Where payroll audits tend to focus
Federal employment tax examinations are run by the IRS, while unemployment insurance audits in New York are handled by the state Department of Labor, and the two can overlap. A frequent issue is whether people paid as independent contractors were in fact employees. That question is answered by the actual working relationship, not by the label in a contract or the form issued at year-end, and it is not something the business gets to choose. Fringe benefits, officer pay in closely held companies, and undocumented reimbursements are other common subjects. A finding in one agency's audit can prompt questions from another, so responses should stay consistent across them.
When withheld tax was not paid over
Taxes withheld from employees' paychecks are held in trust for the government, and failing to deposit them is treated more seriously than many other tax debts. The IRS can assess a penalty personally against people who were responsible for paying those taxes and willfully did not, which can include owners, officers, and sometimes bookkeepers with signing authority. If you are asked to sit for an interview about who made payment decisions, talk with us before it happens. Gather payroll registers, deposit records, quarterly and annual filings, contractor agreements, and communications showing how payment decisions were made. Bank signature cards and authority records often become central to the question of responsibility.
Planning the response
We begin by identifying which agency is auditing, which periods are open, and which issues the examiner has raised. Voluntary programs for reclassifying workers usually are not available once an employment tax exam is underway, so the work shifts to presenting the facts of each working relationship clearly. Some classification disputes can be narrowed by relief provisions that apply where a business had a reasonable basis for its treatment, and whether that fits depends on your history. We also look at whether current payroll practices should change now, because continuing the same practice during an audit tends to enlarge it.
