IRS Launches Employment Tax NRP (Forms 941)

April 29, 2010

An IRS official recently stated that the agency has launched its Employment Tax National Research Project (NRP). Last November, the IRS announced that it would begin the NRP in Feb. 2010, the first of its kind in 25 years. See IRS Will Begin Employment Tax Research Study in February 2010. Also see IRS Takes Aim at Employment Tax Returns (Forms 941) and IRS to Begin Employment Tax Examinations (Forms 941). The NRP will span three filing years, 2008 through 2010, and covers taxpayers under the jurisdiction of the IRS Large and Mid-Size Business (LMSB), Small Business/Self Employed (SBSE), and Tax-Exempt and Government Entities (TEGE) Divisions. LMSB’s NRP sample currently consists of 48 cases.

The examinations are part of a study by the NRP within the IRS Office of Research, Analysis & Statistics to understand the compliance characteristics of employment tax filers. These are very comprehensive examinations that focus on large and small items (including some items that appear immaterial), and are followed by a thorough review of the results.

When the IRS announced the Employment Tax NRP, it stated that the two main goals are:

  • To secure statistically valid information for computing the Employment Tax Gap; and
  • To determine compliance characteristics so the IRS can focus on the most noncompliant employment tax areas.

The issues that the IRS will focus on in the Employment Tax NRP are discussed in IRS Takes Aim at Employment Tax Returns (Forms 941) and IRS to Begin Employment Tax Examinations (Forms 941). Although an NRP examination can be tedious for the taxpayer being examined, the IRS believes these types of projects help taxpayers and the IRS. They help taxpayers by (1) improving the IRS pre-filing programs that assist taxpayers with tax law compliance, and (2) reducing the burden of unnecessary IRS contacts with compliant taxpayers. They help the IRS to (1) apply limited resources where they are of the most value in reducing noncompliance; (2) ensure fairness, observe taxpayer rights, and reduce the need to burden those who comply; and (3) manage compliance programs more effectively.

In addition to the Employment Tax NRP, the IRS is looking more generally at:

  • Penalties for failure to deposit employment taxes
  • Employment tax issues with respect to foreign workers
  • Whether payments to entertainers for live performances are considered royalties or compensation
  • Who should be withholding taxes on payments to entertainers for live performances

The Employment Tax NRP and other employment tax issues under scrutiny by the IRS indicate a concern about employment tax compliance and a desire to increase compliance through more targeted examinations and taxpayer education.