Employment Tax Audits Likely to Increase

IRS Commissioner Daniel Werfel announced on April 6 that the IRS would be utilizing a significant portion of the earmarked $80 billion received through the Inflation Reduction Act to increase their surveillance of employers’ compliance with the requirement to withhold employment taxes. 

Employment taxes required to be withheld include federal income, Social Security and Medicare taxes and the taxes imposed by the Federal Unemployment Tax Act (FUTA).

This initiative to increase the review of employee tax withholding was in response to a report by the Treasury Inspector General of Tax Administration (TIGTA) that found the IRS has not been adequately reviewing employers’ compliance in this area. TIGTA identified the primary concern was that the IRS did not have the technology necessary to prioritize and efficiently review employers’ withholding documents. 

In accordance with the TIGTA’s report, Commissioner Werfel has indicated that over the next couple of years, the IRS will allocate a significant portion of its $80B to business system modernization and operation support that will permit a more effective surveillance of employer withholding of employee taxes. It is anticipated that they will begin to use high technology, presumably artificial intelligence computer programs, to review employers’ employee tax withholdings and identify those that appear to require further personal review. 

Although for many tax practitioners, compliance with clients’ withholding of employees’ tax was not necessarily a high priority, this new IRS focus shows enforcement activity on the horizon and emphasizes the importance to carefully review your clients’ employee tax withholdings to ensure correctness.