Payroll Tax Audits are conducted on businesses that have or had employees and either failed to file and pay the payroll taxes on Form 941 Employer’s Quarterly Federal Tax Returns, misclassified workers as independent contractors when actually they are employees or there is a mismatch between the W-3 Transmittal of Wage and Tax Statement, W-2 Wage & Income Statement and the Form 941 Employer’s Quarterly Federal Tax Returns.
An employment tax auditor will seek bank statements, payroll bank statements, copies of Form 941 Employer’s Quarterly Federal Tax Returns for a specific period, DE-9 Quarterly Contribution Return and Report of Wages and any other form or document that they believe will assist them in determining if all of the worker’s wages/salaries were accounted for on the tax returns filed.
For people who were incorrectly paid as independent contractors, laborers who in fact should have been reported as employees. Then, that’s when the misclassification of worker audits steps to the investigation.
Internal Revenue Service and the State tax agencies have identifying factors for determining when a person should be an employee or independent contractor. File a Form SS-8 Determination of Employees Status for Purposes of Federal Employment Taxes and Income Tax withholdings if you as an employer are not certain as to 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 employee does their job?
2. Financial: Are the business aspects of the worker’s job controlled by the plaintiff? (these include things like how worker is compensated, whether expenses are reimbursed, who supplies tools/supplies, etc..)
3. Type of Relationship: Are there any written contracts or employee type benefits (i.e. retirement plan, insurance, holiday pay, etc.)? Will the relationship continue and is the job performed a vital aspect of the business?
Computer payroll audits are easily calculated from the tax return and statements filed by the employer. Letters, Notices, and results are issued to the employer. The audit result is usually recorded as due on the last quarter of the year in which the alleged mismatch was identified.
An employer is given a deadline to respond to the changes. Furthermore, you might have appeal rights. Always read all the notices, letters you receive. Lots of people do not open authorities issued letters and then they lament on the consequences for not complying with response time frames.
A payroll tax audit may cause large tax bills that create financial havoc on employers. Large expenses that are paid to Accountants, Tax Debt Resolution Experts and Tax Lawyers to represent a business who has misclassified employees and currently owe payroll taxes for the unreported wages/salaries paid to workers who should have been reported as employees in the first place.
A payroll tax debt could result in recording of tax liens, levies (garnishments) issued to accounts receivable, notes receivable, and bank accounts. Furthermore, if negotiations are not successful the tax agency will seize and sell your company to secure payment of the taxes overdue.
Do not try tax debt negotiations without seeking professional assistance. The IRS Collection Officers are expected to follow certain regulations, tax procedures and procedures prior to executing their collection efforts. If you do not know what resolution option you can ask and what the prerequisites are for resolution. Then, your company might be subject to fiscal havoc and potential closure.
Do not overlook or shred notices and letters mailed to you by tax agencies or employees of these tax agencies. There are so many appeal rights, time frames that need a response by particular dates. If these time frames and dates are not complied with. Then, the IRS Auditor or Collector will have no option but to move forward with the next action that is required based on your case.
Liens filed against your company will have an impact on your ability to borrow and will encumber any and all property your company owns and potentially you as the owner, officer, member and or manager of the entity that owes payroll taxes.
Yes, there is a potential individual liability for non payment of payroll taxes. Basically, the IRS is required to compute the amount of tax withholding, social security and Medicare taxes due. Then, letters are sent or provided to the possible responsible people or entities who failed to report properly and pay the taxes accordingly.
These letters provide for 60 day time period to request an appeal before the tax agency having the ability to create a tax invoice against the entities or individuals that failed to abide by the payroll tax rules and regulations.
Business owners, Directors, Officers and general public believe that because an entity is a Corporation, Partnership, Non-Profit or Limited Liability Company that this in itself protects them separately from being accountable for unpaid payroll taxes which the thing failed to forward to the authorities.
It’s not smart to confront the IRS Auditor or Collector on your own. Even the best tax settlement experts encounter obstacles to negotiate audits and debts. You only need to do your research and interview several tax professionals to confirm which one is going to work in your best interest.