a CSP agreement cannot be offered to the taxpayer, as there can be no prospective treatment. However, see IRM 4.23.6.7.1, CSP & Entity Change, for procedures where there has only been a change in the name or form of the business (e.g., change from sole proprietorship to corporation).

(1) Cases which involve only recharacterizing officer/shareholder distributions, constructive dividends, loans or other payments not reported on Forms 1099 will not be included in CSP. See IRM 4.23.6.8 (8). However, reclassification cases, in which the officer was treated as an independent contractor and a Form 1099 was timely filed, are included in CSP. See IRM 4.23.6.7, Cases Included in the CSP, paragraph (1).

(2) Examiners may encounter cases in which Forms 1099 were timely filed, but the officer also received additional payments such as distributions, loans, or personal expenses that the examiner determines to be additional compensation. CSP eligibility is determined based on the requirements of section 530. Therefore, even though the amount reported on Form 1099 was understated, these cases are eligible for CSP since a Form 1099 was timely filed.

(3) The following examples illustrate the application of CSP to cases involving officer compensation issues:

• Example 1: You are examining a taxpayer for 2022 where officer compensation of $100,000 was reported on Form 1099-NEC for 2020, 2021, and 2022. You determine that the $100,000 reported on Form 1099 is reasonable compensation for the officer’s services. No other payments (distributions, loans, personal expenses) were made to the officer.
  This scenario is the same as any other worker classification adjustment. A CSP agreement must be offered for 2022; 2020 and 2021 would not be examined. The tax would be computed on $100,000 for 2022. IRC 3509(a) rates would apply unless you determined there was intentional disregard under IRC 3509(c). Use of full rates under IRC 3509(c) would not exclude the taxpayer from a CSP offer.

• Example 2: You are examining a taxpayer for 2022. Officer compensation of $10,000 was reported for each year on Form 1099-NEC for 2020, 2021, and 2022. The taxpayer also paid the officer $90,000, which it characterized as distributions. You determine that reasonable compensation for the officer's services should be $100,000 and that the $90,000 of distributions should be recharacterized as wages.
  Similar to Example 1, CSP would apply since the officer was treated as an independent contractor and Forms 1099-NEC were issued. A CSP agreement must be offered for 2022; 2020 and 2021 would not be examined (even for the additional compensation that would make up a reasonable wage). The tax would be computed on $100,000 for 2022. IRC 3509(a) rates would apply unless you determined there was intentional disregard under IRC 3509(c). Use of full rates under IRC 3509(c) would not exclude the taxpayer from a CSP offer.

• Example 3: You are examining a taxpayer where officer compensation of $100,000 was reported on Form 1099-NEC for 2022. Officer compensation reported on Forms 1099-NEC for 2020 and 2021 was only $10,000. You determine that the $100,000 reported on Form 1099-NEC for 2022 is reasonable compensation for the officer’s services, but the $10,000 reported on Forms 1099-NEC for 2020 and 2021 is not. The taxpayer paid an additional $90,000 per year (which it characterized as distributions) to the officer in 2020 and 2021. No distributions were paid in 2022.
  This situation would be handled similar to Example 1. A CSP agreement must be offered for 2022; 2020 and 2021 would not be examined even though a reasonable salary was not paid in those years. The tax would be computed on $100,000 for 2022. IRC 3509(a) rates would apply unless you determined there was intentional disregard under IRC 3509(c). Use of full rates under IRC 3509(c) would not exclude the taxpayer from a CSP offer.

• Example 4: You are examining a taxpayer that reported officer compensation of $100,000 on Form 1099-NEC for 2022. No officer compensation was reported on Forms 1099-NEC for 2020 and 2021. The taxpayer paid $125,000 (which it reported as a distribution on Schedule K-1) to the officer in 2020 and 2021. No distributions were paid in 2022. You determine that the $100,000 reported on Form 1099-NEC for 2022 is reasonable compensation for the officer’s services. You determine that reasonable compensation for 2020 and 2021 is also $100,000 for each year. (The $25,000 difference between the total distribution and the amount recharacterized as wages remains a distribution.)
  A CSP offer would apply for 2022, but would not apply for 2020 and 2021 since no Forms 1099-NEC were filed for those years. A CSP agreement would be offered for 2022 only. You would examine 2020 and 2021 for the wage issue. The CSP agreement for 2022 does not prevent 2020 and 2021 from being examined in this situation since no Forms 1099-NEC were filed for those years and CSP is therefore not available. The tax would be computed on $100,000 for 2020, 2021, and 2022. IRC 3509(a) rates would apply to 2022, and IRC 3509(a) rates would apply to 2020 and 2021, unless you determined there was intentional disregard under IRC 3509(c). Use of full rates under IRC 3509(c) would not exclude the taxpayer from a CSP offer.
  

