Withholding and reporting employment taxes require accuracy. Sometimes mistakes are made in withholding or reporting the correct amount of wages, tips and taxes to the Internal Revenue Service. These inaccuracies may be discovered during an employment tax audit.
Publication 5146, Employment Tax Returns: Examinations and Appeal Rights, discusses general rules and procedures that the IRS follows when examining employment tax returns. The publication explains what happens before, during and after an examination, including procedures for appeals.
The IRS may use computer programs or acquire information from public records when selecting a return to examine, the publication said. A return selected for examination does not necessarily mean an error occurred. An audit may find that additional taxes are owed, the employer is entitled to a refund or no changes exist, the publication said.
The IRS notifies audit subjects by mail, the publication said. The IRS may conduct examinations by mail or in person. The length of an examination depends on several factors, including the type of examination and the complexity of items reviewed. The IRS determines when, where and how an examination takes place.
An employer subject to an examination by mail may act on its behalf or have someone represent the company in correspondence. An employer subject to an in-person examination may act on its behalf; have someone accompany a company official as a witness; have a representative for the company, such as an attorney or accountant, accompany an official; or have a representative act for the company without an official present.
The IRS provides audit subjects with a written request for specific documents it would like to see, the agency said on its website. The IRS might request such records as receipts, bills, canceled checks and legal papers, the agency said, adding that only copies should be sent.
An examiner is to verify information-reporting compliance and employment tax-return filing compliance during the initial stages of an examination, the publication said. An examiner also determines whether an employer has filed all required information returns and furnished copies to employees from the return period under examination to the most recent year.
The IRS accepts an employer’s tax return as filed or explains proposed changes, the publication said. An employer whose tax liability changes because of an examination may ask the IRS to reconsider the result.
An employer that disagrees with an IRS tax decision may appeal within the IRS or seek judicial review by filing a refund suit in a federal district court or the U.S. Court of Federal Claims, the publication said. Before filing, the employer must pay to the IRS at least the amount of the tax assessment that relates to one worker for one tax period and then file a claim for refund.
An employer finding an error on an employment tax return not subject to examination must use the corresponding X form, such as Form 941-X, to make the correction, the publication said.
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