Employers: Get Your Ducks In A Row!

Just received this in my inbox from the Texas Society of CPA's:

IRS and Employers Gear Up for Employment Tax Audits
October 9, 2009 – The Internal Revenue Service has announced plans to launch employment tax audits this fall in conjunction with its National Research Program (NRP). NRP audits are intensive audits followed by analysis. While it is expected that the audits will result in tax assessments, the underlying purpose of the audits is to collect data that will be used in designing profiles for future audits.

A random selection of approximately 6,000 employers will result in the audit class for this project. Employers will be chosen across a broad statistical platform and will include large, medium, and small businesses, for profit, and not-for-profit businesses.

Issues to be considered in these audits include classification of employees v. independent contractors, classification of fringe benefits, reimbursement of expenses, comparison of employee and independent contractor records to actual tax return filings by the recipients, and officer compensation.

Accountable plans for reimbursement of expenses will be examined in the audits. Such plans will be expected to demonstrate that there is a business connection for the expenses, the expenses are reasonable, there is reasonable accounting for the expenses, and reimbursements are paid in a reasonable amount of time.

Auditors will look at withholding and remittance of income taxes, Social Security and Medicare taxes, and unemployment taxes. Employer-prepared payroll tax forms and related deposits will also be examined for accuracy and timeliness.

The audits are expected to begin in November, 2009 and will be conducted over a three year period. Typical audits will cover three years of employment tax records.

IRS Audits Contract Labor

A CPA colleague contacted me yesterday to let me know that one of her clients is being audited by the IRS for paying contract labor.  This particular issue is emphasized by one of my prior posts.  The IRS and the state unemployment commissions do not like the contract labor classification, and it is a difficult position for an employer to defend.  If I hear any more detail regarding this case, I will post it here.