On November 25, 2011 the Treasury Department issued proposed regulations relating to the definition of an “interest in a limited partnership as a limited partner.” Specifically, the proposed regulations address the situations wherein a member of an LLC will be treated as not owning an interest in a limited partnership as a limited partner under Treas. Reg. 1.469-5(e)(3).
Under the proposed regulations, an individual is treated as owning an interest in a limited partnership as a limited partner if the entity is classified as a partnership for federal income tax purposes and the holder of the interest foes not have the rights to manage the entity at all times during the entity’s taxable year. The proposed regulations follow a series of cases in which courts rejected IRS contentions that LLC members were limited partners.
IRS Updates FAQ Regarding Classification Settlement Program
On November 28, 2011, the IRS issued new frequently asked questions regarding the Voluntary Classification Settlement Program (VCSP). Employers participating in the VCSP are given the opportunity to reclassify workers as employees for future tax years while paying reduced employment taxes for previous years. The new FAQs primarily cover program eligibility, information sharing, and audit risk.
Specific topics addressed include:
· Program eligibility after receipt of an SS-8 determination letter
· Program eligibility given late filed Forms 1099
· Program eligibility once a related entity has been audited
· Information sharing with the Department of Labor and state agencies
· Audit risk to failed applicants
Under the VCSP, a taxpayer will pay 10 percent of the amount of employment taxes calculated under the reduced rates of section 3509(a) of the Internal Revenue Code for the compensation paid for the most recent tax year to the workers being reclassified under the VCSP. In addition, the taxpayer will not be liable for any interest and penalties on the payment under the VCSP, and will not be audited for employment tax purposes for prior years with respect to the worker classification of the workers.