You won’t become audit bait if you file a Form 941-X to correct a previously filed Form 941, according to Anita Bartels, IRS senior program analyst for employment tax policy. You also won’t become audit bait (or if you do, it will a lot less painful) if you keep good records, file returns on time and respond to IRS notices. What does put you in the audit hot seat?
Bartels answered five key questions at the American Payroll Association’s Annual Congress in May.
Question #1: Are payroll audits different?
Yes, said Bartels. Payroll audits are smaller in scope than corporate audits, and generally encompass these areas:
- Worker classification
- Officer compensation
- Backup withholding.
Question #2: How does an audit work?
If the IRS finds mismatches (e.g., you file 1099 forms but no W-2 forms, or you file W-2 forms but no 941 forms) or your Form 1120S shows distributions to S corp. shareholders but no wages, the IRS will send you a notice/letter and an Information Document Request (IDR). Then, an auditor will make an appointment to come to your office. According to Bartels, payroll auditors prefer to work on site because it’s faster for them if they have questions about your files or need to interview responsible persons. Key: Auditors don’t want to hang around your office any longer than they have to, she stressed.
STICK TO THE IDR: Sometimes IDRs are canned or not well drafted. That’s not your problem. Bartels’ advice: Give auditors exactly what they asked for. Don’t guess and provide what you think they want. If they want more or different documents, they’ll ask for them.
Question #3: What if we ignore the IRS or refuse to cooperate?
Not a good idea, Bartels cautioned. She added that ignoring an IRS notice or showing hostility won’t make them go away; the audit will continue and adjustments will be made. The IRS already has a trove of information at its fingertips without your cooperation. It can get more by, say, using bank records. Helping the auditor will shorten the process, she advised.
Question #4: Do we have to handle the audit ourselves?
No. Bartels said that you may give your CPA, attorney, enrolled agent or another person power of attorney over the audit. But third parties draw out the process, she noted, since all requests and questions must go through them.
On the other hand, if you choose to handle the audit yourself, Bartels provided a list of things you shouldn’t do:
- Don’t panic
- Don’t lie
- Don’t manufacture documents.
Question #5: What if we disagree with the audit results?
You will receive a notice that will advise you on how to handle disagreements. Bartels recommended that all further interaction with the IRS be in writing. Reason: If you call, you probably won’t speak to the same person twice. What if you’re still not satisfied? Bartels advised talking to the auditor’s manager, then to the IRS’ Appeals function and, ultimately, to the Taxpayer Advocate.
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