Thousands of auditors are being hired and trained as part of the Inflation Reduction Act’s $80 billion in funding for modernizing the IRS. We anticipate a significant increase in audit activity will focus on executive compensation, fringe benefits, and employment tax compliance.
To prepare for potential audits, employers should review their payroll and employment tax administration practices. Internal audits can identify compliance risks, address them before penalties are assessed, and demonstrate good-faith efforts in the event of a subsequent audit by the IRS or state taxing authority.
It’s impossible to predict everything the IRS examiners may focus on, but past experience foretells that they’ll “follow the money.” In particular, auditors will scrutinize billions of dollars in employee retention credit refunds. Issues targeted in an IRS employment tax audit vary based on company size and industry.
Fringe benefits and perquisites. If a benefit is provided, and the amount is not excludable from taxation, the employer is liable for federal income tax withholding and FICA taxes that should have been withheld, plus the employer share of FICA and federal unemployment taxes. Late deposit penalties and information reporting penalties could also apply.
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