IRS fine-tuning audit efforts

Although you may have read recent news stories claiming the IRS will be conducting fewer audits than in years past, it’s too soon to breathe a sigh of relief! Apparently, the IRS is making up for its tighter budget by focusing its efforts on those areas likely to yield the most bang for its buck. According to the AIPB (American Institute of Professional Bookkeepers), the IRS is currently wrapping up its research project comprising detailed audits of 6,000 employers. The agency, then, plans to use this research to target its future education and audit efforts. Although final numbers are still being compiled, and IRS official gave a preview of the problems found and, thus, the trajectory of its future audit activities:

Employee classification – The IRS identified a high percentage of employers inappropriately treating employees as independent contractors. While always a problem, it is likely to garner renewed attention.

1099s and backup withholding – The IRS went on to find that many employers are not issuing 1099s to their independent contractors, nor are they using backup withholding on those individuals for which they do not have a valid taxpayer identification number.

Tip reporting – The IRS found many employers are reporting tips incorrectly. In particular, the IRS noted firms failing to comply with Revenue Ruling 2012-18 which states that service charges must be reported as wages, not tips, and are not eligible for the tip credit.

Fringe benefits – The IRS found many employers treating taxable benefits as tax-free simply because they did not understand the rules.

While the IRS is finalizing its data, it would be a great time to go over your procedures and make sure you are in compliance. As always, if you have questions, please give us a call!