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IRS Plans to Audit Many Companies for Employment Tax Violations

We all know that income tax returns get audited. Many tax advisor, however, unfortunately advise their clients that employment tax returns (form 941) and unemployment insurance tax returns, commonly known as FUTA returns (form 940) never get audited. In today’s economy this encourages some taxpayers not to file these returns or to file false returns showing smaller withholdings. These employers are playing dice with the IRS. However, the game is about to change.

Starting in February 2010, the IRS plans to audit at least 6,000 U.S. companies to ensure compliance with federal tax reporting obligations. Several types of businesses will be chosen for this audit including partnerships, S corporations and limited liability companies. The IRS is going to look for such non-compliance as improper worker classification, non-filers and improper corporate officer compensation.

Initially the IRS will look at the basic quarterly employment tax return, form 941, and this may spread to other related returns as well such as the 940 annual FUTA return. It’s going to take the IRS about 3 years to complete this program. In other words, the IRS will examine about 2,000 businesses per year.

The IRS is very concerned about an ever growing tax gap that most likely is hundreds of billions of dollars. According to an IRS news release, employment tax revenue represents close to 38% of what the IRS collects each year. Internally the IRS examined 60,000 employment tax returns in 2008 and imposed close to $3 billion in additional taxes, penalties and interest.

Most likely the EDD will be very interested in the results of the IRS efforts for California employers and it may conduct its own audit of taxpayer selected for examination by the IRS.

Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure”, both published by Commerce Clearing House.