New IRS Employment Audits Targeted for Late 2009
The IRS is launching a new compliance examination program focused on employment taxes. Beginning in late 2009, the agency will randomly select businesses and conduct a series of audits to determine if they are properly following a host of payroll tax and compensation-related rules.
The program is part of the IRS National Research Program (NRP), an initiative to improve its compliance programs and better use its resources, and will involve the examination of approximately 6,000 businesses over three years.
Four primary areas the IRS will examine
- Worker classification: Are you properly classifying workers as employees versus independent contractors?
- Fringe benefits: Are you making the proper adjustment for the personal use of business vehicles and complying with discrimination standards for the various fringe benefits?
- Officer compensation: The IRS is likely pursuing unreasonably low compensation paid by closely held S corporations or excessively high compensation paid by closely held C corporations.
- Reimbursed expenses: The IRS is testing the “accountable plan” rules to determine if actual, documented expenses are being reimbursed versus impermissible flat dollar or percentage allowances.
How to prepare
“Businesses should review their compliance before these exams begin,” says Colette Carlson, tax principal at LarsonAllen. “Those with potential issues can shore things up in advance of these audits.”
Does your business have workers receiving 1099s as independent contractors who regularly perform services under your direction and control? That may raise a question about employee status. And, as a result, some fringe benefits may be discriminatory, because not all employees were properly covered.
“The ‘accountable plan’ rules can be particularly tricky,” Carlson says. There are some IRS allowances that do permit flat dollar reimbursements, such as the out-of-town meals or lodging per diems. But in most areas, tax-free reimbursements can only occur if there is specific documentation of the business expense by the employee.
How we can help
If your business may have weaknesses in any of these areas, we can help you review your compliance. For more information,
contact us.