• Example 5: You are examining a taxpayer that reported officer compensation of $100,000 on Form 1099-NEC for 2022. The taxpayer reported officer compensation of $10,000 on Form W-2 for 2020 and 2021. Additional payments of $125,000 per year were paid to the officer in 2020 and 2021 and were reported as distributions on Schedule K-1. No distributions were paid in 2022. You determine that the $100,000 reported on Form 1099-NEC for 2022 is reasonable compensation for the officer’s services. You determine that reasonable compensation for 2020 and 2021 is also $100,000 for each year.
  This situation would be similar to Example 4, but 2020 and 2021 would not be worker classification adjustments. A CSP offer would apply for 2022, but not for 2020 and 2021 since the officer was already treated as an employee for those years. A CSP agreement would be offered for 2022 only. You would examine 2020 and 2021 to re-characterize the distributions as wages. The CSP agreement for 2022 does not prevent 2020 and 2021 from being examined in this situation since those years do not involve worker reclassification. The 2022 tax would be computed on $100,000. IRC 3509(a) rates would apply unless you determined there was intentional disregard under IRC 3509(c). Use of full rates under IRC 3509(c) would not exclude the taxpayer from a CSP offer. The tax would be computed on $90,000 ($100,000 reasonable compensation less $10,000 already reported on Forms W-2) for 2020 and 2021. Since the adjustments for 2020 and 2021 are not worker classification adjustments, IRC 3509 would not apply and full rates would be used.

(1) If a taxpayer clearly meets the reporting and substantive consistency requirements and satisfies the reasonable basis test, the requirements of section 530 are fully met. As a result, no adjustment will be made and the taxpayer may continue treating workers within the class as non-employees.

(2) However, a taxpayer may prefer to begin treating its workers as employees. In this case, the examiner should determine whether the workers are employees. If so, an agreement for prospective treatment will be made with the taxpayer. A taxpayer that enters into such an agreement may begin treating the workers as employees currently or at the beginning of the next year. By doing so, the taxpayer will not give up its section 530 relief for prior years.

(1) Where the taxpayer is not eligible for section 530 relief and it appears that the taxpayer may have erroneously treated a worker as a non-employee rather than an employee, the IRS examiner will gather the facts necessary to determine whether improper classification has occurred.

(2) The examiner will then consult with the examination group manager before making a CSP offer to the taxpayer. After thoroughly reviewing the facts and circumstances of the case, the group manager will confirm the taxpayer's eligibility for a CSP settlement offer. If an offer is made and accepted by the taxpayer, the parties will sign a CSP closing agreement using the applicable standard closing agreement. See IRM 4.23.6.15.3, CSP Standard Closing Agreement, paragraph (1), for a listing of the three available agreements.

(3) Section 530 relief is generally not applicable to Federal agency employers. However, if a Federal agency agrees to reclassify workers who were not treated as employees of the Federal agency for Federal employment tax purposes as part of the resolution of an examination of the Federal agency’s employment tax returns, a CSP offer may be made to the Federal agency.

(1) In any case involving a determination that a worker was mis-classified, the examiner must comment on CSP. The examiner should fully explain in the workpapers:

• Whether a CSP offer was considered,

• Whether or not an offer was made,

• What type of offer was made, if any, and

• Why or why not.

(1) CSP applies to worker classification issues that arise in examinations conducted by examiners in LB&I, SB/SE, and TE/GE. CSP does not alter the procedures that apply to the Employee Plans Compliance Resolution Program (EPCRS), as detailed in Rev. Proc. 2013-12. CSP also does not affect the TE/GE Voluntary Compliance Resolution (VCR) program, as detailed in Rev. Proc. 2013-12.

(1) First, the examiner will analyze the extent to which a taxpayer meets the requirements for section 530 relief, which is critical to determining whether the taxpayer can continue current classification practices and the appropriate nature of the offer the taxpayer will receive under the CSP. The following subsections provide the procedures for CSP.

