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Payroll Tax Audits Lawyers
Payroll tax audits occur when the IRS looks at a business’s payroll taxes to determine whether they have underpaid. Some business owners might hire independent contractors, which means they don’t have a tax obligation. If the IRS disagrees that these workers are independent contractors, the business will be subject to payroll taxes. There are additional potential consequences to having independent contractors labeled as employees as well.
The majority of payroll tax audits take place over three years. However, if you have never filed a Form 941 or other employment tax paperwork, the IRS can audit decades of financial information. There isn’t a statute of limitations.
You are more likely to face a payroll audit if you only hire independent contractors than if you have a mix of employees and independent contractors.
If you are determined to owe payroll taxes, the financial impact can be catastrophic. Every case is different, so it will depend on the level of financial liability you have. But regardless, you’ll likely need to pay the back taxes, interest, and any penalties imposed by the IRS.
Some potential penalties include:
- Failure to deposit, which is up to 15 percent of the total owed
- Failure to file, which is up to 25 percent of the total owed
- Accuracy penalties, which are up to 20 percent of the total owed
In some cases, you might be subject to several of these penalties at once. That means you might have to pay the back taxes plus more than 50 percent of the original total, along with interest. Most businesses don’t have enough capital to be able to avoid this.
After finishing an audit of a tax payroll, the IRS can be expected to share their results with your state tax agency. In California, this will typically trigger a state payroll tax audit. If you’re found guilty there, you will owe back payroll taxes to the state as well.
Payroll tax audits might be the result of computer software flagging potential issues. They might also be the result of human interference. It’s common for unhappy contractors to file complaints with the IRS when they’re unable to pay a self-employment tax. They might file official paperwork asking the IRS to begin an investigation into whether they qualify as a contractor or an employee.
When this form is filed, the IRS tends to follow up fairly promptly. It can be filed by both workers and businesses, but usually is filed by the worker. If the IRS gets a request to investigate, usually their first step is to ask the business about their contractors and employees. At this point, the situation is not yet an audit. But it is serious.
If the IRS reaches out to you about your payroll taxes or your employee contracts, it’s a good idea to get in contact with an experienced tax attorney. Depending on the situation, a skilled tax attorney might be able to avoid having an audit opened at all. They will fill out an official Form SS-8, which allows you to answer questions about your contractors and employees.
There are some key differences between contractors and employees that not every business owner understands. It’s not enough to simply state in the contract that they are a contractor rather than an employee.
When the IRS decides whether to classify someone as an employee or contractor, they use a “common law” test that examines 20 different factors. Common law means that it comes from English law rather than a specific part of US federal legislation.
Some of the factors in this test have to do with how much control an employer has over their workers. Most recently, the IRS has started using a test with three categories. These are the relationship of the worker to the business, the level of financial control exerted, and the level of behavioral control exerted.
Both the three-category and 20-part test are complex. There isn’t a single algorithm that can decide whether a business will be subject to a payroll tax audit or not. Every cases is judged on an individual basis by looking at the results of the test, the existing circumstances, and any other red flags.
If you’re the subject of a payroll tax audit, it’s important to prove that you employ contractors rather than employees. Tax attorneys understand the differences between these groups and can compile evidence to prove your case. If you have found yourself convicted of payroll tax avoidance after an audit, an attorney can help you appeal. They will either represent you in court or appeal the ruling to the Appeals Division of the IRS.
When you can’t prove definitively that you employ contractors, you still have some legal options. There was legislation passed several decades ago to make it easier for business owners to hire contractors that didn’t pass the 20-part test. This legislation provided relief to business owners, but it isn’t part of official IRS codes. A lot of tax attorneys don’t know about it because they haven’t studied it. But it can help you appeal an IRS judgment.
Payroll Tax Problems Lawyers
Payroll taxes can be complicated for any business, but they’re even more complex with a lot of employees. You also have more complicated obligations if you pay contractors, have overseas employees, or employ people in multiple states. Employers are required by law to withhold part of their employees’ paychecks to make state and federal tax payments. If you aren’t compliant with the latest rules and regulations, you could run into serious problems.
Some businesses must make their tax deposits a single day after sending out paychecks. Others might have extra time, or they might be required to make quarterly payments instead. Failing to keep up with payroll taxes can result in penalties and interest fees. As time goes on, the penalties will add up, until they might be greater than the sum of the delinquent taxes.
Payroll tax problems can occur in any business, no matter the size or the industry. They also aren’t always due to malice. In fact, most issues arise because of extenuating circumstances, or because of mismanagement leading to insufficient funding.
Some businesses don’t have enough money to make their overhead costs, so they use the payroll tax fund to keep the lights on. You might worry that you’ll lose your company if you’re unable to pay for rent or supplies. In comparison to the threat of closure, the IRS seems like a distant issue. After all, consequences from the IRS will not be as immediately apparent as consequences from your landlord.
In a lot of cases, a business owner believes that they will be able to pay their back taxes by the time they’re noticed by the IRS. But that usually isn’t the case. If you’re struggling so much that you have to choose between rent and taxes, your business is in dire straits. It’s likely to get worse, not better, as time goes on.
If you continue to avoid paying your payroll taxes for significant periods of time, the IRS might threaten to close your business. In addition, the business owner might be subject to criminal penalties including imprisonment and additional fines. Criminal proceedings are typically initiated when the IRS has sufficient evidence that the business owner intended to defraud them.
Payroll tax issues also aren’t always the fault of the business owner. Sometimes employees are dishonest about their tax obligations, or they make simple mistakes. They then hide the mistake from their employer instead of fixing it. In these cases, the business owner is still required to pay the owed taxes. However, because the issue was not the business owner’s fault, it’s possible that a tax attorney can get your penalties and interest reduced.
In most cases, when a business owner has payroll issues with the IRS, they will also have payroll issues with their state. California has one of the highest income tax rates in the US. Regulations regarding California payroll tax are very similar to the regulations at the federal level, though there are some differences. A good tax attorney will be well versed in both state and federal tax law.
The IRS is able to use functionally endless resources to pursue payment from you. They can seize your personal property and file criminal charges. When you’re dealing with the might of an institution like this, it’s vital that you know your rights. Having a tax attorney to represent you is one of your most fundamental rights.
Some people might want to file for bankruptcy to avoid paying overdue payroll taxes. It’s true that individuals can start bankruptcy proceedings in order to declare that they can’t pay their back taxes. But businesses don’t have the same exact protection. The IRS might collect part of your past payroll taxes from your personal account, even if the business is a corporate entity. Sometimes the IRS will collect taxes from your employees and contractors, too.
You can talk to a lawyer about how to avoid this. The specific code is called the trust fund penalty. It essentially states that the IRS can use the funds of individuals connected with a business to collect taxes if the business fails to pay them.
Your lawyer will be able to review the financial records of your business. Every payroll tax problem is slightly different, so you will need to consult with an attorney to learn about your options. They will be able to advise you about what your liability is, what they can do to lessen the penalties, and if there are any other potential consequences.
An attorney is the best person to talk to if you want to find out how to reduce your liability and avoid criminal charges. If your unpaid taxes are the result of employee misconduct rather than your own mismanagement, your lawyer may be able to factor that into a judgment. Making partial payments is a good way to avoid having the IRS seize your personal assets because of your overdue business taxes.
Regardless of how many employees you have, payroll tax issues can snowball into a frightening ordeal. Getting in contact with an attorney as soon as possible is the most important step.