Employment & Payroll Tax Reporting & Disputes
Officer and Executive Compensation
The IRS will examine whether officer and executive compensation is reasonable. IRS and state tax auditors are looking for over-compensated shareholders of closely held Corporations and under compensated shareholders of S-corporations.
Further, employees receive stock in addition to their wages, such as, stock options, stock transfers, restricted stock, etc. As such, the IRS audit technique guide, instructs IRS auditors to review documents filed with the Securities and Exchange Commission (SEC) as part of their audit investigation. This can, and does, lead to referrals to the SEC for compliance violations as well as criminal investigations.
Related investigations may be brought by SEC, FINRA, and is one of the most litigious issues in martial dissolution cases.
Fringe Benefits -
Corporations often give some employees or contractors extraordinary fringe benefits that are not provided to other corporate employees. Examples include housing, cafeteria plans, cell phones, and meals. Any property or service that an executive receives in lieu of, or in addition to, regular wages is a fringe benefit. An IRS or EDD audit will investigate whether the benefit should be subject to employment tax.
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The IRS and State will audit the classification of business worker to ensure that employment tax obligations are being met. It is important to note that the factors used in determining the classification are often subjective. A business charged with misclassification of employees, is not only charged with the back payroll taxes but is also facing numerous tax penalties from both the state and the IRS, as well as the Department of Insurance, and often Unions.
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Cash - Under the Table
The IRS and the State investigate and audit instances of Cash Payments to workers because such payments are illegal. Often, cash payments to workers are common industry practices, and thus, competitors often 'tip-off' or whistleblow to the IRS or EDD or Department of Insurance (Workers Compensation, Unemployment Insurance Fund) or even Unions, such practices.
Moskowitz LLP represents businesses. We know that tax disputes and tax audits are not only disruptive to you running your business but can threaten to destroy it.
The IRS is increasing its tax audit and examination of employment tax compliance amongst businesses. Part of this will is an increase in audits, and another is an increase in criminal employment tax investigation and prosecutions. See our recent blog articles discussing some high profile criminal employment tax prosecutions.
Employment Tax and Payroll Dispute Focus Areas:
With any employment tax audit or dispute comes the threat of, or assessment of, additional taxes and penalties, such as Trust Fund Recovery Penalty (aka, 100% penalty) and the State Tax component (in California, the Employment Development Department (EDD) and/or Workers Compensation Insurance).