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Federal and State Audit Bootcamp Robert Kaelber October 12, 2017

Federal and State Audit Bootcamp Robert Kaelber October 12, 2017. Agenda. Welcome and Introduction Types of Audits How Selected for Audit Discuss Specific Audit Types Federal State Other Preparing for the Audit During the Audit Post Audit Questions. Types of Audits. Federal – Tax

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Federal and State Audit Bootcamp Robert Kaelber October 12, 2017

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  1. Federal and State Audit Bootcamp Robert Kaelber October 12, 2017

  2. Agenda • Welcome and Introduction • Types of Audits • How Selected for Audit • Discuss Specific Audit Types • Federal • State • Other • Preparing for the Audit • During the Audit • Post Audit • Questions

  3. Types of Audits • Federal – Tax • General Audits • Payroll Specific • State – Tax • General • Withholding • Unemployment • Other Audits • Department of Labor • Worker’s Compensation • External • Internal

  4. Types of Audits • Field audit • Generally indicated through appointment to visit the company • Sometimes show up unannounced • Office/correspondence audit • Generally indicated by request for documents • Compliance check • This is not an audit – but could trigger further activities • Survey/request for information • E.g.; Form SS-8 (independent contractor), non-resident withholding questionnaire

  5. How Selected for Audit • Unlucky… • Returns include inconsistent information or matching/out of balance issues (e.g., W-2 vs 941, state withholding) • Federal or state examination initiative • A claim for refund or request for abatement requires further review • Complaint from the public alleging noncompliance (whistleblower) • Referral from another taxing agency • Unemployment claim (contractor or proper state) • Ratio of 1099’s to W-2’s, information reporting changes • Delinquent returns or payments

  6. Federal Tax Audits • General audits • All audits should now include a payroll tax aspect • Payroll tax audits • Primary issues include: fringe benefits, expense reimbursements, and worker classification • Other likely topics include: general compliance, 1099/W-9/backup withholding, equity compensation (timing and requirements), sick pay reporting, and FUTA taxes (reconciliation versus SUTA) • Personal responsibility for unpaid taxes may arise for responsible parties under the Trust Fund Recovery Penalty (TFRP) - IRC 6672(a)

  7. Worker Classification • Common audit issue for both Federal and State jurisdictions • Audits triggers include: General Audit, Whistleblower (SS-8 and state websites), Class Action, State UI filing • Degree of control and independence must be considered and all facts and circumstances taken into account • Federal 20 factor and 3-part test (Behavioral, Financial, and Relationship of the Parties) • State common law and “ABC” tests • Non-tax tests (e.g., DOL) • Relief Provisions • Section 530, Classification Settlement, and Voluntary Classification Settlement Program (VDA) • Significant penalty risk – both tax and legal

  8. Expenses • Allowances or reimbursements paid to employees for job-related expenses are not “wages” if paid under an accountable plan. Requires a policy (does not have to be written) that includes the following: • There is a business connection to the expenditure • There is adequate accounting by the recipient within a reasonable period of time • Excess reimbursements or advances are returned within a reasonable period of time • Failure to follow accountable plan rules results in wage designation and significant tax obligations/liabilities

  9. Fringe Benefits • In general, items of value from employer to employee are wages • Certain benefits may be taxable, non-taxable or tax deferred • Failure to follow statutory obligations can result in a non-taxable item being deemed taxable (generally FMV) • If an item is re-characterized, employer tax obligations arise • Cash and cash equivalents are wages

  10. Common Issues • Athletic skyboxes/cultural entertainment suites • Awards or bonuses • Club memberships (including airline and country clubs) • Company-owned or -leased aircraft and/or vehicles • Conventions and conferences • Corporate-owned life insurance • Discounts on property or service • Executive dining rooms • Estate planning and estate enhancement programs • Post-retirement fringes • Spousal or dependent travel • Use of recreation vehicles or boats

  11. Common Issues • Financial, legal and tax counseling • Free or subsidized lodging  • Golden parachute payments • Listed property (laptops, desktops for home, cell phones) • Loans (low-interest or interest-free) • Memberships in clubs and athletic facilities • Moving expense reimbursements • Outplacement services • Physical examinations and/or use of health/medical facilities • Qualified retirement planning • Stock and Equity

  12. State Tax Audits • General multi-tax audit (corporate, sales/use, property, etc.) • Departments communicate and any audit can trigger a payroll review • Withholding Tax • Typically compliance based (inclusions and exclusions) • Multistate withholding, trailing liabilities, work vs residence • State W-4 utilization • Supplemental wage withholding • Local tax issues (as applicable and typically separate from the state review) • Unemployment Tax • Compliance based • Proper state (4-part test, multiple work states or move) • SUTA Dumping • Payrolling

  13. Other Audits • US Department of Labor • Typically triggered by employee complaint • Wage/Hour, minimum wage, overtime, exempt vs non-exempt, worker classification • Worker’s compensation and/or state disability • External audit • CPA firm, investor, purchaser (due diligence) • Internal audit

  14. Preparing for the Audit • Before the Audit Notice • Mock audit or internal process review (limited or full-scope) • Review prior notices/correspondence/audits • Review transaction history • Confirmation of year-end reconciliation practices • Voluntary disclosures?

  15. During the Audit • Receipt of audit notice and IDR’s • Centralize response process and limit communications from other employees • Obtain qualified assistance • Discuss (negotiate) with taxing authority regarding document delivery • Samples, on-site vs off-site, timing of delivery, limitation of scope, limitation of years • Gather documents • NEVER provide anything you have not reviewed yourself • Determine gray areas • Conduct own payroll tests and reviews • Voluntary disclosures?

  16. Post Audit • Receipt of findings/assessment • There may be ways to minimize the assessment • Possible penalty or interest abatement • Negotiations with auditor • If you still don’t agree – APPEAL • Appeal rights should be included with assessment • Usually an administrative hearing • Representation allowed • Evidence and any documentation always helpful • Witnesses usually allowed • Update internal processes and follow best practices

  17. Questions?

  18. Speaker Contact Robert Kaelber Director, Employment Tax Human Capital Tax Services Ryan LLC robert.kaelber@ryan.com

  19. Thank You!

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