IRS To Review Employment Tax Compliance Programs

A General Accounting Office (GAO) report, "IRS's Efforts to Improve Compliance with Employment Tax Requirements Should Be Evaluated," takes the Internal Revenue Service to task over the agency's follow through procedures for helping businesses pay their employment taxes in a timely fashion.

While businesses that file form 941 receive notice of errors, interest, and penalties within five weeks of filing the form, businesses that fail to file form 941 are not notified of a problem for 14 to 28 weeks.

The GAO is encouraging the IRS to evaluate its programs for notifying and educating employers, and IRS Commissioner Charles O. Rossotti has agreed to do so.

The IRS currently has four programs in place for notifying employers and helping them comply with the employment tax laws:

  • Mentoring and Monitoring. This program provides educational materials to employers when they apply for employer identification numbers.
  • Federal Tax Deposit (FTD) Soft Letter. Under this program, employers who appear to underpay an employment tax deposit receive a letter advising them of a possible tax discrepancy.
  • The ABCs of FTDs. This two-hour class encourages employers to comply with the employment tax deposit rules and offers a forgiveness of federal tax deposit penalties of up to 75% to those who attend.
  • FTD Alert. Under this program, IRS officials contact employers with outstanding federal employment tax liabilities of more than $50,000, employers with repeated delinquencies, and employers who appear to have underpaid for the current quarter.

The GAO report contends that the IRS has not evaluated the effectiveness of these programs and encourages the IRS to develop a plan for such evaluation.

"Small businesses that fall behind in paying employment taxes quickly land between a rock and hard place," said Senator Christopher S. Bond, R-MO, ranking member of the Senate Small Business and Entrepreneurship Committee. "When confronted with a choice between paying operating expenses or depositing employment taxes, struggling businesses may opt to pay business expenses instead of taxes. An efficient early warning system to identify these taxpayers will benefit small businesses that want to comply with law and will help the IRS collect taxes owed."

Current procedures only identify non-compliant taxpayers who have made an attempt to file federal employment tax returns. Employers who have not filed returns are not easily identified. At present, there are no plans in place for improving on the current programs relating to federal tax deposit deficiencies.

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