IRS update: digital communication and payroll

Back in the dim mists of antiquity, when most people watched broadcast TV, our favorite part of Mission: Impossible was at the end, when the good guys peeled off their masks.

Paul Mamo, assistant deputy commissioner for Services and Enforcement at the IRS, and Dan Lauer, director of SB/SE, examinations and specialty tax, did something similar at their workshop at PayrollOrg’s annual Congress.

Zoom out for the big picture

The IRS got $80 billion over 10 years. How is it going to spend this money?

Mamo reviewed some initiatives, including IRIS, the IRS’ new simplified platform for filing 1099s. Information return filers filed about 300,000 to 400,000 1099s through IRIS this past winter. While this sounds like a lot to us, Mamo said this was a small number.

Payroll Handbook D

In July the IRS will roll out a bulk filing feature for IRIS. He also confirmed FIRE’s eventual retirement, in favor of IRIS. No one likes FIRE, Mamo admitted.

He next discussed scanning original and corrected 941s and 940s. Scanning original returns is in the pilot phase. The returns come into the IRS as MEF returns (i.e., modernized e-file), and the data is extracted and dropped into a schema. About 500,000 940s have been handled this way. The IRS is just starting the process with the 941s.

The IRS must lean heavily into digital communication, Mamo said, including:

  • Document upload tool. This tool allows you to take a picture of a notice and securely send it to the IRS.
  • Online accounts. This allows the IRS to securely send notices to taxpayers. Right now, according to Mamo, online accounts are functioning on the individual income tax side of the IRS. It’s more challenging with business and payroll returns, because of the power of attorney; the IRS is beginning a POA initiative, he added.
  • Cloud capabilities. The IRS can’t ignore the cloud, although Mamo wasn’t specific about which applications would be moving to the cloud or when.

Zoom in for the payroll picture

The IRS calls withholding voluntary, although your employees may beg to differ. Lauer highlighted the centrality of Payroll’s importance to the functioning of the federal government—75 to 80% of the government’s revenue comes in through withholding.

Payroll is compliance-oriented; there’s very little wiggle room to be creative. Lauer wants his auditors to think of payroll compliance as a triangle, with timely filing compliance, including 941s, 940s and every information return required to be filed, at the top of the pinnacle.

The lower right point is reporting compliance, which means auditors will check the accuracy of the items reported.

The lower left point is dedicated to paying compliance, which encompasses payroll withholding—have fringe benefits been properly characterized as taxable or nontaxable, for example—and backup withholding, Lauer said.

Not surprisingly, Lauer is concentrating on 941s and 941-X forms on which the employee retention credit is claimed. He stressed the IRS’ ERC fraud initiative. Mamo commented that ERC fraudsters are handing out ERCs like they’re candy. He mentioned the aggressive radio and TV ads and how some employers are abandoning their trusted accountants and running to these so-called ERC mills. Lauer’s revenue agents have received 56 hours of training for ERC exams, and audits will be going into next year and probably the succeeding year, too.

So, if you’re still waiting for your ERCs, you’re going to have to be patient. Aside from the fraud aspect, there are a lot of technical issues and nuances with the ERC.

The upshot, according to Lauer: He hopes to be able to handle 2,500 to 3,000 ERC-related returns every quarter.

After the IRS can put the ERC to bed, Lauer noted these areas of concentration:

  • Large case audits
  • Audits of mid-sized privately owned corporations. The major issues Lauer’s auditors will be looking at will include problems with fringe benefits and discriminatory benefit plans
  • S corp audits. Auditors will determine whether S corp owners are taking a reasonable FICA-taxable salary
  • Worker classification audits in certain unnamed (at least as of today) industries and Section 530 relief