Business Alert: IRS to conduct employment audits

The IRS is launching a three-year auditing project that will examine about 6,000 U.S. companies for compliance with employment tax obligations. The project is the first of its kind in 25 years, and its primary objective is to collect data to identify areas of noncompliance across all industry sizes and sectors, including nonprofits and governmental entities. This data will be used by the IRS to update its audit selection formulas in an area where noncompliance is considered a serious drain on the U.S. Treasury.

Among the issues the audits will look at:

• Classification of workers as employees or independent contractors, including executives rehired as consultants, dual status employees, and employee leasing arrangements.
• Fringe benefits, including expense reimbursement arrangements and noncash benefits.
• Executive compensation and fringe benefits, executive retirement contracts, golden parachutes, and stock options.

Employers can take some steps to prepare for these payroll tax audits. For example, conduct a mock audit to check how your company handles the three focus areas - classification of workers as employees or independent contractors, fringe benefits, and executive compensation. Your company may not be selected for the research audit program, but you also need to be ready to face an audit following the three-year project.

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