IRS Targets Employment Taxes To Close Tax Gap

Article by Nancy Bowen, Richard Hunn, William Lee and Robert C. Morris Originally Published 9th October 2009 The IRS is about to start detailed employment tax audits of 6,000 U.S. employers to determine whether those employers are properly reporting and paying Federal employment taxes. These audits will consist of a line-by-line review of the employers' employment tax returns by some of the IRS's most experienced auditors. The audits will occur over a three year period, with at least 2,000 employers randomly selected for audit each year. The employers audited under this initiative will include both large and small businesses, as well as tax-exempt organizations.

These detailed and random employment tax audits will begin in February 2010. The audits will ultimately affect far more employers than the 6,000 initially selected, because the IRS plans to use the audit results to help the IRS select other employers for future employment tax audits.

Employee vs. Independent Contractor One area certain to receive intense IRS scrutiny is the employer's classification of workers as independent contractors vs. employees. Determining a worker's employment status for federal tax purposes is a critical and fact-intensive analysis. There is no universal test, and the classification of each worker generally depends on the degree of control that the employer may exercise over that worker. Although the IRS has published a list of 20 factors that employers may consider, there is no magic or set number of factors that cause a worker to be classified as an employee or independent contractor, and no one factor stands alone in making this determination. The IRS often scrutinizes arrangements between employers and workers very closely to make sure that the substance of the arrangement matches the form.

Federal Tax Consequences Vary Significantly Based Upon Employment Status The federal tax consequences to employers vary significantly depending on whether a worker is classified as an employee or an independent contractor. Employers are generally not responsible for withholding or paying any federal taxes on amounts paid to independent contractors. Conversely, employers are responsible for remitting three different types of federal taxes on wages paid to employees: (1) Income taxes; (2) Social Security and Medicare taxes (FICA); and (3) Unemployment taxes (FUTA).

Employers That Misclassify Workers May Face Significant Adverse Consequences Employers that misclassify...