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IRS Studying Payroll Tax Compliance, Audits to Follow

The Internal Revenue Service estimates that the gap between payroll taxes owed and payroll taxes actually paid is over $200 billion annually. Orange County tax attorneys know that as a result, the IRS has begun a National Research Project (NRP) to collect data that will allow them to understand what people are doing that, intentionally or unintentionally, results in underpayment of payroll taxes.

The data collected via the NRP will allow the IRS to hone in on those areas where mistakes are most likely to occur, and focus their attention to taxpayers most likely to have made mistakes or cheated. They will also use the study results to issue new guidelines and/or regulations.

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The NRP study will randomly select 2,000 small, large and self-employed taxpayers from every geographic region, and examine their employment tax returns each year for the next three years - as well as their routine, less targeted audits.

The process will include face-to-face meetings with IRS auditors and line-by-line reviews of the employer's Form 941's and income tax returns. The examinations will reportedly focus on:

  • Worker misclassification (labeling employees as independent contractors or vice versa)
  • Owner/officer compensation
  • Fringe benefits
  • Review of 1099s with either no taxpayer identification number (TIN), or TIN/name mismatches.

The NRP study is expected to have two effects: first, the IRS will be able to effectively target those who have failed to comply with the payroll tax withholding laws and regulations. Second, they will be able to collect more from the taxpayers found guilty of not complying with those laws and regulations. 

Source: Greenhouse Management & Production "Employment Taxes Under Fire" 9/21/2010

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