Everyone gets scared when they receive an audit notice from the IRS. This year alone, the IRS is planning to randomly audit at least 2,000 business as part of an Employment Tax National Research Project (NRP). If your business hasn’t received one of these letters, you just might. Despite the fact that you may come out ahead financially because of an audit, you may feel as though you have wasted time and money.
Yes, the United States government is short on cash. We have a massive deficit and debt in the trillions. The IRS is attempting to “close the gap” of the $300 billion between what taxpayers pay in taxes and what they think we should pay.
The IRS will keep up their 2,000 random audits well into 2012.
Last November, the IRS announced that these audits will be “comprehensive”. This is the IRS’s way to to close the tax gap. It’s the difference between what businesses owe and what they actually pay, how many businesses attempt to take deductions they don’t qualify for, or under reporting their actual income. The IRS is on an aggressive mission to collect and have come up with their own way of figuring out who the culprits are.
Below is a short list of areas the IRS will be looking into regarding these audits.
Worker Classification: The IRS plans to figure out which workers are employees and which are contracted. If you business hires independent contractors for certain jobs, you must have the right documents to prove their employment status. You must have their signed W-9 and written documents regarding what jobs they do for your company.
Executive Compensation: These audits will focus on salary and non-salary compensation. Loans, deferred compensation and stock options are examples. Keep your business protected by having market comparables to prove compensation of these types. Other examples are market salaries, interest rates and stock prices.
Fringe Benefits: These are generally considered perks for a company’s employees. The IRS will be looking very closely at these to make sure tax free and taxable fringe benefits are separate. Some examples of fringe benefits are: cell phones, use of vehicles and insurance. There are many tax free fringe benefits your business can use, but there are some problems that go with them, as well.
Payroll Taxes: The IRS will also be taking a hard look at 941 Forms and 1099 Forms, as well as W-2s to make sure withholdings and deposits are in order. You should have a highly skilled payroll service working for you to keep everything clear and concise and up-to-date, otherwise, you could face some harsh penalties.
If you have been audited before, you know that the IRS will require access to ALL of your financial records if you receive an audit letter. The main point is, keeping everything legitimate and organized is your best solution all the way around. Make sure you are in total compliance with IRS rules and regulations so there are no worries should you receive that audit letter. Contact a tax professional if you have any questions about an IRS audit.
