By Lisa M. Nadal and George L. Yaksick, Jr., CCH News Staff, and Paul N. Gada, CCH Toolkit Staff Writer
Earlier this year, the IRS revealed that a $345 billion tax gap exists for the 2001 tax year. The tax gap is the difference between what taxpayers should have paid and what they actually paid on a timely basis. Approximately, $66 billion dollars of the estimated tax gap comes from uncollected employment taxes, a senior IRS official told the Second Annual American Payroll Association's 2006 Capital Summit in Washington, D.C., on March 23, 2006.
IRS Acting Chief, Employment Tax, Dan Lauer said that new compliance initiatives will help to close that gap. For example, the IRS has hired more agents for this purpose and is focusing on particular areas of employment tax evasion, such as the underground economy.
More Audits to Come
"We don't get it all," Lauer acknowledged, discussing unreported and uncollected employment taxes, but emphasized that the IRS is adding resources to ferret out noncompliance. The stakes are huge because payroll-related deposits account for roughly 70 percent of all IRS tax collections or $1.7 trillion.
This year, the IRS is making a special push to identify employers who pay their workers in cash to get around their employment tax obligations. The agency is also focusing on unreported tip income. Other enforcement targets include identifying employers that misclassify their workers as independent contractors and return preparer and promoter fraud. Lauer said that the IRS has discovered an upturn in the number of bogus medical reimbursement arrangements being marketed on the internet.
The IRS hired about 50 new employees in 2005 to work on employment tax enforcement. "This is a significant boost to employment tax compliance. More agents mean more audits," Lauer said.
Redesigned Forms
The IRS has rolled out redesigned employment tax returns over the past few years. Form 941, Employer's Quarterly Federal Tax Return, has been redesigned for 2006. The IRS also has introduced new Form 944, Employer's Annual Federal Tax Return, for small employers. Lane said that the IRS is developing a new form to replace Form 941c, Supporting Statement to Correct Information, and it should be released for 2008.
Lock-In Letters
Last year, the IRS relaxed the Form W-4, Employee's Withholding Allowance Certificate, submission rules for employers. "You are not the W-4 police," IRS Senior Tax Analyst, Wage/Investment Compliance, William Warner told conference attendees. Under temporary regulations, employers no longer have to submit withholding certificates unless instructed to do so by the IRS.
If the IRS determines that an individual's withholding is inadequate, based on the employee's Form W-2, Wage and Tax Statement, it will issue a "lock-in" letter to the employer specifying the status and the maximum number of withholding allowances permitted for the employee, Warner said. Employees falsely claiming complete exemption from withholding is the most common problem.
While the IRS also sends a copy of the letter to the employee, Warner told employers to give a copy to employees. If an individual is no longer on the job, the employer should alert the IRS by sending a letter on company letterhead by mail or fax to the IRS office in Lowell, Massachusetts. Warner reminded employers to include their employer identification numbers (EIN) in the correspondence.
Many employers are asking the IRS for some type of mechanism to identify "suspicious" Forms W-4, Warner said. However, the IRS does not have such a mechanism currently in place.
Warner encouraged employers to remind employees that there is a $500 penalty for filing a false Form W-4. The good news for employers is they are not subject to this penalty. The bad news for employees, however, is that the penalty is assessed personally on them.
Identity Theft
Joan Totani, acting senior analyst, IRS Office of Criminal Investigations, said that the IRS warned employers to safeguard confidential information. "Identity theft is a big problem," she said. The IRS has discovered cases of employee Social Security numbers and other information being stolen out of trash and recycle containers.
Totani also cautioned employers never to e-mail anything to the IRS as e-mail communications are not secure. "The IRS will never e-mail you," Totani said.
- Related items:
- Prepare Now for Next Year's Tax Season
- IRS Reports $345 Billion in Taxes Went Unpaid for 2001 Tax Year
- IRS Cautions Taxpayers About Tax Scams
- New Tax Year Means Many Tax Changes to Consider
Added to the news on May 1, 2006.
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