IRS payroll tax audits create havoc for an employer
Payroll tax audits are conducted on businesses that have or had employees and did not file or pay employment taxes on Form 941, Employer’s Quarterly Federal Tax Returns, misclassify workers as independent contractors when are actually employees or there is a discrepancy between the W-3 Transmission of Wage and Tax Statement, the W-2 Statement of Wage and Income, and the Employer’s Form 941 Quarterly Federal Tax Returns.
When a payroll tax audit is selected for auditing, the case is assigned to the Payroll Tax Examination Program and then assigned to one of the payroll tax auditors.
An employment tax auditor will look for bank statements, bank payroll statements, copies of Form 941, Employer’s Quarterly Federal Tax Returns for a specified period, DE-9 Quarterly Contribution Statement and Wage Report, and any other forms or document that you believe will help them determine if all of the employee’s wages/salaries were accounted for on the filed tax returns.
For people who were incorrectly paid as independent contractors, workers who in fact should have been reported as employees. So, that’s when the misclassification of employee audits comes into the investigation.
The Internal Revenue Service and state tax agencies have identifying factors to determine when a person should be an employee or independent contractor. File a Form SS-8 Determination of Worker Status for Federal Employment Tax and Income Tax Withholding Purposes if you, as an employer, are unsure how to treat a worker.
common law rules
Facts that provide evidence of the degree of control and independence fall into three categories:
1. Behavior: Does the company control or have the right to control what the worker does and how he does his job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how the worker is paid, if expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of relationship: Are there any written contracts or employee-type benefits (ie pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work done a key aspect of the business?
A discrepancy between the employer’s Form 941 Quarterly Federal Tax Return, the W-2 Wage and Income Statement, and the W-3 Wage and Tax Statement transmission may result in a computer audit.
Computerized payroll audits are easily calculated from the tax return and returns filed by the employer. Letters, notices and results are sent to the employer. The audit result is generally recorded as past due in the last quarter of the year in which the alleged mismatch was identified.
The employer is given a deadline to respond to the changes. Additionally, you may have appeal rights. Always read all notices, letters you receive. Many people do not open government-issued letters and later lament the consequences of missing response deadlines.
A payroll tax audit can result in large tax bills that create financial havoc for employers. Large expenses paid to accountants, tax debt resolution experts, and tax attorneys to represent a company that has misclassified workers and now owes employment taxes on wages/salaries paid to workers who should have been declared employees first.
An employment tax liability can result in the recording of tax liens, liens (garnishments) issued to accounts receivable, notes receivable, and bank accounts. Also, if negotiations are unsuccessful, the tax agency will seize and sell your business to ensure payment of back taxes.
Do not try to negotiate the tax debt without seeking professional help. IRS collection officers must follow certain tax rules, processes, and procedures before implementing their collection efforts. If you don’t know which resolution option you can request and what the resolution requirements are. Then your business may be subject to financial havoc and possible closure.
Do not forget or shred notices and letters sent to you by tax agencies or employees of these tax agencies. There are so many appeal rights, deadlines that require a response by certain dates. If these deadlines and dates are not met. The IRS Auditor or Collector will then have no choice but to move forward with the next required action on your case.
Liens filed against your business will affect your borrowing capacity and will tax any and all property your business owns and possibly you as the owner, officer, member, or director of the entity that owes payroll taxes.
Yes, there is potential individual liability for non-payment of employment taxes. Read Internal Revenue Code 6672. Basically, the IRS must calculate the amount of withholding, social security, and Medicare taxes owed. The letters are then mailed or delivered to the potentially responsible individuals or entities that failed to correctly report and pay the proper taxes.
These letters provide a 60-day window to request an appeal before the tax agency can create a tax bill against individuals or entities that failed to comply with employment tax rules and regulations.
Business owners, directors, officers, and the general public believe that because an entity is a corporation, partnership, non-profit company, or limited liability company, this in itself protects them individually from liability for income tax. the unpaid payroll that the entity did not send to the government. .
It is not advisable to confront the IRS Auditor or Collector on your own. Even the best tax resolution experts encounter barriers to negotiating audits and debts. You just have to research and interview several tax professionals to verify which one will work in your best interest.