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 actually 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 job 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 particular period, DE-9 Quarterly Contribution Return and Report of Wages and any other form or document that they believe will help them in determining if all the employee’s wages/salaries were accounted for on the tax returns filed.
For people who were wrongly paid as independent contractors, laborers who actually should have been reported as employees. Then, that is when the misclassification of employee audits steps to 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.
Common Law Rules
1. Behavioral: Does the employer 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 commanded by the plaintiff? (these include things like how employee is paid, whether expenses are reimbursed, who provides tools/supplies, etc..)
3. Type of Relationship: Are there any written contracts or employee type benefits (i.e. retirement plan, insurance, holiday pay, etc.)? Will the relationship continue and is the job performed a key facet 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 Lead to a computer audit.
Computer payroll audits are easily calculated from the tax return and statements filed by the employer. Letters, Notices, and outcomes are issued to the employer. The audit result is generally 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 of the notices, letters you get. Lots of people do not open government issued letters and then they lament on the consequences for not complying with reaction time frames.
A payroll tax audit may cause large tax bills that create financial havoc on employers. Huge expenses which are paid to Accountants, Tax Debt Resolution Experts and Tax Lawyers to represent a business who has misclassified workers and now owe payroll taxes for the unreported wages/salaries paid to workers who have to have been reported as employees in the first place.
Furthermore, if negotiations aren’t successful the tax agency will seize and sell your business to secure payment of the taxes overdue.
Do not try tax debt negotiations without seeking expert aid. The IRS Collection Officers are expected to follow specific regulations, tax processes and procedures before executing their collection efforts. If you do not know what resolution option you can ask and what the prerequisites are for resolution. Then, your organization may be subject to fiscal havoc and potential closure.
Do not forget or shred notices and letters sent to you by tax agencies or employees of those tax agencies. There are so many appeal rights, time frames that require a response by particular 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’s required according to your case.
Liens filed against your employer will have an impact on 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 manager of the entity that owes payroll taxes.
Yes, there’s a potential individual liability for non payment of payroll taxes. Then, letters are sent or provided to the potential responsible people or entities that failed to report correctly and pay the taxes accordingly.
These letters provide for 60 day time frame to request an appeal before the tax agency being able to create a tax bill against the entities or individuals that failed to comply 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 accountable for unpaid payroll taxes which the entity failed to forward to the authorities.
It’s not wise to confront the IRS Auditor or Collector by yourself. Even the best tax resolution experts encounter obstacles to negotiate loans and audits. You only need to do your research and interview several tax professionals to confirm which one is going to work in your best interest.