The Tax Times: IRS Plans More Employment Tax Audits

According to Thompson Reuters former senior litigation counsel at the U.S. Department of Justice (DOJ) has stressed that since the IRS’ funding plan mentions more enforcement in areas that include employment taxes, businesses should start planning for audits "now."

Funding . The Inflation Reduction Act was signed into law by President Joseph Biden on August 16, 2022, with a provision earmarking nearly $80 billion in funding for the IRS that Treasury Secretary Janet Yellen said on April 4, 2023 will help ensure fair enforcement of federal tax laws. On April 6, 2023, new IRS Commissioner Daniel Werfel and Deputy Treasury Secretary Wally Adeyemo held a conference to discuss the Service’s 10-year strategic operating plan for the massive financial support.

Employment tax audits part of plan. On page 74 of the 150-page plan, the IRS discusses developing enforcement approaches and compliance treatments for tax types including federal employment taxes by refining tools and processes for auditing key areas and using improved analytics to identify patterns of noncompliance. The plan notes that enforcement and compliance have been too low in employment tax, among other areas.

TIGTA report calls for audit improvements. On February 13, 2023, the Treasury Inspector General for Tax Administration (TIGTA) released a report on the need for improvements to the employment tax examination process to increase taxpayer compliance and collection potential. The report explains that although employment tax workstreams are set up to focus on probable areas of noncompliance to show cases with a high potential for audit adjustments, the IRS does not have a computer program to prioritize employment tax returns.

The report made a handful of recommendations to the IRS, and now that the Service has funding that includes an estimated $4.8 billion for business system modernization and $25.3 billion for operations support, the employment tax audit process is likely to improve and may involve using more technology in selecting who will be subject to an examination.

There are two steps that employers should take to prepare for an IRS employment tax audit.

Is to make sure they have substantiation regarding an issue with the law so they can be prepared when the questions come from the IRS and
To get advice from tax professionals on potential areas of concern where the IRS is likely to adopt scrutiny so you can prepare for it all.

What to do When Receiving a Notice

The IRS will typically send an audit notice indicating the type of audit, the scope of the audit, and the documentation required to support your payroll tax filings. It is crucial to take the time to review the notice and understand what is being requested so that you can provide the right information and documents. Start by gathering all the records and documentation related to your payroll taxes

Preparing for the Audit - Seeking Professional Help

When facing an audit, it is important to work with an experianced tax professional or lawyer who has expertise in dealing with the IRS and is familiar with the audit procedure. A professional tax advisor or lawyer can provide guidance on the types of records and documentation required by the IRS, help prepare and organize the necessary records, and ensure that all responses to the audit are accurate and timely.

Gathering necessary documentation is a crucial step in preparing for an IRS payroll tax audit. The IRS will request specific financial and payroll records that are relevant to the audit. It is important to gather all relevant records, including, but not limited to, the following:

Payroll records
Tax returns
Bank account statements
Pay stubs
Payroll reports
Any other financial records that pertain to the audit.

An IRS payroll tax audit is a complex process that can be stressful and time-consuming for business owners. However, understanding the steps involved in the process and seeking an experienced tax professional help can greatly reduce the burden.

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