If you are an employer, you will have a chance beginning in February to participate in a new IRS comprehensive  study on employment  tax compliance.  The IRS will randomly select and audit approximately 6,000 employers — 2,000  each  year for the next three years. The audits will be comprehensive in scope and will likely apply to for-profit and not-for-profit employers alike.  The last time that the IRS undertook such a project was in the 1980s.

           According to the IRS’s website, it believes that business practices in the employment tax area might have “changed significantly” since its prior study. The stated objectives of the audits are twofold: to determine taxpayer compliance characteristics to allow the IRS to focus on the most noncompliant employment tax areas; and to gather valid data to calculate what it considers the “employment tax gap.”

          The primary areas of concern to the IRS are –

• Worker classification: Are employers avoiding payroll taxes by improperly classifying workers as independent contractors who are, under the law, employees?

• Reimbursed expenses: Are employers reimbursing only actual documented expenses rather than paying impermissible undocumented expense allowances and thereby under-reporting employees’ taxable income?

•  Officer compensation: The general target here is unreasonably low compensation by S corporations (avoiding payroll taxes) and unreasonably high compensation for very successful C corporations (avoiding the double tax on distributed earnings).

• Fringe benefits: Are employers complying with the rules prohibiting discrimination in granting various fringe benefits?

           The IRS’s audits will not, however, be limited to these targeted issues and will likely be extended while in progress if other issues are observed.

           Employers selected for audit will receive a notice describing the National Research Program study and the audit process. Those who are selected will, even if totally compliant, still lose the time and the expense of cooperating in the audit. If your business is selected, we will be glad to answer your questions and to help you with the audit.

 The requirements for information reporting of payments continue to increase in complexity and penalty potential. The most common information returns required of taxpayers are Forms W-2 for wages paid and Forms 1099 for other payments.

The penalty for failure to file these returns timely with correct information is generally $50 per statement, up to $250,000 for any calendar year. Also, there is an additional $50 penalty (with a $100,000 maximum) for failure to furnish timely and correct information statements to the payees or for failure to include the taxpayer identification number on the statement. If, however, the failure to provide a correct return to a payee is due to intentional disregard of the filing requirement, the penalty is $100 per return or, if greater, up to 10 percent of the aggregate amount of the items required to be reported with no maximum. Louisiana law also provides for penalties of $5 per statement up to a maximum of $7,500 for the late filing of Forms W-2.

Businesses are required to report on Form 1099 payments to all recipients of $10 or more of interest, dividends, and royalties. Payments to unincorporated payees of $600 or more of rents, fees, commissions, and prizes must also be reported. The exemption from reporting payments to corporations, however, does not apply to payments for legal services. All attorneys’ fees of $600 or more paid in the course of a trade or business are reportable in box 7 of Form 1099-MISC. In addition, if a payment is made to an attorney in connection with legal services and the attorney’s fee cannot be determined, the total amount paid (gross proceeds) must be reported in box 14. Retirement plans are required to report all payments to beneficiaries on Form 1099-R.

Nominee Reports--Even taxpayers not involved in a business might be required to file information returns if involved in joint investments. For convenience in the joint operation of real estate or to obtain a higher rate of income, taxpayers sometimes invest in interest-bearing bank  accounts or stocks  and  bonds  jointly  with

2010 Limitation Changes

             Many tax or regulatory limitations change on a calendar year basis. Here is a summary of some of the major 2010 limitations with 2009 for comparison.