Last November, the IRS announced it would launch a comprehensive audit of employers’ payroll tax practices, which is slated to begin in February 2010. To read the IRS’s announcement, click here.
Referring to it as an Employment Tax Research Study, the IRS intends to randomly select 2,000 employers each year for the next three years to review their current payroll tax practices. That means 6,000 employers over a three-year period will be targeted by the IRS for review.
According to the IRS, this review is intended to be for research purposes only in which they will collect data to gauge more accurately the extent to which businesses properly comply with employment tax law and related reporting requirements. Despite this proclamation, ultimately, the purpose behind this study is likely to be revenue collection. In fact, it has been reported that the IRS has, for years, believed that employers were drastically underpaying payroll taxes to the tune of $14 billion annually.
As part of the audit, the IRS is likely to be focused on misclassification of workers and issues related to expense reimbursement, officer/owner compensation, fringe benefits and tip reporting. In order to prepare for the IRS’s ramped up enforcement effort, you should conduct a self-audit of your practices, which should include a review of your independent contractor classifications and record keeping practices.