Ignoring the IRS won’t make a tax audit go away, advised Sarah Plowman, senior policy analyst at the IRS. In fact, according to Plowman, the opposite is true—ignoring a notification of a payroll audit means that you give up your chance to tell your side of the story and set the record straight. Plowman calmed tax audit fears of attendees at the American Payroll Association’s Annual Congress, held in May.
Tax audit ABCs
The auditor will request an appointment and send you an information document request (IDR). Tip: If the IDR simply says “Payroll Records,” call the number listed on the form and ask the auditor to be more specific.
Added benefit: You may be able to winnow down the number of documents the auditor wants to see.
Plowman said that payroll audits are usually conducted on the business premises. Auditors will be flexible and reasonable about postponing audits, but if you fail to cooperate, auditors will proceed by using any available information, she warned.
Auditors will interview responsible parties, so be sure to present an employee who knows how the business works. The worst thing you can do, Plowman stressed, is to waste the IRS’ time.
More good advice: Don’t put auditors in an unventilated room or outside when it’s 100 degrees. It just makes them angry.
Tax audit dynamics
Payroll audits are generally limited to these four areas:
- Worker classification
- Officer compensation
- Backup withholding.
Don’t let your pristine payroll records lull you into a false sense of security.
Plowman noted that auditors will pull corporate officers’ 1040s and the company’s 1120s to determine officers’ compensation. Auditors talk to other auditors, she said, so a payroll audit can quickly grow into an income tax audit.
Tax auditors also receive information from the U.S. Department of Labor regarding worker classification issues.
PAYROLL PRACTICE TIP: To stay out of the IRS’ audit cross hairs, Plowman advised keeping good records and filing tax returns on time. Further, she emphasized that you should read IRS notices carefully and act on them promptly. What to avoid: Participating in abusive schemes, which the IRS jumps on, according to Plowman.