IRS Begins Employment Tax Compliance Audits
The Internal Revenue Service (“Service”) is beginning this month audits of employment tax issues under a National Research Program (“NRP”). The NRP was first announced last year and will last three years. Each year, 2,000 returns will be selected at random to be audited, for a total of 6,000 audits. Cases have been selected for the first of these rounds, and businesses that will be subject to the audits should expect to receive notification letters from the Service beginning in February or March of this year. The program will involve agents from the Small Business/Self-Employed Division, the Large and Midsize Business Division, and the Tax-Exempt and Government Entities Division. About 80 percent of the audits will be of small businesses. The scope of the NRP audits will be greater than the approximately 60,000 regular employment tax audits the Service conducts each year.
Subjects of the NRP audits will include worker classification, fringe benefits, executive compensation (including section 409A deferred compensation), employee expense reimbursement plans, and nonfilers. Those five items, however, are only guidelines, and employers should expect revenue agents to look at everything thoroughly to uncover hidden employment tax issues. The NRP audits will be conducted for research purposes. Among the questions the NRP audits will answer is whether the frequently cited $15 billion tax gap attributed to employment taxes is accurate. In addition, the audits will be used to help the Service improve audit selection in the future.