Going Where the Money Is

Even if you’ve not been impacted by Justice Department’s investigation of insider trading, here’s a new potential notice to worry about.  The IRS is in the process of launching it’s Employment Tax National Research Project.   The research plan is to audit 6,000 companies selected at random on the general topic of the compliance characteristics of employment tax filers.  In case you’re wondering why this is a priority, the taxes collected through employers come to $1.7 trillion a year.  This is almost 72% of the annual revenue of the US treasury.   So yes,  it appears the study is worth doing “because that’s where the money is” .

The first 2,000 “lucky” companies have gotten their audit notices already.   This will be an annual event for the next two years, so you still may be selected.  The stated goal of the study sound reasonable.  The IRS estimates a “tax gap”, which they define as the difference between the amounts taxpayers should pay and what they actually send in as payment.  The IRS typically targets audits hoping to reduce this tax gap.  There is a concern that in the 25 years since the IRS last looked at likely causes of “tax gap” associated with employment taxes much has changed in how companies process these payments.  So the first goal is to determine if current estimates of this tax gap on target, and then, perhaps more importantly to figure out what areas of employment tax lead to the most compliance problems. 

While the agency indicates that the audits are going to be comprehensive, there are apparently four areas that will be targeted for scrutiny:  worker classification (this goes to the question of whether you’re an employee or contractor), executive compensation, fringe benefits and payroll taxes.  According to the Thompson Bulletin, law-abiding companies who are included in these random samples will have to provide significant amounts of information and will need to allocate specific resources to meet the IRS requirements for data.   Compliance Week  passes on the following:

  In its alert to employers the IRS advises companies to plan their response carefully should they receive a letter initiating an audit under the research program. The IRS says companies should form an internal team consisting of representatives from payroll, accounts payable, accounting, human resources, internal auditing, general counsel, and outside tax professionals.

If you’re not getting scrutiny on this topic now, it’s worthwhile to add doing some internal due diligence on the area of employment tax compliance as a New Year’s resolution.   Better to catch your issues yourself rather than have the IRS do it for you.