Labor and employment newsletters, compliance publications and accountants have recently been abuzz warning employers to be on the watch for the IRS initiative known as the Employment Tax National Research Project. As the Federal government wrestles with its systemic inability to control costs, or even simply limit spending more taxpayer money on an ever growing list of programs, projects, and bureaucracies, it must generate more revenue. Hence,the resurgence of this IRS endeavor to fix the "tax gap," as politicians call it, meaning that the government wouldn't need to raise taxes if it collected what it was owed.
So for the first time in 25 years, the IRS has undertaken this project to randomly select 2000 employers for examinations that will be "comprehensive in scope." A total of 6000 employers will be audited over the next three years with a focus on employment tax reporting and payment obligations, more specifically payroll taxes, fringe benefits, independent contractors, expense reimbursements, and other related payroll issues.
As reported in the IRS's publication for employers titled "Reporter," the IRS has identified two goals in conducting these audits: 1). To secure statistically valid information for computing the Employment Tax Gap, i.e., the difference between collected taxes and taxes owed to the U.S. government, estimated to be about $200 billion, and 2). To determine compliance characteristics so the IRS can focus on the most non-compliant employment tax areas.
According to the labor and employment law firm located in Sacramento, CA, Carlton DiSante & Freudenberger, LLP, the audits are "expected to be long, lengthy, inconvenient, and expensive." Notifications to employers are not to be disregarded; instead should be taken very seriously by selected organizations.
Compliance Week's March blogpost by Tammy Whitehouse reported that, "Even the most conservative taxpayers and those most closely in compliance will not be spared the expense of defending themselves in one of these "comprehensive" audits, since the IRS is trying to collect detailed audit data even from conservative taxpayers, " say David Fuller and Jerry Holmes, attorneys at the law firm of Morgan Lewis & Bockius and former IRS managers.
Their inside IRS sources report that the audits will be "excruciating" and somewhat like seeing a proctologist, expect Fuller and Holmes. "While perhaps overly graphic and crude, these descriptions of pain and foreboding lead us to conclude the National Research Project is a tsunami, not a ripple on the sea," they wrote recently in their Thompson bulletin.
The audit is expected to focus on four areas: 1). worker classification (independent contractor versus employee); 2). reimbursed expenses with properly created accounting plans; 3). compensation of owner employees to ensure enough wages are paid instead of only dividends; and 4). taxable fringe benefits that are treated as nontaxable benefits.
The IRS recommends forming an internal team consisting of members from payroll, accounts payable, human resources, internal audit, general counsel and outside tax professionals. They and other experts recommend performing an internal audit now to identify and resolve any troubled areas, before your company receives notification.
You may recall the famous class action lawsuit filed against Microsoft, Vizcaino, et. al. v. Microsoft which was settled for $97 million dollars in 1998. The suit alleged that Microsoft had misclassified workers as independent contractors instead of employees, which prevented them from being eligible for benefits (including their stock purchase and option plans). Many other major corporations have been similarly sued for the same violation. A short list includes Hewlett-Packard, Time Warner, Inc., and Allstate.
If your gut check is telling you that your company has a problem with independent contractors or any of the other three focus areas for these audits, today is a good day to start tackling it. Being proactive in addressing these landmine areas for potential class action litigation is always a sound strategy in my book. Well, better than a visit to the proctologist anyway.....
Becky Regan is the founder and President of Regan HR, Inc., a human resources consulting firm specializing in compensation consulting for California employers and purveyor of online HR products. A former Corporate Human Resources Director (10,000+ employees) with more than 25 years of HR work experience in many industries, her team works with private, public and non-profit clients. Becky is passionate about designing HR programs and compensation plans that build organizations.
Flickr photo courtesy of bitzcelt
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