The Internal Revenue Service (“IRS”) recently issued Publication 5146, Employment Tax Returns: Examinations and Appeal Rights, which provides rules and procedures that IRS personnel must follow when performing employment tax examinations. The publication serves as a guide for both the IRS and organizations filing employment tax returns of the process before, during and after examinations and also outlines appeal procedures that must be followed.
IRS Examinations
Employment taxes are the amounts an organization must withhold from its employees’ wages or compensation for income, Social Security, Medicare, and Railroad Retirement Tax Act taxes. The IRS selects certain returns for examination based on computer programs that identify returns that may have incorrect information or from compliance projects suggesting incorrect amounts reported. Examinations vary in length depending on the complexity of the situation and the availability of both the information and parties involved. They can be completed either by mail correspondence or in-person depending on the situation. In-person examinations are done at the organization’s location, an IRS office or at the organization’s accountant’s or lawyer’s office. Selecting a return for examination does not always suggest that the taxpayer has either made an error or been dishonest. In fact, some examinations result in a refund to the taxpayer or acceptance of the return without change.
IRS Publication 5146
As outlined above and in the publication, the publication discusses general rules and procedures that IRS personnel must follow when examining employment tax returns. In addition, it discusses what happens before, during and after examinations, as well as appeals procedures and special procedures dealing with tips and worker classification issues.
Memorandum
In addition to the publication, the IRS issued an internal memorandum on September 18, 2015 to its Small Business/Self-Employed division that addresses the scope of employment tax examinations. The memorandum indicates that it is being issued “to provide clarification for an updates to the examiner’s responsibilities regarding the required filing checks and scope of all employment tax examinations.”
Examiners are required to look for three specific aspects of employment tax filings during their procedures. The first is that the required information returns were correctly filed, including Form 1099-MISC, W-2, etc. If returns were not properly filed, the examiner must consider expanding the audit to include a penalty case file and/or Form 945, Annual Return of Withheld Federal Income Tax. Secondly, examiners ensure that FICA tax was properly withheld from employees’ wages. Finally, examiners must ensure that all Federal returns, other than employment tax or information returns were properly filed. All actions and decisions regarding any unfiled returns are required to be documented in the examiner’s case file.
View IRS Internal Memo – Employment Tax Examinations
Period Covered by Examination
Employment tax examinations generally cover an entire calendar year, including all four quarters of Form 941, Employer’s Quarterly Federal Tax Return, filings. If the examination covers less than the four quarters, the examiner is required to document in the case file the reason why a shorter period was used. Examinations should not begin until after the last filing date for the employment tax returns, which is typically January 31st for calendar year filers. Examinations are likely to be expanded if there exists large, unusual or questionable findings during the examination.
Conclusion
Organizations should be aware of the examination process and cognizant of the potential for being selected for an IRS employment tax examination. The IRS places a high importance on the accuracy of employment tax and information returns so it is essential for taxpayers to ensure that payroll tax and information returns are filed accurately and timely in order to avoid any unnecessary penalties.
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