Overview: The IRS has recently announced a new National Research Project (NRP) audit sweep which will gather current data to estimate the extent to which the federal "tax gap" is derived from employment tax compliance issues, as well as to generate revenue for the IRS. Employment tax is widely perceived as being an area ripe for tax recovery, due to both misunderstanding and misrepresentation on employers’ part, and also because it’s historically been under-enforced by government agencies. This is the first NRP study in the area of employment tax since 1984.
Key Points:
Scheduled to start this November, the IRS audits will be ongoing over the next 3 years and will involve as many as 6,000 randomly-selected businesses of various sizes and legal forms, including nonprofits.
The audit sweep will focus on years 2007-08 and on four main areas: owner/officer compensation; reimbursed expenses; fringe benefits; and worker classification. However, the scope will not be strictly limited to those 4 areas of focus, or to calendar years 07-08.
Audits will be extremely detailed, comprised mainly of face-to-face meetings and line-by-line reviews of 941's and income tax returns.
General Context: This audit sweep is just one measure of the escalating scrutiny of employment taxes in the current economy; employment taxes are receiving increased attention by state and federal agencies across the board. The NRP sweep comes in addition to already-increasing audits by state and federal taxing authorities, which are aggressively pursuing revenue sources to replenish their depleted unemployment funds. Increasingly, these agencies are working together, sharing information, and exchanging audit leads. Currently the IRS and 34 states share information on employee misclassification-related audits. Since late 2007, there has been a Memorandum of Understanding between many of the states’ unemployment agencies and the IRS to exchange employment tax-related information, and potentially to conduct joint audits. Even Congress has an eye on worker classification- this August, the U.S. Government Accountability Office released a 74 page report on the topic of employee misclassification. All of this means that it is not “business as usual” for companies that in the past may have skated by from year to year, paying less than their share of taxes either through deliberate manipulation of numbers, by failure to be vigilant about the minute details, or by honest misinterpretation of rules.
Recommendations for Employers:
Proactively review current employment tax procedures and practices (state and federal).
Update company mail processing procedures to carefully monitor for IRS audit notices.
Designate an internal lead employment tax person and empower them to review current employer compliance, manage audits, and make recommendations for adjustments.
Consider an outside review of your employment taxes by an employment tax professional, to best position your company in advance of an audit.
If you are audited, engage the assistance of outside expertise as early in the process as possible.
Do not schedule any IRS (or other agency) audit appointment until a thorough internal analysis can be conducted and necessary records reviewed and organized.
For more information about Employment Tax Specialists, including our specialization in employment tax compliance issues, please visit our website at http://www.employmenttax.com.
