Is Your Organization Prepared for an IRS Employment Tax Audit?

March 15, 2011

2011 marks the second year of the Internal Revenue Service’s Employment Tax National Research Project. The purpose of the National Research Project is to determine the root cause of the $290 billion employment tax gap which the IRS believes has resulted from employer under-reporting of wage income. Last year the Service began the first of 6,000 comprehensive employment tax examinations of public and private sector employers which will continue through 2012. While employer organizations of varying sizes and legal forms are subject to a National Research Project audit, the Service is specifically targeting small companies, governmental entities and tax-exempt organizations to determine the scope of under-reporting of taxable income items. National Research Project audits are painfully detailed and cover a broad range of employment tax related issues. You can expect the Service to focus primarily on the following items: (1) fringe benefits (such as gift cards, employer subsidized cafeterias and fitness facilities, cash payments, employer-provided cell phones and vehicles); (2) improper classification of workers as independent contractors instead of employees; (3) executive compensation (such issues as deferred compensation, use of company jet, club dues, and executive loans); (4) payroll tax compliance (such issues as Form 1099/W-2 compliance and next-day deposit requirements); and (5) reimbursed expenses (such as travel, meals and per diem allowances). To date, approximately 2,000 organizations have received notice from the IRS of a National Research Project audit. Another 4,000 more will be audited over the next two years. And this is just the beginning. The IRS will analyze the data gathered from the National Research Project to determine where to focus its auditing resources so that it will produce the greatest amount of tax revenue. Therefore, all employers – private and public sector, large and small – should review their payroll practices, paying particular attention to the five issues that are the focus of the National Research Project audits. Even if your organization is not selected for audit as part of this initiative, you should review your payroll and accounting practices, your organization’s worker classification processes, and all independent contractor relationships now to ensure compliance not only with employment laws but also the Internal Revenue Code, since applicable legal compliance standards are not always the same. Genova Burns can assist companies and government organizations with a review of their employment payroll practices and documentation for legal compliance and can also provide guidance to employers that receive notice from the IRS of a National Research Project audit. For further information about the National Research Project audit process or any employment tax compliance matter, please contact Patrick McGovern at 973-535-7129 or Gina Schneider at 973-535-7134.