IRS Takes Aim at Employment Tax Returns (Forms 941)

July 22, 2009

The IRS is in the process of randomly selecting for examination Forms 941 filed for the 2008 calendar year. The examinations are part of a study by the National Research Program (NRP) within the IRS Office of Research, Analysis & Statistics to measure reporting and payment compliance for employment taxes.

An IRS official said the examinations are scheduled to begin in mid-February, 2010, and he estimates that approximately 1,500 to 2,000 examinations will be conducted. In the September/October, 2010, time frame, the IRS will select 2009 employment tax returns for examination.

NRP is working to close an employment tax gap estimated at $15 billion. Of that amount, $14 billion is attributed to Federal Insurance Contribution Act (FICA) taxes (which fund old age retirement benefits and Medicare/Medicaid); and $1 billion is attributed to Federal Unemployment Tax Act (FUTA) taxes (which fund unemployment compensation), according to the IRS official.

The employment tax examinations will cover taxpayers falling under the IRS’ Large & Mid-Size Business (LMSB) Division, Small Business/Self-Employed (SBSE) Division, and Tax Exempt & Government Entities (TEGE) Division. Thus, large, mid-size, and small for-profit businesses and non-profit entities will be included in the examinations, which will be conducted by IRS Agents who are specially trained to conduct employment tax examinations.

During the examinations, the IRS Agents will focus on issues including:

  • Worker Classification (employee vs. independent contractor).
  • Whether Section 530 of the Revenue Act of 1978 applies, and, if so, why.
  • Wage underwitholding resulting from fringe benefits.
  • Backup withholding.
  • Whether Forms 1099-MISC contain the correct TIN for the payee.

With respect to fringe benefits, the IRS does not plan on looking at cell phones or computers provided or paid for by the employer. It will focus on other types of fringe benefits, such as company-provided vehicles. The IRS will use the information gained from these examinations to improve its program for selecting employment tax returns for examination.

For more information please contact the author or any member of our Business Tax or Employee Benefits practice teams.