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Common Mistakes That Lead to Employment Tax Liability and Penalty Exposure
The Internal Revenue Service is focused on closing the tax gap. One way it hopes to do so is by collecting under-withheld employment taxes. As part of the Employment Tax Research Project (ETRP) launched in 2010, the IRS is reviewing the payroll practices of 6,000 employers in four main areas: worker misclassification, fringe benefits, executive compensation and payroll taxes. Once the research project is complete, the IRS will identify areas in which compliance errors routinely occur and focus audits on those issues. Companies not selected as part of the research project should look at their payroll practices and make any necessary corrections before the IRS comes knocking. We have already observed the IRS paying a lot more attention to employment tax issues and pursuing penalties with a diligence we have not previously witnessed in this area. Because we are seeing an expanded audit scope and depth of diligence by the IRS, we've put together a list of common payroll mistakes we've seen companies make. We recommend that companies, at a minimum, look at these issues: