The IRS has identified the eight most common areas examined nationwide that arise in examinations of entities. These areas also arise in compliance checks and can be avoided by using the IRS’ Compliance Self-Assessment Tool which allows entities to efficiently review all areas of Federal tax law to ensure compliance.
The most common issues, and information concerning compliance are as follows:
1. Information return filing. Governments are generally subject to the same requirements for information reporting as other taxpayers. This includes issuing securing taxpayer identification numbers and issuing Form 1099-MISC to recipients of nonemployee payments made during the year. See Instructions for Form 1099-MISC.
2. Worker classification issues. Unless a statute provides an exception, workers who perform services subject to the will and control of the payer are employees, subject to income tax and FICA withholding. Workers improperly classified as independent contractors can result in assessment of back taxes and penalties. See Publication 963, chapter 4, for more information on how to determine who is an employee.
3. Personal use of government property. Except where the law provides a specific exception, the value of the personal use of any government property by an employee is taxable wages. See Publication 15-B for more information.
4. Form W-9. Generally, you are required to secure a taxpayer identification number from anyone to whom you make payments. Form W-9 should be given to nonemployee payees for this purpose. You are required to begin backup withholding on payees who fail to furnish an identifying number. See Form W-9 for more information.
5. Allowances not under accountable plan. If amounts are paid as allowances to employees (for example, for travel), these amounts are taxable wages unless they are made under an accountable plan. See Publication 15, Employer’s Tax Guide (Circular E).
6. Payments improperly characterized. Wages may be subject to social security or Medicare taxes, or both, depending in some cases on the type of work and the status of the employee. Wages includes all remuneration for services performed by an employee for his employer, including salaries, bonuses, awards, stipends, etc. See Publication 15, Employer’s Tax Guide (Circular E).
7. Meals furnished. Except for meals paid or reimbursed for overnight travel, or provided for the convenience of the employer, meals or allowances for meals paid to employees are generally taxable. See Publication 15-B for more information.
8. Forms W-2 and W-3. Employers are responsible for correctly identifying wages
subject to employment taxes, and coding the payment of other items on Form W-2. The totals on these forms on Form W-3 must match the wages reported on Form 941.
See the Instructions for Forms W-2 and W-3.
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