Employers Beware—IRS Study Is Underway
In February 2010, the IRS commenced its first Employment Tax National Research Project in 25 years. The IRS reports that its two main goals are (1) to secure statistically valid information for computing the Employment Tax Gap (the difference between the taxes collected and taxes owed to the United States government, estimated at approximately $200 billion); and (2)to determine compliance characteristics so IRS can focus on the most noncompliant employment tax areas.
In other words, the IRS is looking into the extent to which businesses comply with employment tax laws and withholding requirements. In each of the next three years, the IRS will select 2000 employers for what it describes as examinations that will be "comprehensive in scope" and will, at first, focus on returns from 2007 and 2008.
It is likely that employers who are unlucky enough to be selected will be subject to lengthy, inconvenient and expensive audits. And, any employers that are audited and that had the misfortune to misclassify employees as independent contractors or failed properly to withhold, will likely be subject to significant tax bills.
Therefore, if you receive a notice from the IRS that your business has been selected for this project, do not ignore it.You should consider contacting counsel and shouldalsoprepare to spend extra time gathering employment and tax records to facilitate and expedite these examinations. Ensure that there are records supporting the company's decisions to retain independent contractors. And, identify one person, who could be outside counsel, to be your liaison with the IRS to limit the opportunities for misunderstandings and better ensure that everyone from your company is on the same page and speaking through one voice.