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IRS to Increase Focus on Employment Taxes

February 8, 2010

The Internal Revenue Service (“IRS”) will shortly begin a more rigorous examination of payroll tax compliance as part of its Employment Tax National Research Project.  Payroll taxes account for approximately 70% of federal tax revenues, but the IRS has estimated that companies underpay employer taxes by about $14 billion annually.  As a result, the IRS will be undertaking 2,000 audits per year for 2010 through 2012 in order to gauge employer compliance and identify loopholes and other problem areas.  This is the first project of its kind that the IRS has undertaken in the past 25 years.

The IRS will send notices to randomly-selected employers; the audits will primarily be conducted in person and will involve a review of all records relating to employment tax returns.  The audits will focus on several prominent topics, including:

 Apart from this IRS initiative, President Obama’s proposed budget for the Department of Labor for the 2011 fiscal year includes a $25 million allotment for the “Misclassification Initiative,” which would also address the improper classification of employees as independent contractors.  As part of this initiative, the proposed budget provides for 100 additional enforcement personnel.

In light of this increased attention on employer taxes and the misclassification of employees, we encourage employers to conduct internal reviews to ensure that they are compliant in these areas.  Employers should, however, remain cognizant of the risks of performing an internal audit without the cloak of attorney-client privilege.  For additional information regarding these areas or how best to conduct an internal review, please do not hesitate to contact any of our attorneys.