IRS Mounts Major Payroll Tax Audit Initiative of 6,000 Companies

IRS Mounts Major Payroll Tax Audit Initiative of 6,000 Companies October 26, 2009 The Internal Revenue Service (IRS) has quietly unveiled its most significant audit initiative in decades—an initiative the IRS confirmed last week with little fanfare even though its expansive scope will target the federal tax returns of 6,000 companies. In the next few months, the IRS will commence the first wave in its audit initiative—audits intended to “study” compliance in the areas of payroll taxes, independent contractor (IC) status, fringe benefits, and executive compensation. The primary audit goals include (i) reducing the tax gap by increasing tax compliance and payroll tax collections and (ii) reducing the number of “misclassified” ICs. A likely secondary objective, and one urged by the Government Accountability Office (GAO), is to ensure benefits coverage and “labor protections” traditionally associated with employee status. Most companies have never been subjected to a payroll or targeted tax audit even though payroll taxes account for more than 70% of federal tax revenues and are now a Tier 1 audit issue. Those companies that have are typically surprised at the scope, far-ranging issues, and unique procedural nuances associated with these audits. The unusual issues targeted in payroll tax audits have their origin in the IRS National Office’s unique organizational structure, which gives the Tax Exempt and Governmental Entities (TEGE) Division of ...