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U.S.Companies May Face Audits In Early 2011
IRS Looks to Close $60 Billion Employment Tax Gap
The "tax gap" is a common phrase used to describe the difference between taxes owed and taxes actually paid to the IRS. The estimated tax gap is currently $345 billion. A large portion of that figure - to the tune of $60 billion - comes from uncollected employment taxes. And the IRS is on a mission to recover those unreported or underreported taxes via the National Research Project (NRP). The IRS also hopes to use information from the project to update standards and education to the public on proper treatment of employment related issues.
Imminent Impact
Under the NRP, the IRS has embarked on auditing 6,000 U.S. employers. The first wave of employers has been notified and more will be notified in November 2010. Audits will be exhaustive and are set to begin in early 2011.
Audits will focus on four primary areas:
- Employee classification
- Fringe Benefits
- Expense Reimbursements
- Owner compensation
The ongoing struggle to classify independent contractors likely will be high on auditors’ lists, as will owner compensation issues - both often difficult to clearly define and report. A list of 20 questions the IRS uses to classify employees can be found immediately following this article.
Plan Ahead
Conduct an internal review of your relevant documents. Carefully analyze your employment tax reporting practices from the perspective of this particular IRS audit. Keep in mind that Section 530 of the Revenue Act of 1978, which provides a safe harbor allowing employers to reclassify independent contractors without paying back taxes and penalties, is still in effect. However, The Fair Playing Field Act of 2010, introduced in the House of Representatives as H.B. 6128 and in the Senate as S. 3786, seeks to repeal Section 530. If the legislation passes, it would eliminate the safe harbor provision.
Independent Contractor or Employee? 20 Questions the IRS uses to Make the Call.Answering "yes" to any one of the questions below (except #16) may mean the worker is an employee.
- Is the worker required to comply with instructions about when, where and how the work is done?
- Is the worker provided training that would enable him/her to perform a job in a particular method or manner?
- Are the services provided by the worker an integral part of the business' operations?
- Must the worker render the services personally?
- Does the business hire, supervise, or pay assistants to help the worker on the job?
- Is there a continuing relationship between the worker and the person for whom the services are performed?
- Does the recipient of the services set the work schedule?
- Is the worker required to devote his/her full time to the person he/she performs services for?
- Is the work performed at the place of business of the company or at specific places set by the company?
- Does the recipient of the services direct the sequence in which the work must be done?
- Are regular oral or written reports required to be submitted by the worker?
- Is the method of payment hourly, weekly, monthly (as opposed to commission or by the job?)
- Are business and/or traveling expenses reimbursed?
- Does the company furnish tools and materials used by the worker?
- Has the worker failed to invest in equipment or facilities used to provide the services?
- Does the arrangement put the person in a position or realizing either a profit or loss on the work?
- Does the worker perform services exclusively for the company rather than working for a number of companies at the same time?
- Does the worker in fact make his/her services regularly available to the general public?
- Is the worker subject to dismissal for reasons other than non-performance of the contract specifications?
- Can the worker terminate his/her relationship without incurring a liability for failure to complete the job?
To discuss the impact of NRP audits on your organization or to discuss other related tax issues, contact a member of your service team or Maura Corrigan at 216-774-1137 or mcorrigan@cohencpa.com.
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