The Internal Revenue Service has begun a new program, the Early Interaction Initiative, to more quickly identify employers who are falling behind on their payroll or employment taxes and help them get caught up on their payment and reporting responsibilities.
The initiative is designed to help employers stay in compliance and avoid needless interest and penalty charges. The initiative will seek to identify employers who appear to be falling behind on their tax payments even before an employment tax return is filed. The IRS will offer information and guidance through letters, automated phone messages, other communications and in some instances, a visit from an IRS revenue officer.
In the past, the IRS noted, the first attempt by the IRS to contact an employer having payment difficulties often did not occur until much later in the process, after the employment return was filed and the employer’s unpaid tax obligation had already begun to spiral out of control.
“Employers play a key role in our tax system, and we want to offer them the information and assistance they need to carry out that responsibilities,” said IRS Commissioner John Koskinen in a statement. “With early interaction, we will be able to offer help weeks or even months sooner, when it can often do the most good.”
Two-thirds of federal taxes are collected through the payroll tax system. By law, employers must withhold federal income, Social Security and Medicare taxes from employees’ wages.
Shortly after employees are paid, employers typically must turn over withheld amounts, along with employer-matching contributions, to the federal government. Though payment schedules vary, these payments, known as federal tax deposits, are made electronically through the Electronic Federal Tax Payment System, or EFTPS. These FTDs are later reported on Form 941, which is typically filed on a quarterly basis with the IRS.
Employers, particularly those facing liquidity difficulties, sometimes inappropriately divert funds withheld from employees’ pay for working capital or other purposes, the IRS noted. Even when well-intentioned, such diversions can quickly result in mounting tax liabilities for the employer, along with interest and penalties, potentially threatening the employer’s financial viability.
Employers may also have a payroll processor, accountant or others handling their payroll, withholding, matching, remittance, and/or reporting responsibilities, which sometimes leads to miscommunication between the parties and may result in tax deposits and reporting not being made as required. Such miscommunication may also quickly result in mounting tax liabilities, interest and penalties that are costly and risky to the business.
To help employers avoid these problems, the new IRS initiative will monitor deposit patterns and identify employers whose payments decline or are late. Employers identified under this initiative may receive a letter reminding them of their payroll tax responsibilities and asking that they contact the IRS to discuss the situation. In addition, some employers may receive automated phone messages from the IRS providing information and assistance. Where appropriate, an IRS revenue officer will also contact some of these employers at their place of business.
A variety of useful information is available to employers on the IRS website, including:
What Are FTDs and Why are they Important?
Understanding Employment Taxes
Depositing and Reporting Employment Taxes
Employment Tax Publications
Small Business Taxes – The Virtual Workshop (video)