Payroll Tax Audit

Payroll Tax Audit

Knowing how to handle a payroll tax audit is a bit different than regular 1040 income tax audits. These audits involve federal withholding, social security, and medicare tax all withheld from employees’ paychecks. This is reported on IRS form 941. It involves the federal unemployment tax reported on federal IRS form 940. There are various types of penalties, and there there is interest associated with an untimely filing of reports & payment of taxes as they become due. There is also the issue of assessing trust fun taxes, which is the remaining FICA, medicare and withholding tax after the application of any payments. Knowing the potential adjustment and the rules to avoid personal liability has helped us save hundreds of thousands of dollars for our clients where others have failed. This is one of our firm’s most successful services. It’s one of our “unique solutions” offered from Joe’s 30+ years of experience.

Payroll Tax Audits Can Lead to Other Return Items

As always, when returns are audited, we recommend discussing the scope with the auditor and discussing the necessity to prepare to defend other items. This is what we do as part of our employment audit representation.

State Unemployment Insurance (UI) Audit

The IRS has entered into agreements with state agencies administering unemployment insurance to actively exchange information. In addition to a potential state audit, the state may share their information with the IRS. The IRS uses that information to prepare unfiled 941 payroll reports. They are under code section 6020b. The IRS, upon seeing that the info from the state is a large dollar amount or that it doesn’t match the 941 filed, may elect to audit the return. More often than not, they send an adjustment letter requesting that you reconcile the difference.
We have assisted taxpayers in successfully reconciling the report for many years. Continuously, we have cases where an accurate reconciliation will produce a high tax increase. Taxpayers often decide if they want to provide false information. We can help you successfully if you provide accurate information. The knowledge we have that helps taxpayers avoid overpaying stems from years of professional practice.

SS-8 Independent Contractor Employee Status Determination

Many companies are the subject of investigations by the IRS from sub contractors claiming that their employer should have taken out taxes from their paycheck. The IRS may require you to fill out an SS-8 form and related documents to determine worker status. This is not a form to just blindly fill out. It should support the classification you think it should be. Was the worker self employed or an employee?

Sources of Information Leading to Payroll Examinations

The IRS gets leads from competitors and people who desire to get the company in trouble, such as customers and ex-employees. Filing past the deadline and paying late is an audit trigger. Information from the state and other government agencies help, too. Using a lot of independent contractors, as they do in construction and various service industries, can cause an audit.