IRS drops the veil on payroll audits

The IRS has issued interim guidance that clarifies and updates auditors’ responsibilities during payroll audits. (SBSE-04-0915-0058)

Parameters of payroll audits. Payroll audits generally cover an entire calendar year, which means that auditors must establish so-called controls on all returns to address that year. It also means that auditors will not examine the current year.

Upshot: Auditors need a good reason to control for less than a calendar year and, according to the guidance, they shouldn’t start an audit for a calendar year until after your fourth-quarter 941 is due.

Insight: You’ll be required to present all four Forms 941 and supporting documentation, so you should organize those records around calendar years, not the company’s fiscal year.

Scoping out audits. Audits are limited in scope or more general. For limited-scope audits, auditors must address and document certain items, including:

• Interviewing you and touring your business
• Completing specific filing checks, including whether you’ve filed appropriate information returns, and if you haven’t, whether the audit should be expanded to include penalties; whether you properly withheld FICA taxes; and whether you satisfied other reporting requirements (e.g., you filed corporate and information returns)
• Considering applicable penalties, such as failure to file or pay, failure to deposit and negligence.

For general-scope audits, auditors will determine an audit’s scope based on facts they learn during your preaudit interview and a review of your books and records.

Warning: Auditors can expand an audit’s scope to other issues they find, if they conclude that expansion is warranted to ensure that they consider all items necessary to properly determine your tax liability.

KNOW BEFORE YOU GO: Going into an audit blind only gives auditors the upper hand. Pub. 5146 lays out the ins and outs of payroll audits in detail; the pub is available at the IRS’ website: www.irs.gov.