Posts Tagged ‘Audit’
The IRS has announced a new initiative for employers, known as the Voluntary Worker Classification Settlement Program. The program allows employers who have misclassified workers as “independent contractors” rather than “employees” to reclassify the workers. The employers would only have to pay a small percentage of the employment tax liability that would have been due to cover past payroll taxes, with no interest or penalties. While the IRS program is available to businesses of all sizes, as a practical matter, it is likely to most affect smaller entities.
The classification — or misclassification — of an employee as an independent contractor, as the case may be, has been a hot-button issue of late. The import of the proper classification of a worker as an employee or an independent contractor goes beyond a mere label: A substantial monetary and employee benefit impact is at stake for the employer and the worker alike. Worker classification is also an important issue to the IRS, since a significant percentage of federal revenue comes from employment taxes. The IRS has been conducting random audits of businesses to ensure employment tax compliance.
Employees and independent contractors are treated differently for income-tax withholding and employment-tax purposes. With an employee, the business generally must withhold income taxes from the employee’s pay and remit those taxes to the federal (and state, if applicable) government. The business and the employee share the responsibility for Social Security and Medicare (FICA) taxes on the employee’s earnings. The business also must pay unemployment taxes for the worker. In the case of an independent contractor, income-tax withholding is not required and the worker is fully liable for his or her own self-employment taxes (essentially equivalent to the total of the employee-employer contributions to FICA taxes) and unemployment taxes do not apply.
In determining a worker’s classification, the IRS applies a “facts and circumstances” test involving numerous factors; an analysis of the entire relationship needs to be taken into account. A key issue that the IRS has traditionally examined is whether the employer had the right to direct and control the actions of the worker as to how to perform the services. Other factors include how the worker is paid, whether there is a written contract, whether expenses are reimbursed, and whether the business or the worker provides tools and supplies.
The New IRS Initiative
The new program enables certain employers to resolve past worker classification issues and gain clarity as to the worker classification issue at a relatively low cost by voluntarily reclassifying their workers.
As opposed to waiting for a potential IRS audit, businesses (and other entities, including tax-exempt organizations and government units) may use the Voluntary Worker Classification Settlement Program to achieve compliance by making a minimal payment (generally, 10% of the employment tax liability deemed owed) to cover past payroll tax obligations. To be eligible to take advantage of the IRS’ offer, a business must satisfy some basic requirements. The entity must:
- Have consistently treated the worker(s) as nonemployees in the past,
- Have filed all required IRS Forms 1099 for the workers for the past three years, and
- Not currently be under a worker classification audit by federal or state agencies.
The IRS created the program ostensibly to increase tax compliance and reduce the burden placed on employers by providing greater certainty for the worker, the business, and the IRS as to a given worker’s employment classification status.
How to Apply
Employers who are interested in applying to the new voluntary classification program can do so by filing IRS Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before intending to treat a contractor as an employee. If all conditions are met, the employer will not be audited on payroll taxes related to the worker for prior years.
Take Advantage of Professional Advice
We would be happy to discuss any questions or concerns that you may have relating to the new IRS worker classification initiative. We can help you determine whether your organization is eligible and, if so, how to participate in the program. Let’s get together and talk.
Helping nonprofits, human resources departments with fund accounting and HRMS software, reporting, and accounting services; Huckstep & Associates is proud to have customers throughout the central United States including Arkansas, Colorado, Michigan, Missouri, Nebraska, Kansas, Oklahoma, Minnesota, Texas and Wisconsin.
There are many considerations to think about when selecting an accounting software program. One consideration that is rarely thought of is what could happen if the taxpayer’s tax return is selected for an IRS audit. The IRS is now both equipping and training its auditors on a couple of the most commonly used software packages. This may only be a start down a rocky road for the taxpayer. The IRS has purchased licenses for software products and can accept backup files for “most accounting software programs that are used by small business customers.” (IRS website Q&A).
The majority of the attention on this new audit procedure has been focused on QuickBooks and PeachTree as they are the most common “off-the-shelf” accounting products used by small businesses. And, we are seeing in several of the public tax forums discussions regarding IRS auditors requesting copies of backups for these products as a part of the audit.
You may ask a question like, “Why should I care if an IRS auditor wants a backup of my accounting software?” You should care! Tax practioners are concerned about the open access this gives an auditor to the organization’s information. And, then there is the interpretation of what is contained therein. Given a full backup of your accounting data, the IRS auditor would have open access to transactions from prior and subsequent years that are not within the scope of the audit.
With this new development, IRS has been very clear that financial accounting software files cannot be modified to delete activity for periods that are not currently under audit. Remember Enron? The big issues there really started with Destruction of Records. The destroyed records were outside of the retention requirements, but had not been destroyed in a timely manner. The destruction began when the organization was notified of an audit – a Big No-No.
So, given this development, you cannot delete activity from subsequent periods so as to limit the auditor’s view into solely the records covered by their audit request areas. The IRS position is that “…..the new or modified company file is not a copy of the books and records of original entry. The altered electronic file would not meet the requirements of the Information Document Request.” (IRS website Q&A)
The typical small business owner, or nonprofit organization who considers a purchase of accounting software typically is looking only at whether or not the package they are considering can provide them with the internal reports the organization needs to run the business at hand. But, as you can see, there are many more things to think about. In the event of an IRS audit, it is important that you only provide appropriate responses to the questions that are raised. But, given certain of the low-end accounting packages, you run the risk of opening yourself and your organization to the entire world of the IRS agent should you receive a request for a full copy of your accounting system.
There is lots to think about in your choice of an accounting system, but this is a new development that should definitely be factored in to your decision. We all love technology, but sometimes it is a double-edged sword.
For information on accounting software options, and their impact on your organization, please feel free to contact Huckstep & Associates, LLC at (800) 269-6466.
Huckstep & Associates is proud to have customers throughout the central United States including Arkansas, Colorado, Michigan, Minnesota, Missouri, Nebraska, Oklahoma, Kansas, Texas and Wisconsin and specializes in accounting services, nonprofit fund accounting software, reporting and human resource management systems (HRMS).