subject: Audits, Are You Safe From One? [print this page] As of February the Internal Revenue Service has stepped up audits in an effort to increase its collections from taxpayers. Among the scheduled increase is a plan to audit 6,000 US companies in an effort to determine whether they have paid all of their required payroll taxes. These taxes fund Social Security and Medicare.
The audits, a component in the first statistical analysis since 1984, are designed to investigate the frequency with which companies misclassify workers in order to save money by not paying their share of FICA taxes, failing to pay taxes on fringe benefits such as bonuses and employee personal use of company vehicles and other payroll related obligations. IRS says that the companies will be randomly chosen.
"We think that businesses have changed significantly over the last 25 years," said John Tuzynski, chief of employment tax operations at the IRS, in an interview on September 18, 2009. "This will help us find out where there are real issues that we have to address."
Based on the 1984 data, the Treasury Department estimated in 2005 that US companies underpay employer taxes by around $14 billion annually. A particular area of concern is the classification of workers as independent contractors rather than employees.
Echoing the IRS's sentiment, the Government Accountability Office said in August, 2009 that employee misclassification could be a significant problem with adverse consequences because it cheats the government out of tax revenue and employees out of labor protection. Typically, independent contractors do not qualify for benefits such as health insurance, overtime pay and unemployment insurance.
Mr. Tuzynski has aid that the audits are to be undertaken over a three year period and would also focus on S corporation officer salaries, company cars and corporate owned vacation properties. Most of the audits will be held in person; however IRS will also use internal information as a supplement. Mr. Tuzynski also said "We're going to try to make it as least burdensome as we can."
Employers are required to pay half of their employees' FICA taxes which translate to 6.2% for Social Security and 1.45% for Medicare. These percentages are generally calculated using the employees' gross wages. Employers are also required to pay both federal and state unemployment taxes on behalf of their workers. Independent contractors are required to pay the entire levy themselves.
The Bureau of Labor Statistics reported that 10.3 million workers, or about 7.4% of the workforce, were classified as independent contractors in 2005. It is unknown how many of these were misclassified.
