No one wants to learn that their company is being audited, whether large or small, especially if it is their first time. It is your responsibility as a CPA company to guide customers through the process, prepare them for the Audit, and finally set their minds at ease.
How the payroll audit will be carried out.
How audit notices are sent to taxpayers. If the IRS suspects the taxpayer has failed to submit payroll taxes properly, an audit notice will be sent. Many people get IRS letters because their tax returns were flagged as having a high risk of a mistake by an IRS algorithm that scans them. The most prevalent forms of errors are: Workers are being classified incorrectly. Overtime pay is undervalued. Paying the incorrect tax rate.
Being subjected to a compliance check or a complete audit. A compliance check entails a review of a company’s federal employment tax filings and a verification focused on the essential aspects. A full audit involves a thorough examination and evaluation of a company’s books and records, including payment activity, business operations, and more.
Examining and evaluating Before the Audit
Before the IRS conducts an official audit, the CPA should advise the customer that this is a comprehensive evaluation to confirm that all financial facts and worker categorization are proper.
Check your 1099 and W-2 forms.
Set up meetings with management, human resources, payroll, and legal departments once the previous papers have been obtained. There may also need to be meetings with workers to check the worker categorization to keep with their responsibilities. This is also when all papers will be reviewed to see if workers were appropriately classified as 1099 or W2 employees and classified consistently from year to year. A CPA can then use this information to identify which employees may need to be reclassified and assess the tax implications of that reclassification.
Initial Interview with the Auditor.
The first interview with an auditor will be overwhelming, but hopefully, the auditor will explain everything and answer your questions. Read all documents concerning the Audit carefully, and respond to their requests timely. Seeking legal counsel is always a good approach.
The Auditor’s Initial Interview.
The auditor should explain why the Audit is taking place, how it will operate and ask general questions about your company. You will also have the option to question the auditor. You should thoroughly study all of the audit papers and reply to any demands as soon as possible.
A deeper investigation of employee pay and business activity is part of the IRS’s second level of review.
A thorough audit may be conducted if the agent discovers that the information given during the first review is not compliant or contains mistakes. This would most likely entail a review of all files, worker classifications, and payroll ledgers over the previous three years, as well as interviews with employees and managers. The agent may also seek more information to understand business activities at this stage better. A thorough audit is a lengthy procedure that takes over a year to complete.
Resolving Problems and Reaching Agreements
Some firms come out of a complete audit with no concerns discovered by the IRS, or the errors found were minor and easy to fix. However, if more significant concerns are found, some firms may have to take steps to rectify their situation with the IRS. Fortunately, let’s say the IRS uncovers more severe problems. In this situation, several initiatives are in place to encourage taxpayers to settle categorization concerns as early as feasible in the administrative process. You may be liable for penalties and interest.
Keeping an Audit from Happening in the First Place.
Preparing all tax returns that leave nothing up for debate is the most significant way to avoid an audit (and the severe penalties that come with it). Submitting the correct taxable amount minimizes their chances of triggering an IRS audit.
According to www.justice.gov, a Florida man has pleaded guilty to promoting a nationwide tax fraud scheme and $14.6 million in fraudulent tax refund claims with the IRS. He conspired to defraud the US government and the American people by selling a tax fraud scheme to over 200 people in at least 19 states.
The professional had clients and convinced them that certain deductions qualified them for tax refunds, according to court documents. Allegedly, other tax professionals (with his help) created tax returns and submitted them to the IRS. The returns claimed to withhold significant income taxes, so the clients were refunded. In reality, no one had paid nor withheld any income taxes. The IRS paid out more than $7.6 million in fraudulent tax refunds.
The professional stated that he and his co-conspirators got fees from his clients ranging from $10,000 to $15,000. He filed fraudulent tax forms, claiming that he was entitled to tax refunds and received a refund of $193,347.97. He also advised clients on how to thwart IRS collection attempts by shifting the received funds to a trust.
The IRS Criminal Investigation Division is investigating this case.