The IRS recently announced that it will launch a major audit initiative targeting underpayment of employment

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The IRS recently announced that it will launch a major audit initiative targeting underpayment of employment

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ƒƒ Client Alert December 8, 2009IRS TO LAUNCH SWEEP OF EMPLOYERS’ PAYROLL TAX PRACTICES The IRS recently announced that it will launch a major audit initiative targeting underpayment of employment taxes by U.S. companies. The project is scheduled to begin in February 2010 and is the agency’s first comprehensive review of employers’ payroll tax obligations in 25 years. As part of the Employment Tax National Research Project (NRP), the agency will randomly select 2,000 taxpayers each year for the next three years. Those employers will be subjected to comprehensive audits of their payroll tax practices. Then, the agency will use the information it obtained from those 6,000 audits to design a ramped-up enforcement strategy — a strategy that will enable it to identify and audit future employment tax returns deemed to have the greatest compliance risk. WHY IS THE IRS DOING THIS? In a press release announcing the project, the IRS stated that the project is necessary because “[b]usiness practices regarding employment tax issues may have changed significantly since the last IRS employment tax study in the 1980s.” The agency hopes that the data it collects will allow it “to gauge more accurately the extent to which businesses properly comply with employment tax law and related reporting requirements.” Although the agency has taken pains to characterize the project as a “research study,” the project’s ultimate goal is revenue collection. Because ...

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Nombre de lectures	18
Langue	English

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Client Alert

December 8, 2009

IRS

AUNCH

WEEP OF

MPLOYERS

’

AYROLL

RACTICES

IRS to Launch Sweep of Employers’ Payroll Tax Practices

The IRS recently announced that it will launch a major audit initiative targeting underpayment of

employment taxes by U.S. companies. The project is scheduled to begin in February 2010 and is the

agency’s first comprehensive review of employers’ payroll tax obligations in 25 years. As part of the

Employment Tax National Research Project (NRP), the agency will randomly select 2,000 taxpayers each

year for the next three years. Those employers will be subjected to comprehensive audits of their payroll

tax practices. Then, the agency will use the information it obtained from those 6,000 audits to design a

ramped-up enforcement strategy — a strategy that will enable it to identify and audit future employment

tax returns deemed to have the greatest compliance risk.

HY IS THE

IRS

DOING THIS

In a press release announcing the project, the IRS stated that the project is necessary because

“[b]usiness practices regarding employment tax issues may have changed significantly since the last IRS

employment tax study in the 1980s.” The agency hopes that the data it collects will allow it “to gauge

more accurately the extent to which businesses properly comply with employment tax law and related

reporting requirements.” Although the agency has taken pains to characterize the project as a “research

study,” the project’s ultimate goal is revenue collection. Because payroll taxes account for about a third of

all tax revenues collected within the federal tax system, the IRS is eyeing payroll taxes as an

underexploited source of revenue to replenish its dwindling coffers during these lean economic times. The

agency suspects that employers may be underpaying payroll taxes by about $14 billion annually. The

IRS’s announcement comes on the heels of anecdotal reports that several states have ramped up their

audit and enforcement activities, particularly concerning the proper classification of workers as

employees or independent contractors.

HAT SHOULD EMPLOYERS EXPECT

Selected employers will receive the unfortunate news that they have been chosen for an IRS

payroll audit by mail. The notice will describe the extremely detailed NRP process, which will include

face-to-face meetings with IRS auditors and line-by-line reviews of the employer’s 941’s and income tax

returns. IRS auditors will be particularly focused on fettering out underpayment of taxes in these problem

areas:

owner/officer compensation (e.g., executive retirement contracts, golden parachutes, and

stock options);

reimbursed expenses (e.g., PDA and cell phone bills);

Client Alert

December 8, 2009

IRS to Launch Sweep of Employers’ Payroll Tax Practices

fringe benefits (e.g., use of company cars, planes, vacation properties, and other perks);

and

worker misclassification (e.g., misclassifying employees as independent contractors).

Keep in mind that the NRP’s audit sweep is just the first step in the IRS’s broader plan to ramp-up

enforcement of employment tax compliance, so even if your company is lucky enough not to be among

those 6,000 employers selected for an audit, your company still may be included as part of the IRS’s plan

for escalating scrutiny of employment tax compliance. So now is the time to correct any areas of

noncompliance that may have cropped up in your payroll department, either through failure to be vigilant

about the details of employment tax law or by simple misunderstanding of the tax law.

HAT SHOULD EMPLOYERS DO

To make sure your company is prepared, we recommend the following steps:

Conduct a preemptive self-audit of your company’s employment tax procedures and

practices to ensure full compliance. Consult with a qualified employment tax attorney

regarding any areas of concern, particularly the four problem areas listed above. As part

of your audit, ensure that your company’s records pertaining to past employment tax

returns are properly maintained and preserved.

Designate an internal lead employment tax person and empower him or her to review

current compliance, manage audits, and recommend improvements.

Check company mail-processing procedures to ensure that any IRS audit notice will be

forwarded to the responsible company official.

If your company is selected for an IRS audit, contact an employment tax attorney

immediately. Do not schedule any IRS audit appointment (either by phone or a personal

meeting) until you have arranged for representation. A qualified employment tax attorney

can guide you through the process and help ensure your company is treated fairly.

UESTIONS

The attorneys at

Thompson

& Knight are here to help you prepare for the IRS’s escalating

scrutiny of employment tax practices. With attorneys specializing in both taxation and employment law,

we have the breadth of knowledge and experience to provide you with valuable, timely, and practical

assistance on employment tax as well as employee benefits, worker classification, and executive

compensation matters.

If you have questions or concerns about your company’s employment tax

obligations or if you need help with any other legal matter, please contact the Thompson & Knight

attorney with whom you regularly work or one of the attorneys listed below.

Client Alert

December 8, 2009

IRS to Launch Sweep of Employers’ Payroll Tax Practices

_________________

ONTACTS

Roger D. Aksamit

713.951.5885

Roger.Aksamit@tklaw.com

Anthony J. Campiti

214.969.1565

Tony.Campiti@tklaw.com

Bennett W. Cervin

214.969.1124

Bennett.Cervin@tklaw.com

Stephen F. Fink

214.969.1120

Stephen.Fink@tklaw.com

Sharon M. Fountain

214.969.1518

Sharon.Fountain@tklaw.com

Andrea Hyatt

214.969.1577

Andrea.Hyatt@tklaw.com

J. Mike Holt

214.969.1500

Mike.Holt@tklaw.com

Tamara R. Jones

214.969.1448

Tamara.Jones@tklaw.com

Marc H. Klein

214.969.1795

Marc.Klein@tklaw.com

Bryan P. Neal

214.969.1762

Bryan.Neal@tklaw.com

Micah R. Prude

214.969.1698

Micah.Prude@tklaw.com

Elizabeth A. Schartz

214.969.1737

Elizabeth.Schartz@tklaw.com

Steven W. Sloan

214.969.1113

Steven.Sloan@tklaw.com

Frank Waite

214.969.2122

Frank.Waite@tklaw.com

Shelly A. Youree

214.969.1439

Shelly.Youree@tklaw.com

This Client Alert is sent for the information of our clients and friends.

It is not intended as legal

advice or an opinion on specific circumstances.

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