More Employment Tax Audits

Blog content provided by Barbara Weltman, Publisher of Big Ideas for Small Business ®

Here’s one lottery you don’t want to win. Anita Bartels, Senior Program Analyst in the Office of Employment Tax of the IRS, told the audience at the American Payroll Association’s 27th Annual Congress this past May that the IRS will conduct about 5,000 random payroll tax audits over the next several years.

This means that an employer can be selected even if the employer did nothing wrong. The reason for these random audits: The IRS needs more statistics for its National Research Program to help it better select returns for examination in the future.

The IRS will probably focus on some key areas, such as worker classification (making sure that a company’s independent contractors are really independent and not just employees given an IC label to avoid employment taxes), fringe benefits, and compensation to owner-employees.

While there is no way to prevent being selected for a random audit, you can protect yourself by maintaining good records that may be useful in case of an audit.

These records should include:

1. Your employer identification number (EIN).
2. Amounts and dates of all wage, annuity, and pension payments.
3. Amounts of tips reported.
4. The fair market value of in-kind wages paid.
5. Names, addresses, Social Security numbers, and occupations of employees and recipients.
6. Any employee copies of Form W-2 that were returned to you as undeliverable.
7. Dates of employment.
8. Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third-party payers made to them.
9. Copies of employees’ and recipients’ income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).
10. Dates and amounts of tax deposits you made.
11. Copies of returns filed.
12. Records of allocated tips.
13. Records of fringe benefits provided, including substantiation.

Even if you escape selection, get into a habit of good recordkeeping. The IRS suggests that you keep all records of employment taxes for at least four years after filing the return for the 4th quarter for the year.

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