(1) Generally, regular closing procedures apply. However, closures involving a CSP agreement will require the following additions or changes.

(1) The CSP includes safeguards to ensure the program is implemented and executed consistently and in accordance with program guidelines. There are three layers of quality control built into the program:

1. The first safeguard is inherent in the structure of the program. The standard closing agreement provides a uniform settlement offer that was reviewed and approved by the Headquarters Office. Modifications are not permitted. However, see IRM 4.23.6.7.1, CSP & Entity Change, for procedures where there has only been a change in the name or form of the business (for example, change from sole proprietorship to corporation).

2. Employment Tax Policy has an analyst assigned as the program leader for the CSP.

3. Compliance group manager review and approval of all settlement offers is required. This will ensure a high level of managerial involvement. The authorized compliance group manager has the expertise and the familiarity with other open cases to assure the accuracy and consistency of determinations.

(1) CSP monitoring and follow-up activities for SB/SE are centralized in the ET-WSD for agreements secured in SB/SE and Appeals. These CSP agreements and related documents should be emailed to *SBSE ET WSD Case Closing Packages (sbse.et.wsd.case.closing.packages@irs.gov) with the subject "CSP Agreement – Tax Periods 20XX03-20XX12."

(2) Each CSP Agreement and related documents must be combined into one Adobe (.pdf) file. Scanned documents must be reviewed to confirm scans are complete and legible. The following documentation must be sent to ET-WSD upon final closure of any case that has an agreed CSP agreement:

• CSP agreement,

• Complete copy of the full employment tax examination report (Forms 2504-T, 4666, 4667, and 4668),

• CSP memorandum,

• Lead sheets and workpapers for the worker classification and section 530 issues, and

• Activity record showing contact information.

(3) TE/GE will monitor its own agreements. The CSP Coordinators in each TE/GE function (Exempt Organizations Examination (EOE), Federal, State and Local/Employment Tax (FSL/ET), and Indian Tribal Governments (ITG)) will send fully executed CSP Agreements to TE/GE Classification & Case Assignment mailbox at *Manager EO Classification (EOClass@irs.gov). The subject line of the email should state "[Insert Function] CSP Agreement." Additional information for TE/GE employees can be found at:

• IRM 4.70.6, TE/GE Examinations, Classification and Case Assignment (C&CA) Procedures

• IRM 4.70.14.2.1.4.4, TE/GE - Classification Settlement Program

(1) The ET-WSD Unit is responsible for monitoring SB/SE CSP agreements and for performing an annual follow-up to assess taxpayer compliance with the CSP agreements secured by SB/SE, LB&I, and Appeals.

(2) When a case in Appeals results in a CSP settlement, a copy of the Appeals Case Memo, CSP agreement, and Appeals Report must be sent to the ET-WSD for filing and follow up procedures.

(3) The Chief, Employment Tax Examination, will oversee the SB/SE program for review and follow-up activities and will coordinate with other functions. Each function within TE/GE with employment tax responsibility (FSL/ET, EO, and Indian Tribal Governments (ITG)) will oversee its own program through their respective TE/GE Program Manager.

(4) In TE/GE, the functional CSP Coordinator (along with their manager) is responsible for the operation of the CSP program. TE/GE Compliance, Planning and Classification is responsible for initiating an examination if it appears that the taxpayer is not treating the individuals as employees per the signed agreement.

(1) The Voluntary Classification Settlement Program (VCSP) is a voluntary program that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements, apply to participate in VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

(2) The VCSP allows eligible taxpayers who are not under examination to obtain relief similar to that currently available through the Classification Settlement Program for taxpayers under examination.

(3) Examiners should be familiar with VCSP to address any questions taxpayers or authorized representatives might have about the program. See IRM 4.23.20, Employment Tax - Voluntary Classification Settlement Program (VCSP) Procedures, for additional information on the VCSP process.

(4) If an examiner is auditing a taxpayer who has a VCSP agreement that covers a specific class of worker, the worker classification issue for that class of worker is closed and cannot be examined unless the taxpayer is not in compliance with the VCSP agreement. Like the CSP, the VCSP is a final settlement of the issue.

1. Generally, the examiner would not make a determination on worker status if the Taxpayer is entitled to section 530 relief. However, the taxpayer may state that the belief that the workers are employees and request a CSP agreement.

2. At least one of the tests in the previous three columns is "No".

3. "Colorable" means the taxpayer’s argument has some merit but not sufficient enough to fully meet the test.

