“I don’t have to worry about an IRS Audit or how I classify my employees. We are a small office and we might not have it all completely right, but it’s the big companies they are after, not us. We’ll be fine.”
Fact: Small companies can no longer fly under the radar when it comes to IRS audits and DOL compliance.
As if being an employer, making ends meet, and keeping patients and employees happy isn’t a big enough challenge, even bigger challenges await. Beginning in February 2010, the IRS started a much heralded and three year long project — one that enables them to extract hundreds of thousands of dollars in recovered taxes and penalties from large and small employers across the country. The IRS has been randomly selecting 6000 businesses for detailed audits to determine compliance with the IRS employment tax codes. The purported goal is to update the estimated “tax gap” stemming from out of compliance employers. In reality, they are policing all types of employers to look for the missing money.
Because the audits are random, there is little you can do to avoid selection. What can you do? Be prepared. If you want to be ready for them to come knocking on your door, you will need to understand the legal significance of at least two very important distinctions concerning classification of your employees: exempt vs. non-exempt and independent contractor vs. employee. They’ll also review in detail how you pay overtime, your tax returns, and informational returns such as 1099’s and w-2’s. The IRS can expand its investigation as they see fit. If they go digging and discover a mistake, you’ll be required to fix it and pay penalties. But, if you haven’t even been trying to follow the rules, the audit will just go deeper.
Classifying and paying employees properly is an area most small employers are fuzzy on, and many are not getting it correct. You are not only vulnerable to a random IRS audit; you are also vulnerable if an employee makes a complaint. All it takes is that one bad apple with a computer or the new DOL APP for employees. Do you really want to give anyone else in your office that kind of leverage over you?
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