Much has been written (true and untrue) about how the average taxpayer will be affected by the expected increase in IRS funding from the Inflation Reduction Act of 2022 (IRA 22). While the total funding has been decreased and priorities have shifted a bit, the Commissioner has made clear that increasing the IRS’s efforts at ensuring employment tax compliance remains of utmost importance. For those operating businesses with employees, there is no better time than now to review their employment tax compliance over the recent years to prepare for the eventuality of an IRS audit, including:
- Payroll Tax Compliance. Throughout the pandemic, the IRS went largely inactive when it came to efforts to collect unpaid employment taxes, largely because Revenue Officers (those charged with collecting unpaid taxes) were prohibited from in-person meetings. But the IRS has hired and is in the process of training a whole group of new Revenue Officers to begin this process again. So, if you have been unable to pay all your employment taxes (including the “trust fund” portion), your time to address the liability is quickly coming to an end.
- Employee Retention Credits. ERC fraud was the first addition to the IRS’s 2023 “Dirty Dozen” list, and part of the IRA 22 funding has been earmarked for a new ERC fraud program. We have already seen one of these audits in our office. So, if you claimed ERCs in 2020 or 2021, you should be prepared to justify both your eligibility for the credits, and amounts.
- S-Corporation “Reasonable Salary.” If your business is taxed as an S Corporation, you must pay yourself a “reasonable salary” for the services you provide to the business. If not, the IRS will re-characterize all distributions to you as wages and assess additional employment taxes against the business.
- Worker Classification. The IRS is going to (again) increase the number of worker classification audits- looking to convert independent contractors to employees for purposes of FICA, Medicare, and income tax withholding obligations.
If you think any of the above may apply to you, contact one of the Denver tax attorneys at Anderson & Jahde, P.C. to discuss how you can be proactive in resolving these issues before they get out of control.