How the New Wave of IRS Audits Will Affect Your Small Business

Anita Campbell        Founder Small Business Trends

October 14, 2010

Have you gotten an audit letter from the IRS yet? The agency is auditing 2,000 companies this year at random as part of its Employment Tax National Research Project (NRP).

If you haven’t received an audit letter, that doesn’t mean you can relax. The IRS will continue performing 2,000 random audits each year through 2012. And even if your company never receives an audit letter, the results of the project will have far-reaching impact on all small businesses.

In its announcement of the NRP last November, the IRS said the audits will be “comprehensive.” This is the first NRP in 25 years; its purpose is to see how well businesses are complying with employment tax regulations, which have changed substantially in that time.

As CFO Zone pointed out recently, the main impetus behind the project is the IRS’s desire to “close the tax gap”—the difference between the amount businesses owe and the amount they actually pay on time. Whether the gap is due to businesses not filing taxes, not paying on time, overstating deductions or underreporting income, the IRS is eager to close it. By honing in on problem areas, the agency hopes to pinpoint leaks where it’s losing income.

According to CFO Zone, the audits will focus on four key areas:

  1. Worker Classification: Whether workers are classified as employees or independent contractors.
  2. Executive compensation: Salary and non-salary compensation, such as loans, deferred compensation and stock.
  3. Fringe benefits: Perks for executives and employees.
  4. Payroll taxes: The IRS will be looking closely at Forms 941 and Form 1099/W-2 for issues including withholding and next-day deposit requirements.

The IRS has warned that firms being audited should be prepared to open all their records to the agency. But whether or not your business gets an audit letter, the NRP puts all small businesses on notice that they need to make sure their ducks are in a row.

Why? The NRP may be a short-term project, but its findings will be used to focus a long-term crackdown on business tax compliance in the four areas above. So start now to make sure your business is in full compliance with employment tax issues. Do an internal audit; if you find anything questionable, take immediate steps to resolve the problem.

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