Expert Author Martha De La Chaussee
Payroll Tax Audits are conducted on businesses that have or had employees and either failed to file and pay the payroll taxes on Form 941 Employer's Quarterly Federal Tax Returns, misclassified workers as independent contractors when in fact they are employees or there is a mismatch between the W-3 Transmittal of Wage and Tax Statement, W-2 Wage & Income Statement and the Form 941 Employer's Quarterly Federal Tax Returns.
When a payroll tax audit is selected to be audited, the case is assigned to the Employment Tax Examination Program and then it is assigned to one of the employment tax auditors.
An employment tax auditor will seek bank statements, payroll bank statements, copies of Form 941 Employer's Quarterly Federal Tax Returns for a specific period, DE-9 Quarterly Contribution Return and Report of Wages and any other form or document that they believe will assist them in determining if all the employee's wages/salaries were accounted for on the tax returns filed.
For people who were incorrectly paid as independent contractors, laborers who in fact should have been reported as employees. Then, that is when the misclassification of employee audits steps into the investigation.
Internal Revenue Service and the State tax agencies have identifying factors for determining when a person should be an employee or independent contractor. File a Form SS-8 Determination of Workers Status for Purposes of Federal Employment Taxes and Income Tax withholdings if you as an employer are not sure as to how to treat a worker.
Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker's job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Mismatch between the Form 941 Employer's Quarterly Federal Tax Returns, the W-2 Wage & Income Statement and W-3 Transmittal of Wage & Tax Statement can result in a computer audit.
Computer payroll audits are easily calculated from the tax return and statements filed by the employer. Letters, Notices, and results are issued to the employer. The audit result is usually recorded as due on the last quarter of the year in which the alleged mismatch was identified.
An employer is provided with a deadline to respond to the changes. Furthermore, you may have appeal rights. Always read all the notices, letters you receive. Many people do not open government issued letters and then they lament on the consequences for not complying with response time frames.
A payroll tax audit can lead to large tax bills that create financial havoc on employers. Large expenses that are paid to Accountants, Tax Debt Resolution Experts and Tax Attorneys to represent a company who has misclassified workers and now owe payroll taxes for the unreported wages/salaries paid to workers who should have been reported as employees in the first place.
A payroll tax debt can result in recording of tax liens, levies (garnishments) issued to accounts receivable, notes receivable, and bank accounts. Furthermore, if negotiations are not successful the tax agency will seize and sell your business to secure payment of the taxes overdue.
Do not attempt tax debt negotiations without seeking professional assistance. The IRS Collection Officers are required to follow certain regulations, tax processes and procedures prior to implementing their collection efforts. If you do not know what resolution option you can request and what the requirements are for resolution. Then, your company may be subject to financial havoc and potential closure.
Do not forget or shred notices and letters mailed to you by tax agencies or employees of these tax agencies. There are so many appeal rights, time frames that require a response by certain dates. If these time frames and dates are not complied with. Then, the IRS Auditor or Collector will have no option but to move forward with the next action that is required according to your case.
Liens filed against your company will affect your ability to borrow and will encumber any and all property that your company owns and possibly you as the owner, officer, member and or director of the entity that owes payroll taxes.
Yes, there is a potential individual liability for non payment of payroll taxes. Read Internal Revenue Code 6672. Basically, the IRS is required to calculate the amount of tax withholding, social security and Medicare taxes due. Then, letters are mailed or provided to the potential responsible people or entities who failed to report correctly and pay the taxes accordingly.
These letters provide for 60 day time frame to request an appeal prior to the tax agency being able to create a tax bill against the individuals or entities that failed to abide by the payroll tax rules and regulations.
Business owners, Directors, Officers and general public believe that because an entity is a Corporation, Partnership, Non-Profit or Limited Liability Company that this in itself protects them individually from being responsible for unpaid payroll taxes that the entity failed to forward to the government.