The IRS is Ramping Up Employment Tax Audit Activity

March 16, 2012
Law Offices of Debbie J. Cunningham

In an effort to close the tax gap, the Internal Revenue Service (“IRS”) is increasing audits of employers related to employment tax issues.  Now in its third year of the Employment Tax Research Project, the IRS is looking at the payroll practices of 6,000 employers to identify compliance failures.

The IRS is focusing on four main areas including:

  • Executive Compensation
  • Fringe Benefits
  • Expense Reimbursements
  • Independent Contractors vs. Employees

Executive Compensation.  The IRS will be looking at amounts paid to the highest-ranking executives and owners to determine whether the compensation paid to them is “reasonable” and, therefore, deductible.  The IRS also wants to make sure that all of the types of compensation are appropriately included in the executives’ incomes at the right times.

Fringe Benefits. Fringe benefits can be both taxable and non-taxable.  There are specific exceptions in the Internal Revenue Code that must be satisfied before a fringe benefit can be treated as not taxable.  One of the most common errors in this area is the failure to include the value of gift cards in an employee’s taxable wages.  Cash equivalents are never excludable from income, no matter how small the value.

Expense Reimbursement.  Another area the IRS is digging into is the reimbursement of business expenses.  If expenses are not reimbursed under an “accountable” plan, they need to be included in wages and subject to federal income tax withholding and employment taxes.  An “accountable” plan is generally one where expenses have a business connection, the employee documents the expense to the employer, and any excess reimbursements are returned to the employer.

Independent Contractors vs. Employees.  Finally, the misclassification of workers is a big issue.  This topic will be discussed in more detail in future blog post, but the IRS will be looking with great interest into whether a worker is classified as an independent contractor when they should have been classified as an employee.  Employees are subject to federal income tax withholding and employment tax withholding, while independent contractors are not.

Make sure you look at what your company is doing to make sure you are in compliance with the rules.

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Law Offices of Debbie J. Cunningham

Debbie Cunningham is an Irving attorney providing affordable estate planning to the Dallas/ Fort-Worth areas. She understands the steps you should take to protect yourself and your loved ones. Debbie is family-focused and wants to ensure her clients are fully informed on the options that are available for their families. Debbie’s own blended family has given her valuable insights into the complexities of family dynamics.

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