The IRS this week indicated that its previously-announced employment tax examination program will commence this November. In the initial stage, approximately 6,000 employers of all sizes and types will be randomly selected nationwide for audit. These audits are intended to be a key part of IRS efforts to increase revenue collection & close the "tax gap", as well as provide perspective on where best to target future audit resources. The reviews will concentrate on four primary areas of employment tax - worker classification, fringe benefit taxation, reimbursed expenses and compensation of owner employees.
The federal Government Accountability Office recently released a report on misclassification of employees as independent contractors. The report covers employer incentives to misclassify, the current extent of misclassification, Department of Labor and Internal Revenue Service efforts to address the problem, and GAO recommendations for more effective prevention. The IRS and DOL estimate that between 10-30% of employers may be misclassifying workers, resulting in a significant loss of tax and unemployment insurance revenue. We anticipate this report to be a precursor for more robust enforcement in this area, including via the audit process described above.
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