Businesses brace for IRS employment tax compliance audit project

Starting soon and extending over a three-year period, the IRS will be auditing businesses for employment tax infractions on an intense basis. A key part of this IRS initiative will be extension of its National Research Program (NRP) to employment tax compliance. The IRS will be using random audits under the NRP to update its estimates of the extent to which noncompliance with employment tax obligations contributes to the $300+ billion tax gap. The IRS is also looking for "drivers" of employment tax noncompliance.

With this new information in hand, the IRS will reprogram its computers and retrain its examiners to identify those businesses that should be audited for employment tax. Those audits will not only look to the future but also encompass retroactive review of employment tax returns and deposits now being submitted to the IRS.

Note. While the IRS is showing some leniency to businesses during these economic hard times on the income tax front, it reportedly continues to show no mercy for employment tax missteps. In fact, the IRS suspects that many more businesses are now tempted to take out "short-term loans" by delaying payment to the IRS of money withheld from employee wages. It has been dealing harshly with those businesses that misappropriate employment taxes. It also takes a tough stand on situations in which an employer tries to save employment taxes by reclassifying more employees as "independent contractors" without changing the actual structure of that relationship.

Noncompliance

The IRS's estimates of the tax gap are largely based on studies from 10 or more years ago. Treasury and the IRS have estimated that employment tax underreporting accounted for approximately $54 billion of the gross $345 billion tax gap. Underreporting of FICA accounted for $14 billion; underreporting of self-employment tax accounted for $39 billion; and underreporting of unemployment tax accounted for $1 billion. Underpayments of employment taxes also contributed $5 billion to the tax gap.

Starting soon

In July, the IRS reported that it will launch its NRP study of employment tax compliance this autumn. Starting soon, the NRP study will focus on employment tax reporting and filing with the goal of measuring compliance and discovering reasons for non-compliance. IRS officials have indicated that the NRP study of employment tax compliance will be a multi-year project. In addition to payment issues, the study will focus on worker classification, fringe benefits, non-filers, and officers' compensation.

Our office is prepared not only to assist you on all your income tax planning and compliance needs, but also your employment tax obligations. Please call if you have any questions about how IRS's new employment tax audit initiative applies to your business.