We recently represented several taxpayers in employment tax audits stemming from irreconcilable 941′ ‘s to W2’s.
Employment tax should have zero errors: quarterly 941’s should match year-end W-2’s and the W-3. The 940 should also match. Finally, the income tax return (1040 schedule C, 1120S, 1065, 1120) should match as far as wages, payroll tax. If any of these are inconsistent, a payroll tax audit could follow suit.
Typically there are gaps in 941’s filed. There might be gaps in 941 payments. In other words, if the tax shown in the W-2 plus the employer side (15.3 percent) does not match deposits, an audit could be triggered.
Once an audit is triggered, it is more expansive in scope and years. The income tax return is reviewed for irregularities, and the years reviewed is expanded. In addition, state issues are reviewed such as state unemployment tax payment, rate. Employee benefits are reviewed such as health insurance, pension/profit sharing plans, automobile use, allowances, reimbursements.
Employee records are checked triggering potential illegal alien employment audit such as with employee forms I9, W4. Cash disbursements are checked, vendor payments, 1099’s. All books and records acan be checked, including accounting software. These audit exams are handled by IRS Revenue Agents with vast power.
It has been my recent experience that the IRS downsizing efforts have taken a toll. I have heard repeatedly from various agents about the stress and affects throughout the entire country. I recently heard of an effort of 40% downsizing. Many agents do now know if they can complete an audit because they might be terminated. I just thought it was interesting to note the real time effect.