The IRS is wrapping up its research program comprising detailed audits of 6,000 employers, and will use the results to target future education and audit efforts. Final numbers have not been compiled but an IRS official gave a preview of problem areas the IRS has identified:
1099s and backup withholding. A high percentage of employers do not file required 1099s for workers treated as ICs/ A related issue is failing to use backup withholding when an IC does not provide a valid TIN for the employer to put on the 1099.
Tip reporting. Most firms that customarily deal with tips are not reporting them correctly, IRS research revealed. The worst offenders are small businesses. The IRS says most employers do not comply with Rev. Rul. 2012-18 (www.irs.gov - search 2012-18, click on first item), which holds that service charges must be reported as wages, not tips, and are not eligible for the employer tip credit. To date, IRS auditors have focused on employer education rather than on penalties.
Employee classification. A perennial conflict between businesses and the IRS is ICs who are really employees. The research project found that a high level of employers classified workers as ICs when the IRS believed they were employees.
Fringe benefits. The IRS says that many employers treat taxable benefits as tax-free or treat benefits that might be tax-free but are not because they do not comply with code requirements.
When the IRS finishes the audits and compiles the data this year, it will likely increase audits of firms whose profiles match those the project found not in compliance (e.g., firms dealing with tips), but the IRS is likely to focus on education before emphasizing enforcement.
The IRS is so pleased with the success of its Voluntary Compliance Settlement Program -- lets firms treating workers as ICs to pay greatly reduced penalties if they come forward -- it may try similar programs for 1099 problems and other issues.
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