(1) The most current CSP agreements, as listed below, are located in the forms repository at https://publish.no.irs.gov/catlg.html#tab=tab1:

1. Form 14490, Closing Agreement on Final Determination Covering Specific Matters for Taxpayers Entitled to Section 530 Relief. To be used when taxpayers qualify for relief under section 530 relief but choose to treat the workers as employees prospectively.

2. Form 14491, Closing Agreement on Final Determination Covering Specific Matters Regarding Worker Classification. To be used when taxpayers do not qualify for section 530 relief, are currently treating the workers as non-employees, and are eligible for a CSP offer.

3. Form 14492, Closing Agreement on Final Determination Covering Specific Matters Regarding the Classification of Workers Currently Treated as Employees. To be used when taxpayers do not qualify for section 530 relief, are currently treating workers as employees, and are eligible for a CSP offer.

• All CSP forms are now in fillable Portable Document Format (PDF). Spaces for taxpayer information that is to be inserted by the examiner appear at the top of the first page of each agreement. The information the examiner enters in these fillable boxes will appear in the correct place on each form when completed.

  Caution: The CSP agreement is an agreement between the taxpayer and the IRS in settlement of all issues covered by the agreement. It binds both the taxpayer and the IRS for prospective treatment of workers. It is imperative that all information that is inserted into the agreement by an examiner be correct.

  Caution: The period, type of tax, audit adjustments, and penalties are entered in a separate place from the general taxpayer information that is inserted in the fillable spaces at the top of each form. The table for the audit information is in the body of the CSP agreement. The examiner must manually insert the audit results in the spaces provided for this information.

• Enter each date in the format "mmmm dd, yyyy", that is January 1, 2023.

  Note: "mmmm" means to write out the month, for example "January."

• Draw a diagonal line through any space at the bottom of a page to avoid any unintended insertions by the parties to the agreement. This is optional.

• Print three copies of the standard closing agreement and secure original signatures on all three original copies of the agreement.

  Note: Examiners may accept CSP agreements received by fax, images of signatures, and digital signatures. Examiners must follow the procedures outlined in IRM 10.10.1.6.1, Accepting Images of Signatures and Digital Signatures in Certain Taxpayer Interactions, to authenticate the signature. For further information refer to IRM 4.23.6.15.3 (5).

  Note: Any IRS document signed under an approved alternative method will be treated for all purposes as an original signature.

  Exception: TE/GE employees prepares just one standard closing agreement rather than three. For additional TE/GE procedures, refer to IRM 4.70.14.2.1.4.4, TE/GE - Classification Settlement Program, IRM 4.70.6, Classification and Case Assignment Procedures, and IGM TEGE-04-0523-0010, Change in Closing Agreement Requirements, dated May 8. 2023.

• When all three originals of the agreement are signed by the taxpayer or the taxpayer’s representative and the approving official:

Recipient	Action
Taxpayer	Provide one original copy to the taxpayer using Letter 5155, CSP Agreement Transmittal
ET-WSD	Provide one original copy to ET-WSD with CSP agreement, complete copy of the full employment tax examination report, CSP memorandum, lead sheets and workpapers for the worker classification and section 530 issues, and activity record
Case file	Retain one original copy in the case file

Note: TE/GE employees will use Letter 1595 to send a draft or final closing agreement to a taxpayer. For additional TE/GE procedures, refer to IRM 4.70.14.2.1.4.4, TE/GE - Classification Settlement Program, IRM 4.70.6, Classification and Case Assignment Procedures, and IGM TEGE-04-0523-0010, Change in Closing Agreement Requirements, dated May 8. 2023.

(1) Form 14490 is used when taxpayers qualify for relief under Section 530 but choose to treat the workers as employees prospectively.

(2) Insert the following information in the numbered boxes available at the top of Form 14490:

(1) Form 14491 is used when taxpayers do not qualify for relief under section 530, are currently treating the workers as independent contractors, and are eligible for a CSP offer.

(2) IInsert the following information in the numbered boxes available at the top of Form 14491:

(3) Enter the following information in the body of the Form 14491 for the type of tax and amount to be assessed:

(1) Form 14492 is used when taxpayers who do not qualify for section 530 relief are currently treating workers as employees and are eligible for a CSP offer.

(2) Insert the following information in the numbered boxes available at the top of Form 14492: