My chronicle of how the IRS and Tax Court affect taxpayers' daily lives.

See below for important disclosures.

Sunday, October 4, 2009

IRS's newest audit target? Employment taxes!

The IRS has announced that it will be using random audits uner the National Research Program to analyze the way businesses are paying and reporting their payroll taxes.  The IRS estimates that that $54 billion of the $345 billion tax gap (difference between what is paid, and what should be paid) is made up of the underreporting of payroll taxes. 

The IRS has indicated that the new study will begin in October, and that the study will be a multi-year project inspecting over 6,000 businesses in all industries.  CCH comments that "This NRP is focusing on four broad areas; worker classification, fringe benefits, non-filers, and officer compensation." 

Aaron's Take:  We have already experienced one audit that indicated the IRS is ramping up these audits.  Employment Tax Auditors are a small overall percentage of IRS staff, and these audits will require special training.  Our experience showed an auditor that needed hand holding throughout the process, and did not have the appropriate training or confidence to be able to handle this type of audit. 

Pertaining to the four areas of focus, here is what they are looking for in english:
  • Worker Classification - Employee (aka mandatory withholding) vs. Independent Contractor (most common tax evaders)
  • Fringe Benefits - Personal use of employer provided auto, travel expenses (non-qualified spouses & meals), non-cash benefits, boutique insurances
  • Non-filers - specifically small businesses, with huge potential for penalties.  Most bang for the buck!
  • Officer Compensation - the use of S-Corporations to create minimal salaries (and thereby minimal social security taxes) with high dividends. 

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Aaron Blau, E.A. is the Vice President of the Central Arizona Chapter of Enrolled Agents and a member of the Government Relations Committee of the National Association of Enrolled Agents. The opinions and ideas expressed here are in no way representative of the official position of the National Association of Enrolled Agents, Arizona Society of Enrolled Agents or the Central Arizona Chapter of Enrolled Agents.

For official comments, please e-mail NAEA Director of Communications at or Arizona Society president

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