If you're flagged for an employment tax audit, be careful

If you're a business owner, receiving a letter from the Internal Revenue Service or Maryland State Department of Assessments and Taxation can be intimidating. It may be tempting to ignore the inquiry in hopes that it's a minor issue that can be addressed later, but that's exactly the wrong approach. The best way to minimize exposure and get back to conducting normal business operations is to immediately find out the exact nature of the inquiry.

Tax audits occur for a variety of reasons. While some are truly random, others are triggered by a perceived irregularity in a previous return. Unfortunately, some types of businesses are subject to greater scrutiny than others. For instance, businesses that employ workers seasonally, primarily from immigrant groups or under a contract basis may be flagged for review. Whatever the reason, once an audit begins, other tax issues may arise, including reviews of past years' returns.

One of the more common issues involves the classification of a worker as an independent contractor versus a regular W-4 employee. There are many tests that can be applied to determine the proper classification, but none are absolute. If the IRS says the worker was improperly classified, the employer could face charges of failure to collect and remit payroll taxes and failure to pay employment taxes. It's important to remember that penalties and interest accrues from the time of the violation.

Our experienced employment tax audit attorneys have encountered a wide variety of tax issues and are often able to anticipate what action the government is planning. If you have questions regarding a pending audit or have received an inquiry letter, please view our page on tax audits.

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