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IRS Payroll Tax Audits Create Havoc on an Employer
Payroll tax audits are conducted on companies that have or had employees and have failed to file and pay payroll taxes on their Form 941 quarterly federal employer tax return, workers incorrectly classified as independent contractors when in fact are employees, or there is a discrepancy between the W-3 Submission of Wage and Tax Return, W-2 Payroll and Income Return, and the Employer’s Quarterly Form 941 Federal Tax Return.
When you select a payroll tax audit to audit, the case is assigned to the employment tax review program and then assigned to one of the employment tax reviewers.
An employment tax auditor will look for bank statements, payroll bank statements, copies of quarterly Form 941 employer federal tax returns for a specific period, DE-9 quarterly tax returns and payroll reports, and any other form or document they believe will help them determine whether all of the employee’s wages/salaries have been accounted for in the tax returns filed.
For people who were mistakenly paid as freelancers, day laborers who should in fact have been reported as employees. So, that’s when employee audit misclassification enters the investigation.
The Internal Revenue Service and state tax agencies have identifying factors for determining when a person should be an employee or an independent contractor. File a Form SS-8 Determination of Workers’ Status for Federal Employment Tax and Income Tax Withholding purposes if you as an employer are unsure of how to treat a worker.
Common law rules
Facts that provide evidence of the degree of control and independence fall into three categories:
1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how the worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of relationship: Are there any written contracts or employee type benefits (eg, retirement plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
A mismatch between your employer’s quarterly Form 941 federal tax returns, W-2 income and salary return, and W-3 income and salary return submission may result in a computer audit.
Payroll computer checks are easily calculated from your tax return and employer-filed returns. Letters, notices and results are sent to the employer. The audit result is usually recorded as due in the last quarter of the year in which the alleged mismatch was identified.
The employer is given a deadline to respond to the changes. In addition, you may have appeal rights. Always read all the notices, letters you receive. Many people don’t open government-issued letters and then complain about the consequences of not meeting response times.
A payroll tax audit can lead to large tax bills that wreak financial havoc on employers. Large fees being paid to accountants, tax debt resolution experts, and tax attorneys to represent a company that misclassified workers and now owes payroll taxes on unreported wages/wages paid to workers that should have been reported as employees first.
A payroll tax debt may involve the posting of tax liens, levies (attachments) issued on receivables, notes receivable, and bank accounts. Furthermore, if the negotiations are unsuccessful, the Agenzia delle Entrate will seize and sell your business to guarantee the payment of the taxes owed.
Do not attempt to negotiate your tax debt without seeking professional assistance. IRS tax collectors are required to follow certain tax regulations, processes and procedures before implementing their tax collection efforts. If you don’t know which termination option you can request and what the termination requirements are. Then, your business could be subject to financial turmoil and potential closure.
Do not forget or destroy notices and letters sent to you by tax agencies or employees of these tax agencies. There are many rights of appeal, times that require a response within certain dates. If these times and dates are not respected. Then, the IRS auditor or collector will have no choice but to move forward with the next action required based on your case.
Liens filed against your company will affect your ability to borrow and burden any property your company owns and possibly you as an owner, officer, member and/or director of the entity owing payroll taxes.
Yes, there is potential individual liability for non-payment of payroll taxes. Read Internal Revenue Code 6672. Basically, the IRS is required to calculate the amount of withholding, Social Security and Medicare taxes you owe. Then, the letters are mailed or provided to the potential liable persons or entities who have not reported correctly and paid their taxes accordingly.
These letters provide for a 60-day period to request an appeal before the IRS is able to create a tax invoice against individuals or entities that have failed to comply with payroll tax rules and regulations.
Entrepreneurs, directors, officers and the general public believe that because an entity is a corporation, partnership, non-profit, or limited liability company, this in itself protects them individually from being liable for unpaid payroll taxes that the entity has not reported to the government.
It is unwise to take on the IRS auditor or collector yourself. Even the best tax resolution experts encounter barriers to negotiating audits and debts. You just have to do your research and interview several tax professionals to see which one will work in your best interest.
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