Is Your Company Facing a Payroll Tax Audit? Here are Four Steps to Help You Prepare

irs payroll tax audit


A tax audit is a time to prepare and not to panic. Many companies are requested to supply documents to support deductions, and if your company keeps good records, a tax audit can be a simple inconvenience.

The important thing is to prepare for your date with the tax auditor. He or she can be a federal auditor, a state auditor, or a local auditor from the IRS. Whoever comes, you should be ready with documentation and good information that supports your company’s payroll tax filing.

Here we will look at four steps that can help you prepared for the big day. But first, let’s understand the meaning of payroll audit.

What is a Payroll Audit?

A payroll audit is an examination that analyzes s a company’s payroll processes to ascertain accuracy. It examines things such as business’s current employees, wages, pay rates, and tax withholdings.

Companies should conduct a payroll audit once per year to ensure that their payroll is up-to-date and comply with the law. Unless the auditor comes calling, payroll audits are internal affairs that you or someone in your company can conduct effectively.

Performing yearly payroll audits can help you to spot errors and even prevent external audits later. But if things have gotten worse, the auditor will come to audit your company’s payroll.

Preparing for Company Payroll Audit

Here are the four steps that you should follow:

1.       Review the IRS Letter

You will get a notice from the IRS in your mailbox, not by email or phone. This mail lists all the items that are in question and will ask you to provide specific documents. You are given 30 days to respond to the questions.

It is best to respond as soon as possible because if you owe any money, it will continue to accrue as long as the issue is in question. However, it would be wise to contact a certified public accountant or a tax preparer or an attorney before you respond to the issues.

2.     Contact Your Tax Professional

In reality, this is the first thing you should do when you receive the IRS letter. You have the right to seek legal help when you are faced with a payroll tax audit. You can seek help from a CPA, a tax attorney, or a tax preparer who prepare returns (although a tax attorney is your best bet).  The professional will help you to understand the type of audits that might be carried out in details including:

  • Correspondence audit – This is by letter, and the auditor wants you to provide documents or verify documents or correct errors.
  • Office audit – This audit requires you to visit the IRS office to take specific documents.
  • Field audit – The IRS will visit your company to conduct a more comprehensive audit and request for documents, forms, and even previous years return with limits.

For a correspondence audit, you can contact your tax professional for guidance and advice. For an office audit, it is advisable to seek help from a tax professional who will accompany you to the IRS office or he or she can even represent you. Also, seek professional help for a field audit.

A tax attorney understands the tax code and is familiar with the audit process. The expert knows that every question from the auditor is important and has a purpose and will provide the right answer to suit your interest.

Note: Form 2848 grants power of attorney to authorize another person to act on your behalf. Form 8821 allows that person to receive and inspect your tax information.

3.       Gather Your Documents

As a rule of thumb, you should always keep good records every year. You should organize all the documents and file them in an easy to retrieve place. Prepare a summary of the entries you use to prepare your payroll and look for supporting documents that might help during the audit.

If you cannot locate certain paperwork, request for duplicates. For instance, you can contact the doctor’s offices to get copies of your employees’ medical expenses. Also, an employer can reissue some documents such as W-2s or 1099s.

Remember to provide just what the auditor has requested and don’t provide original documents. Print copies of your documents if they are computerized or even share them in a flash drive.

Here are a few things that can help you to get your documents in order:

  • Ensure that all the relevant documents are available. If you cannot find them, get busy and acquire them. Request credit cards or bank records or information from vendors. Do not make up a document that does not exist.
  • Reconstruct destroyed or lost records. They might be missing due to fire or other things. Show that you had backups of the documents.
  • Find out unintentional and intentional failures. Intentional failures reduce your tax burden illegally, and you can be penalized for this. The auditor can be more understanding if you can prove that the errors were unintentional.
  • Ensure that there are no personal expenses on your records. You should always keep your employee’s private expenses separate from the business.

4.       Respect the Auditor and Be Confident

You want the auditor to treat you fairly without making any judgment, hence, be respectful to the auditor and act professionally. Act as if you are the auditor.

Don’t try to cover information but don’t provide what the auditor hasn’t requested. Answer only what you have been asked and be confident when responding. Remember that you filled the correct return and you are here to prove that.

Note: It doesn’t mean that you owe money because your company is being audited. You might even get a refund.

The auditor often asks questions about:

  • Cash business – It is very easy to under-report cash transactions.
  • Business meals and entertainment – They should show time, date, amount, and any other information to prove their purpose to the business.

Final Verdict

Follow the above four steps, and the auditor might even recommend you get a refund. Of importance is to seek the services of a tax defense attorney, keep good records, and provide only what you are asked to. Also, be confident when providing answers.

Contact an Attorney

If you are facing a payroll audit or jus have a tax issue/question, contact the attorneys at Ayar Law for free, no-obligation tax advice 800.571.7175.

Venar Ayar, Esq.

Venar Ayar, Esq.

Attorney-at-Law, Master of Laws in Taxation
Principal and founder, Ayar Law

Venar is an award-winning tax attorney ranked as a Top Lawyer in the field of Tax Law. Mr. Ayar has a Master of Laws in Taxation – the highest degree available in tax, held by only a small number of the country’s attorneys.