Employment Tax: Expect More Audits

In February 2010, the IRS began a study to estimate the tax gap for underreported employment taxes and determine compliance rates for business taxpayers, the first study of its kind since 1984.  The National Research Project intended to be a comprehensive review of 6,000 taxpayers over a three year period.  The goal was data collection to find ways to reduce noncompliance and chip away at the current $345 billion tax gap of which underreported employment taxes account for $54 billion, almost one-fifth of the total of underreported liability. 
On July 7, 2011, the Treasury Inspector General for Tax Administration released a report that concludes that the sample size used by the IRS to determine the tax gap for employment taxes will likely not be sufficient to measure compliance.  TIGTA recommended that the IRS outline its strategy for updating employment tax gap estimates, focus its resources on the areas with the most noncompliance, calculate the percentage not covered by the study, and determine whether that population should be included in the next similar employment return study. The IRS agreed with all the recommendations
The TIGTA report indicated that the National Research Project will provide its most meaningful results on small businesses because about 68 percent of the audits performed in the study represent small business employers. While small businesses filed more than 85 percent of employment tax returns in fiscal 2008, large employers accounted for more than 45 percent of the total payroll in the country.   Large employers can expect increased scrutiny focusing on worker classification, fringe benefits and executive compensation.
The IRS has indicated that additional audits may be necessary after the original term of the National Research Project which will most definitely target a more aggressive cross sample of employers.

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