Important Things to Know about Employment Tax Return Audits

The last thing you want as an individual taxpayer is a letter from the IRS stating that you are being audited. Well, the same goes for employers. Being informed that an employment tax return has been selected for further examination is enough to strike fear in the heart of any employer.

In the event of an examination, the first thing an employer should know is to not panic. The IRS is governed by certain rules of conduct regulating what they can and cannot do. All the rules are laid out in IRS publication 5146, a document that can be freely downloaded from the IRS website.

Innocent until Proven Guilty

Publication 5146 clearly states that the IRS uses multiple streams of information to select employment tax returns they intend to further examine. For example, the document explicitly states the following:

“We may use information from various sources including news media and public and internal records. If we determine that the information from these sources is accurate and reliable, we may use it to select a return to examine.”

This paragraph insinuates that the IRS may use information from a trusted news source to determine whether an employment tax return should be audited or not. Publication 5146 also says the government uses computer software to look at things like past examinations and information entered on returns.

What must be understood in all of this is that a return selected for audit is not necessarily a return on which the government believes it will find mistakes. The law stipulates that employers are ‘innocent until proven guilty’, so to speak. If your company has been selected for an audit, that does not necessarily mean you have done anything wrong.

Employer Liability

Outsourcing payroll to a company like BenefitMall does reduce the likelihood of errors and give employers an advocate in the event of an audit. But outsourcing does not eliminate employer liability. Once again, publication 5146 states explicitly:

“If you outsource payroll and employment tax functions to a third party, generally you will remain liable for those taxes.”

The obvious benefit of working with a company like BenefitMall is that they handle all tax withholding and reporting for the client. It is ultimately the client’s responsibility to make sure reporting and withholding are done accurately.

The most important aspect of this is making payroll tax deposits on time. Even when employers outsource payments to payroll vendors, those vendors are expected to make timely deposits according to the IRS schedule. Failure to do so could result in penalties assessed to the employer.

Employer Representation

When a company does receive an audit notice, the employer also has rights that come with that audit. In terms of representation, employers have four options. First, they can represent themselves during any and all meetings with IRS officials.

The second option is for the employer to attend the meeting with a representative who will act merely as a witness to the proceedings. The third option is similar except that the representative is there solely for the purpose of acting on behalf of the employer.

The fourth option is to send a representative in place of the employer. In such cases, the employer must authorize such representation via form 2848 granting power of attorney and declaration of representation to the individual or firm.

Being audited by the IRS after filing an employment tax return is not an ideal situation. But it does not have to be the end of the world if employers know what to do and how to do it.