Payroll tax audits are conducted on businesses that have or had employees and failed to file or pay employment taxes on Form 941, Employer’s Quarterly Federal Tax Returns, misclassified workers as independent contractors when are actually employees or there is a discrepancy between the W-3 Wage and Income Tax Statement Transmission, the W-2 Wage and Income Statement, and the Employer’s Form 941 Quarterly Federal Income Tax Returns.
When a payroll tax audit is selected to be audited, the case is assigned to the Payroll Tax Examination Program and then assigned to one of the payroll tax auditors.
An employment tax auditor will look for bank statements, bank payroll statements, copies of Form 941, Employer’s Quarterly Federal Tax Returns for a specified period, DE-9 Quarterly Contribution Statement and Wage Report and any other forms or document that you believe will help them determine if all of the employee’s wages/wages were accounted for on the filed tax returns.
For people who were wrongly paid as independent contractors, workers who should in fact have been reported as employees. So, that’s when employee audit misclassification comes into the investigation.
The Internal Revenue Service and state tax agencies have identifying factors to determine when a person should be an employee or independent contractor. File a Form SS-8 Determination of Status of Workers for Federal Employment Tax and Income Tax Withholding purposes if you, as the employer, are unsure how to treat a worker.
Common law rules
The facts that provide evidence of the degree of control and independence are classified into three categories:
1. Behavior: Does the company control or have the right to control what the worker does and how they do their job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, if expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of relationship: Are there written contracts or employee-type benefits (ie, pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work done a key aspect of the business?
A discrepancy between the employer’s quarterly federal tax return Form 941, the W-2 wage and income statement, and the W-3 wage and tax statement transmission may result in a computer audit.
Computerized payroll audits are easily calculated from the tax return and employer-filed returns. Letters, notices and results are sent to the employer. The audit result is generally recorded as due in the last quarter of the year in which the alleged mismatch was identified.
The employer is provided with a deadline to respond to the changes. In addition, you may have appeal rights. Always read all notices, letters you receive. Many people fail to open government-issued letters and then lament the consequences of missing response deadlines.
A payroll tax audit can result in large tax bills that create financial havoc for employers. Large expenses paid to accountants, tax debt resolution experts, and tax attorneys to represent a business that has misclassified workers and now owes payroll taxes on unreported wages/wages paid to workers who should have declared as employees in the first place.
A payroll tax debt can result in the recording of tax liens, liens (garnishments) issued to accounts receivable, notes receivable and bank accounts. Also, if negotiations are unsuccessful, the tax agency will seize and sell your business to ensure payment of back taxes.
Do not attempt to negotiate tax debt without seeking professional help. IRS collection officers must follow certain tax rules, processes, and procedures before implementing their collection efforts. If you do not know which resolution option you can request and what the requirements for resolution are. Then your company may be subject to financial havoc and possible closure.
Don’t forget or shred notices and letters sent to you by tax agencies or tax agency employees. There are so many appeal rights, deadlines that require a response by certain dates. If these deadlines and dates are not met. The IRS Auditor or Collector will then have no choice but to proceed with the next action required in your case.
Liens filed against your business will affect your ability to borrow and will encumber any and all property owned by your business and possibly you as the owner, officer, member or director of the entity that owes payroll taxes.
Yes, there is potential individual liability for nonpayment of payroll taxes. Read Internal Revenue Code 6672. Basically, the IRS must calculate the amount of tax withholding, social security, and Medicare taxes due. The letters are then mailed or delivered to potentially responsible individuals or entities that failed to report correctly and pay the appropriate taxes.
These letters provide a 60-day window to request an appeal before the tax agency can create a tax bill against individuals or entities that failed 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, nonprofit, or limited liability company, this in itself protects them individually from being liable for property taxes. unpaid payroll that the entity did not send to the government. .
It is not advisable to confront the IRS Auditor or Collector on your own. Even the best tax resolution experts find barriers to negotiating audits and debts. You just have to do your research and interview several tax professionals to verify which one will work in your best interest.