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The IRS Commissioner, Charles “Chuck” Rettig, a former Los Angeles-based tax lawyer of 38-years, has been diligently making his rounds at virtually every major tax conference around the country. 

The message –

            “I’m an enforcement guy, I’m a taxpayer service guy. I hope to touch every aspect of the tax service.”

he said to an audience of over a thousand accountants at the 2019 American Institute of CPAs’ Engage conference. 

He went on to say:

            “The IRS has the ability to help this country, and this country has the ability to help the world, and as tax pros, you have the ability to help the IRS.”

He called on tax practitioners to help taxpayers and the IRS resolve issues quickly and transparently, by saying:

            “It’s the responsibility of everyone here to get there first — if your clients have issues, clean it up fast. I believe tax practitioners need to do the right thing. If you discover problems in preparing for an IRS exam [audit], let us know.”

On the tax enforcement front, he said: 

            “Taxpayers who are trying to do it right will have my support. Those who wake up with an idea of a creative way not to pay tax,  I’m paying attention to that. We will have a much greater presence on enforcement than before. We will be in every neighborhood that we can be, we’ll be touching people, but a fair touch.”

PAYROLL TAXES

One area where the new enforcement mindset has taken hold is in the payroll tax arena.  

Inside word has it that IRS agents recently received a one-week long refresher course to help them better spot payroll tax non-compliance problems.

The new approach is simple, somewhat harsh, but not necessarily unfair.  If a company paid someone as an independent contractor and did not issue a 1099, the IRS will give the company 3 options (take your pick):

  1. The auditor can open a payroll tax case and assess:
  2. the payroll tax (15.6% for Social Security and Medicare), plus
  3. the employee’s income tax that should have been withheld, plus
  4. failure to file penalties (25% of the taxes assessed), plus
  5. failure to deposit penalties (15% of the taxes assessed), plus
  6. Interest on the taxes and penalties at the current rate (ranging between 4% to 6% per year); or,
  7. The auditor can impose a Backup Withholding Penalty of 24% on the amount paid to the contractor; or,
  • Disallow (throw out) the expense and assess additional tax on the amount (depending on the taxpayer’s tax rate, that could cost between 25% to 37% of the amount disallowed), plus perhaps a 20% penalty on the tax, and interest too.

Which road a taxpayer chooses depends on the taxpayer’s particular circumstances, and whether this is a one-off situation; or, whether the taxpayer has many service providers that fall under this scenario.

THE NIGHTMARE SCENARIO

The biggest consideration is trying to contain the problem to the year under audit, and hope the IRS does not go back in time 3 or more years; and, whether the State of California may follow the IRS’ approach, or take a harsher approach. 

A business can be crippled by a payroll tax audit.  A stitch in time…

By: John Balian, Of Counsel

About the Author
Theodore J. Schneider practices in the areas of business and corporate transactions, employment law counseling, municipal and public law, real estate and land use, and homeowner associations. Ted began his legal career in 2002 when he joined the Los Angeles office of Gibson, Dunn & Crutcher, L.L.P. before relocating to Ventura County to join his father in practice.