IRS to Audit 6,000 Companies to Test Employment Tax Compliance
By Ryan J. Donmoyer
Sept. 18 (Bloomberg) — The Internal Revenue Service will audit 6,000 U.S. companies to determine whether they pay all their required employment taxes to fund Social Security and Medicare benefits.
The IRS said the audits will provide data for its first statistical analysis since 1984 of how often companies misclassify workers to duck tax obligations, fail to pay taxes on fringe benefits such as personal use of company cars, and improperly pay taxes for company executives. The audits will begin in February, and the companies will be randomly chosen.
“We think businesses have significantly changed over the last 25 years,” John Tuzynski, chief of employment tax operations at the IRS, said in an interview today. “This will help us find out where there are real issues we have to address.”
The Treasury Department in 2005 estimated, based on the 1984 IRS data, that companies underpay employer taxes by about $14 billion annually. In particular, federal agencies have raised concerns about whether employers are properly classifying workers as company employees or independent contractors.
Employee misclassification “could be a significant problem with adverse consequences” because it cheats the government out of tax revenue and employees out of labor protection, the Government Accountability Office said last month. Employees who are improperly classified as independent contractors can be denied health benefits, overtime pay, and unemployment insurance.
Tuzynski said the IRS audits, to be conducted over three years, also will focus on fringe benefits such as company cars and personal use of corporate-owned vacation property, as well as the way salaries are reported for officers at so-called S- corporations.
Most of the audits will be conducted face-to-face, Tuzynski said, although the IRS also will gather information from internal sources and the Internet.
“We’re going to try to make it as least burdensome as we can,” he said.
Employers are required to pay half of their workers’ 12.4 percent Social Security tax and 2.9 percent Medicare tax when the workers are classified as “employees.” Workers classified as “independent contractors” pay the entire levy themselves.
The Bureau of Labor Statistics reported that 10.3 million workers, or about 7.4 percent of the workforce, were classified as “independent contractors” in 2005. It’s unknown how many of those weren’t properly classified as independent contractors.
States uncovered about 150,000 workers in 2007 who weren’t receiving labor protection because they were misclassified, the GAO said. Improper worker classification costs state governments revenue used to pay unemployment benefits.
FedEx Corp. said on Sept. 11 that the IRS, following an audit of the company’s 2002 taxes, is proposing to assess tax and penalties of $14 million related to the misclassification of employees as independent contractors. The company said it would contest the IRS’s findings.
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