The NASPP Blog

The IRS began its Employment Tax National Research Project (NRP) this year (See our January 26th blog entry), auditing 2,000 randomly selected companies. Soon, the next 2,000 will be receiving their notices that they have been selected for 2011. In totally, the IRS will audit 6,000 companies over three years. This NRP comes on the heels of similar studies conducted on Subchapter S Corps in 2003 and 2004 and individual taxpayer returns from 2006 to 2008 returns). All are part of a Department of the Treasury’s commitment to provide updated estimates of the “tax gap” (i.e.; the difference between the taxes owed and the taxes actually collected). A full description of the efforts is included in the Update on Reducing the Federal Tax Gap and Improving Voluntary Compliance.

Don’t think that if you aren’t selected, you’re totally off the hook. These are just the random audits as a part of the evaluation process. Not only are regular tax audits still taking place, the results of the NRPs will be used to help identify which individuals and companies to target for regular audits and what areas of audits are most likely to result in the discovery of noncompliance.

The current NRP will focus on four main issues: fringe benefits, worker classification, executive compensation, and payroll taxes. The stock plan management team won’t have much, if anything, to do with an audit of fringe benefits. Worker classification (i.e.; determining if there are consultants who should be classified as employees) could spill over into stock plan administration. A quick review of your company’s policy on granting to nonemployees and an audit of the database to identify grants to nonemployees will help your company make a full assessment of classifications. Executive compensation sounds like an area that stock plan management would be involved in, but actually the main focus will be on owner-officers and the particular audits in this area may not apply to most corporations. So, the area where the stock plan management team can provide the most assistance is payroll taxes.

Payroll Taxes

At this point, you should already have a regular, at least annual, audit of your tax withholding and remitting policies that helps you identify areas of potential noncompliance. The NRP only increases the risk of your company being audited, but compliance should be a serious focus, regardless. Here are my top areas to review before the new year:

Timing of Tax Deposits
Social Taxes
Mobile Employees
ISOs and 423 ESPPs
162(m) and 409A Compliance

Why Now?

If you uncover areas where the company is not withholding correctly on equity compensation, the beginning of the calendar year is the perfect time to implement new withholding practices. This is especially true for mobile employee withholding and if the change will be prospective only

How Far Should You Go?

When you do identify an area that your company has been out of compliance with, the big question is whether to make policy changes that are prospective or retrospective. Even if you aren’t going to be changing retrospectively, it’s a good idea to at least audit back a minimum of three years, but no specific length of time is appropriate across the board. For example, if you discover that you haven’t been making timely tax deposits, there isn’t a way for you to go back in time and make them any earlier. But, you can go back and audit the instances of noncompliance to help give your company an idea of what fees could result from an audit.

States, Too!

The federal government isn’t the only one with a tax gap to close; states are also looking to find lost tax revenue. What’s more, the IRS has reciprocal agreements with many states to share audit findings. That means that if you are audited by the IRS as part of the NRP or as a regular audit, state and local tax authorities may not be far behind.

-Rachel