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IRS Employment Tax Audits: What Employers Need To Know

June 25, 2013



Over the past few years, the IRS has been sending a loud and clear message that employment tax compliance is at the center of their attention. Based on recent activity, it is evident that the IRS is strongly committed to reducing the tax gap, which is the amount of tax liability thought to be owed by taxpayers not paid on time. Payroll taxes account for about 70% of total federal tax revenues and the IRS feels that a large number of companies are not in compliance.


In February of 2010, the Internal Revenue Service unveiled a major audit initiative focusing on underpayment of employment taxes.  This national research program was designed to investigate tax compliance issues related to: 

  • Classification of workers as employees or independent contractors;

  • Tax treatment and reporting of fringe benefits as tax-free or as taxable compensation;

  • Reasonable executive compensation; and

  • Tax treatment and reporting of employee reimbursements.


Although the program ended in 2012, the efforts of the IRS are far from finished. The following is a simplified outline of what employers need to know regarding each compliance area going forward.

Classification of Workers

It is no secret that the IRS prefers to classify workers as employees. Determining who is truly an independent contractor vs. an employee, however, is not an easy task. The IRS has traditionally considered 20 common law factors (found here), but is looking to develop one substantially simplified test to be us