What You Need to Know: Payroll Tax Audits

Posted on September 5th, 2018

Employment classification is often a point of contention between IRS auditors and businesses. Many employers who have their paperwork in line find themselves receiving audit notices, all because their contractors could be classified as employees. As intimidating as the IRS is, records and sound arguments can prove them wrong.

It’s essential for business owners to consult with their accountants or CPA firm to successfully navigate the employment audit. Doing so without expert assistance may result in penalties and costs. These audits are intimidating, but it is possible to fulfill the requirements, stay compliant, and protect your business.

The Two Kinds of IRS Investigations

The IRS performs two kinds of audits: a compliance check and a full audit.

The compliance check is not as in depth and will be less involved for business owners. The IRS will review all federal tax forms and interview you. They will then consider whether you have violated any policies.

Full audits are time-consuming and in-depth. All financial records for the year in question will be reviewed, and multiple interviews may be required before the IRS is satisfied with what they find. If a full audit is initiated, the auditors have a good idea that employment laws have not been followed, either due to actual violations or incorrect records.

In any case, it’s important to cooperate with the auditors. Answer their questions, provide requested records, and meet with them when required. When dealing with a full audit, however, working with a CPA can help you resolve the issues correctly.

How to Avoid the Full Employment Audit in the First Place

It’s frustrating to know that the IRS can initiate an audit at any time, even when you have all but guaranteed your records are valid. Have your accountant review all federal employee and contractor policies, and make sure yours comply. For example, an employee who serves in one role and a contractor that performs the same task can be flagged. Re-classify where necessary.

The key to reducing the risk of an audit is controlling the factors that could cause one.

Need Help with Payroll Services or an Audit? Call Us!

Contact Davis & Associates, Certified Public Accountants to resolve your Employment Audit. We serve Naples, Cape Coral, and Bonita Springs.

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