If your business receives an audit notice from the IRS regarding payroll tax compliance, don’t panic. In this post I explain how the IRS conducts its payroll tax audits. Later posts will go into more details on what to expect and steps you can take to protect your business.
While each audit varies due to the type of examination, the complexity of items being audited, and information provided to the IRS, there are two types of audits used for payroll audits.
Types of IRS Payroll Tax Audit
If your business is selected for audit, the will conduct either a correspondence audit (by mail) or an in person audit. An interesting factoid, unlike 1040 audits which are done by correspondence, payroll audits are done primarily using in person audits.
Correspondence audits are remote audits. The IRS mails a letter detailing what information it wants as part of the audit. done remotely meaning you may never see an IRS agent. You will respond by mailing back a letter explaining your position along with any supporting information.
Correspondence audits typically involve less complicated tax issues. Having said that, less complicated doesn’t mean easier. Some taxpayers report that it takes a great deal of time to address the issues because of the lag time between receipt of correspondence, developing a response and awaiting the IRS answer.
A word of warning, never send original documents to the IRS if you are subject to a correspondence audit. The IRS is just too big to properly track and safeguard original documents. Avoid trouble and just send copies of information in a correspondence audit.
In person audits involve a face-to-face meeting with an IRS Revenue Agent, often at the taxpayer’s place of business. In-person audits often involve more complicated issues and bigger risks for the taxpayer. In later posts we will discuss worker classification exams and tip reporting compliance audits.
If you are expecting an in-person audit, you should be very careful. The IRS agent(s) will be looking to talk with you and other important people in your business. Anything you say may be used against you later and so you should be very careful how you respond. While the IRS is not the enemy, the IRS agents are certainly not your friends either.
Whether correspondence or in-person payroll audit, the taxpayer always has the right to be represented by a tax professional, whether a tax accountant or attorney.
What Is the IRS Looking For?
Here are some of the issues which the IRS examines during a payroll audit:
- If you properly reported your employees’ wages and fringe benefits
- If you properly calculated reasonable compensation paid to business officers and executives
- Your tip reporting compliance
- If you are properly treating your workers as employees or independent contractors
If you have any questions please contact my firm. I help Maine taxpayers in trouble to resolve your tax debts. If you or someone you know in the Portland, Maine area wants more information on how to handle an IRS payroll audit, please feel free to contact me directly at 207-299-0515 or by filling out my contact form. A Maine tax attorney can help you consider your options.