Preparing for (and Surviving) an IRS Audit TASPA Conference December 2010 Kelly K. Crook, Ph.D. Assistant Superintendent for Finance Del Valle ISD
DISCLOSURE The information and suggestions presented in this presentation are based on an audit conducted in Del Valle ISD in November 2008 and subsequent follow-up with IRS specialists. The opinions expressed are those of the presenter and have not been sanctioned by the Internal Revenue Service.
“Dear Taxpayer…” - Initial Contact Who is chosen and why? Possible tip-offs: W2/1099, Medicare tax contributions, Retirement contributions Length of Audit
Requested Information Information requested is specific to one or more years – usually 2 to 5 years previous. On-site requests usually involve current year See A-1 for sample list of requested items
What Are They Looking For??!! Unpaid taxes. Plain and simple.
Major Areas of Concern Medicare contributions for employees Updated W-9s on file for all active vendors Fringe benefits for employees Independent Contractor vs. Employee
Medicare Contributions All employees hired after 3-31-86 must pay 1.45% Medicare tax contributions Employees hired in your district prior to 3-31- 86 with no break in service do not pay Medicare tax contributions Check on this – very easy for people to slip through…
Updated W-9s for All Active Vendors Must have current version (updated October 2007) with corporate tax classification (see A-2) Develop coding system to separate vendors from employees, parents, students Scan W-9s into purchasing software, if possible
Fringe Benefits for Employees Any property, service, or cash (other than salary) provided by employer All taxable unless excluded specifically by law (see A-3) Must be included in employee’s wages and reported on W-2 form (NEVER on 1099- MISC form)
Examples of Fringe Benefits Uniforms & Clothing Cleaning service for Uniforms & Clothing District cell phone or cell phone allowance Awards (Teacher of the Year check, etc.) Bonuses (D.A.T.E. grant, etc.) District vehicles or travel allowances Housing or housing allowances
District Issued Vehicles/Cell Phones Personal use is taxable Verified business use is not taxable Can use cents-per-mile, commuting rule ($1.50 per way), lease valuation rule (annual) Cell phone billing statements – very difficult under current billing structure
Kelly’s Common Sense Fairness Rule If an employee receives something that everyone else has to pay for themselves – they need to at least pay taxes on it!
Independent Contractor vs. Employee Right to direct and control Substantive Consistency & Reasonable Basis Twenty Common Law Factors test Control of payment of wages (Business or Individual) Who is ensuring that taxes are being paid?!
Right to Direct and Control Behavioral: If employer provides instructions on how to do job, what hours/days to work, etc. then worker most likely employee Financial: If employer provides an office, supplies, computer, email address, etc. then worker most likely an employee Relationship: If employer provides benefits (life, health, dental, etc.) then worker most likely an employee
Substantive Consistency & Reasonable Basis Tests Consistency: Treating all workers in similar positions the same Reasonable Basis: Relying on prior audit safe haven, judicial precedent safe haven, industry practice safe haven
Twenty Common Law Factors Test Designed to help you evaluate how work is performed (see A-4) Form SS-8: Be careful about submitting for review (see A-5) Remember – employees can submit as well!
Control & Payment of Wages Business or Individual What do you do when you’re in a bind? Contract with businesses, not individuals (ensures the payment of taxes) Must pay contractor under tax ID number – not social security number
Where are the Specific Rules? There aren’t any! Your audit findings only apply to you! Private Letter Ruling: Method of appeal, but “This document may not be used or cited as precedent. Section 6110(j)(3) of the Internal Revenue Code”
Where are the Specific Rules? It is completely up to the auditor, so… Be cooperative, respectful, prompt with information, and pick your battles…
Resources www.irs.gov Publication 15 – Circular E, Employer’s Tax Guide Publication 15-A – Employer’s Supplemental Tax Guide Publication 15-B – Employer’s Tax Guide to Fringe Benefits
Contact Information Kelly K. Crook, Ph.D. Assistant Superintendent for Finance Del Valle ISD (512) 386-3043 kelly.crook@del-valle.k12.tx.us
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