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February 2010
IRS Audit Initiative targets payroll tax compliance issues.
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By Joel Hamsher, CPA. MTax 
Principal, Manufacturing Team Leader
You may be one of the 6,000 companies the IRS plans to audit in coming months looking for payroll tax compliance issues. The audits will focus on 1) worker classification and independent contractor status, 2) executive compensation, 3) fringe benefits and 4) payroll taxes. The initiative’s goals are to reduce the tax gap with increased compliance and appropriate payroll tax collection and to reduce the number of misclassified workers and independent contractors. In addition, the Government Accountability Office (GAO) is supporting the initiative to ensure benefits coverage and “labor protections” afforded an employee by worker status.
Some of the specifics within the four main audit areas include:
- Worker Classification/Independent Contractor Status
- Traditional IC relationships
- Exclusion of misclassified workers from benefits
- Three-party relationships
- W-2 Vendors
- Staff leasing relationships
Executive Compensation
- Loans
- Executive travel
- Non-qualified deferred compensation
- Retirement contracts
- Stock-based compensation
- Section 409A compliance
Fringe Benefits
- Executive compensation benefits such as company cars, club dues, spousal travel and housing
- Non-cash benefits such as expense reimbursement, club memberships, and gift cards
Payroll Taxes
- Audits of Forms 941
- Next day deposit requirements
- Backup withholding
- B notices
- Form W-2/Form 1099 compliance
So what should you do now? Conduct your own compliance reviews looking closely at the issues of concern in the IRS initiative. This will give you the opportunity to identify problem areas and take voluntary corrective action before the IRS steps in. For assistance with your compliance review or to receive more guidance on this very real IRS threat, please contact your tax advisor at Apple Growth Partners.
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