Beginning in February, the IRS will kick off an initiative targeting the employment tax practices of employers, and nonprofit hospitals and other tax-exempt organizations will be firmly within its crosshairs. Point of fact: of the 6,000 employers to be selected for investigation during the next three years, 1,500 are expected to be tax-exempts.
And this may well be just the tip of the iceberg. The IRS will use the information collected during these investigations to help them select future employers for review. Under the circumstances, it seems pretty clear that employment tax concerns will be a focus of tax regulators for years to come, and even if your organization’s number doesn’t come up now, prudence dictates that you exercise diligence to ensure you are in compliance with the governing law.
Comprehensive in Scope
The IRS states that the anticipated audits will be “comprehensive in scope.” While this leaves the door open for just about anything employment tax-related, IRS officials have identified areas of particular concern where auditors are expected to concentrate their efforts:
- Worker Classification. The IRS is interested in knowing whether employers have properly classified their workers. When a worker is misclassified as an independent contractor rather than an employee, the employer fails to collect and remit the correct amount of employment taxes. The IRS believes that proper classification will translate to a significant increase in revenue.
- Benefits. Not all benefits, fringe or otherwise, are tax-free, and the IRS is concerned that employers do not properly include taxable benefits in wages. A deficiency in wages necessarily results in an employment tax deficiency. Business expense reimbursement and the mechanics of how an organization pays those reimbursements are expected to be areas of focus.
- Executive Compensation. Both regular and nonqualified deferred compensation will garner special attention, and all of this will play out against the backdrop of what constitutes reasonable compensation.
There are certain concrete actions you can take now to minimize your organization’s risk of liability should it be selected for an audit:
- Organize relevant documentation. Taxpayers typically are provided a limited amount of time to respond to audit request letters. Organizing relevant documentation now can help minimize the time that it takes to prepare for an audit while allowing you to identify issues of concern.
- Conduct a review of your personnel procedures to confirm that your organization’s workers have been properly classified as either employees or independent contractors.
- Review your organization’s benefit programs and expense reimbursement plans and policies to confirm that they are up-to-date and compliant with IRS guidelines.
- Most importantly, if you uncover any problems, fix them now. Proactive correction will minimize any penalties and interest for which the organization may otherwise be responsible.