In August 2022, the Inflation Reduction Act was signed into law with a provision earmarking nearly $80 billion in funding to support the IRS enforcement of federal tax laws, notably, employment tax.
The IRS typically performs employment tax audits to ensure that a business is compliant with tax filing requirements and to verify the reported amounts. With more IRS “boots on the ground,” you may want to prepare for a potential employment tax audit sooner rather than later.
Zeroing in on employer liability
Employers are generally required to withhold federal income, Social Security and Medicare taxes (collectively known as employment taxes) from employees’ earnings and forward these funds to the U.S. Treasury on employees’ behalf.
You’re also liable for taxes imposed by the Federal Unemployment Tax Act (FUTA). The IRS examines some employment tax returns to determine if wages, tips, compensation, credits and taxes are reported accurately.
Companies are obligated to remit payroll taxes on a timely basis. These taxes are called trust fund taxes because employee money is held in a trust until the employer makes a federal tax deposit in that amount. Any unpaid trust fund taxes must be immediately available for collection from the business.
In addition, it’s critical to correctly determine whether workers are employees or independent contractors, as it impacts employment taxes. Employee misclassifications can be an expensive mistake. If an independent contractor is misclassified by a company and pays his/her own self-employment taxes, but offsets it with expenses, the government never receives the entire amount owed.
If you’re concerned you may be falling short on your obligations, now’s your chance to make sure you’re in good standing — and fix what’s broken before an employment tax audit is conducted.
Calling for audit improvements
On February 13, 2023, the Treasury Inspector General for Tax Administration (TIGTA) released a report on the need for improvements to the employment tax examination process to increase taxpayer compliance and collection potential.
Employment tax workstreams are set up to focus on probable areas of non-compliance to show cases with a high potential for audit adjustments. But with increased funding, the employment tax audit process is likely to fine-tune its processes and may involve using more technology in selecting who will be subject to an examination.
Here’s an unexpected way that artificial intelligence (AI) could impact your business. An AI algorithm, for example, could examine thousands of tax returns and isolate certain areas where there are anomalies in a matter of milliseconds.
Getting a step ahead
Businesses may use internal or external resources to prepare for an IRS employment tax audit. Internal audits may be better suited for larger employers with an in-house tax department responsible for filing tax returns and other levels of compliance.
For smaller employers, seeking the help of an independent auditor can provide deeper knowledge into the issues being probed.
This information is provided for educational purposes and should not be construed as financial or legal advice. Please consult your accountant or attorney for advice specific to your situation.