Payroll Tax Audits are conducted on businesses that have or have employees and fail to file and pay payroll taxes on Employer Quarterly Federal Tax Return Form 941, misclassify workers as independent contractors when in fact they are employees or there is a discrepancy between W -3 Wage Report Delivery and Taxes, W-2 Wages & Income Statements and Employer’s Quarterly Federal Tax Return Form 941.
When a payroll tax audit is selected for audit, the case is assigned to the Employment Tax Audit Program and then assigned to one of the employment tax auditors.
The employment tax auditor will seek bank statements, payroll bank statements, copies of the Employer’s Quarterly Federal Tax Return Form 941 for a specified period, DE-9 Quarterly Contribution Returns and Wages Reports and any other forms or documents they believe will assist them in determining whether all employee wages/salaries have been calculated in the submitted SPT.
For people who are wrongly paid as independent contractors, workers who incidentally should be reported as employees. Then, that’s when the employee audit misclassification came under investigation.
The Internal Revenue Service and State tax agencies have identified factors to determine when a person should become an employee or independent contractor. File Form SS-8 Worker Status Determination for Federal Employment Tax Purposes and Income Tax withholding if you as an employer are unsure about how to treat an employee.
General Law Rules
The facts that provide evidence of a degree of control and independence fall into three categories:
1. Behavior: Does the company control or have the right to control what workers do and how workers do their jobs?
2. Finance: Are the business aspects of the worker’s job controlled by the payer? (this includes things like how workers are paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there any written contracts or employee type benefits (ie pension plans, insurance, vacation pay, etc.)? Will the relationship continue and is the work done a key aspect of the business?
A mismatch between Employer’s Quarterly Federal Tax Return Form 941, W-2 Wage & Income Statement and W-3 Transmittal of Wage & Tax Statement may result in a computer audit.
Computer payroll audits are easily calculated from tax returns and statements filed by employers. Letters, Notices and results are issued to employers. Audit results are usually recorded as due in the last quarter of the year in which the alleged non-conformance is identified.
Employers are given a deadline to respond to changes. In addition, you may have a right of appeal. Always read all notifications, mails you receive. Many people don’t open a government-issued letter and then they regret the consequences for not adhering to the response time frame.
Payroll tax audits can lead to large tax bills that create financial turmoil for employers. Huge expenses paid to Accountants, Tax Debt Resolution Experts and Tax Lawyers to represent companies that have misclassified workers and now owe payroll taxes for unreported wages/salaries paid to workers who should have been reported as employees in the first place.
Payroll taxes payable can result in the recording of tax liens, garnishments issued on accounts receivable, notes receivable, and bank accounts. Furthermore, if negotiations are unsuccessful, the tax agency will foreclose and sell your business to secure payment of taxes that are due.
Do not attempt tax debt negotiations without seeking professional help. IRS Collection Officers are required to follow certain tax rules, processes and procedures before carrying out their collection efforts. If you don’t know what resolution options you can request and what are the requirements for those resolutions. Then, your company may experience financial catastrophe and possible closure.
Do not forget or corrupt notices and letters sent to you by a tax agency or an employee of that tax agency. There are so many appeal rights, timeframes that require a response by a specific date. If this time frame and date is not met. Then, the IRS Auditor or Collector will have no choice but to move forward with the further action required according to your case.
A lien filed against your company will affect your ability to borrow and will encumber any and all property your company owns and your possible owner, officer, member and/or director of an entity that owes payroll taxes.
Yes, there is a potential individual liability for not paying payroll taxes. Read Internal Revenue Code 6672. Basically, the IRS is required to calculate the amount of withholding taxes, social security, and Medicare taxes that must be paid. Then, a letter is sent or given to a potentially responsible person or entity who does not properly report and pay taxes properly.
These papers provide a 60-day time frame for filing an appeal before the tax agency can create a tax bill against an individual or entity that fails to comply with payroll tax rules and regulations.
Business owners, Directors, Officers and the general public believe that because an entity is a Corporation, Partnership, Non-Profit or Limited Liability Company, this in itself protects them individually from liability for unpaid payroll taxes that the entity fails to pass on to the government.
It is not wise to face the IRS Auditor or Collector alone. Even the best tax resolution experts face barriers to negotiating audits and debt. You just need to do some research and interview several tax professionals to verify which one best suits your interests.