Your payroll is a bigger audit risk than your deductions.. 🫣

Hi,

Of the roughly half a million audits the IRS closed last year, 32,615 were employment tax returns – the second largest category after individual returns. Not Schedule C deductions. Payroll.

The first filter is automated: 4.47 billion information returns get matched against filings by machine, so a mismatch isn’t a judgment call, it generates a notice. After that, four things drive most business exams:

• S-corp owners taking no salary while running large distributions
• Contractors who function as employees
• Personal expenses in the business, especially a vehicle at 100% business use
• ERC claims – the OBBBA extended that assessment window to six years, and roughly 41,000 claims are still in exam or appeal

Most of it is preventable. Match 1099-NECs and other 3rd party reports to your books before you file, not after a notice arrives. Set reasonable compensation with a documented methodology and comparable data behind it. Keep business and personal spending genuinely separate.

If you’re already being audited, start by working out what you actually received. A CP2000 is not an audit – it’s an automated matching notice and it’s answered differently. A Letter 566 is a correspondence exam, a Letter 2205 means a field agent, and a Letter 105-C is an ERC disallowance that starts its own clock.

Then five rules:

• Don’t call the examiner yourself. Under section 7521, saying you want to consult a professional stops the interview. File Form 2848 to pull in your CPA or EA.
• Answer the document request as written. Handing over your full accounting file invites a wider exam than the one you were selected for.
• Never recreate a document to look contemporaneous. That turns a 20% accuracy penalty into a 75% fraud penalty and can trigger a criminal referral. It’s the worst thing a business owner does under pressure.
• Do not automatically elect to go to Tax Court – this makes defense of simple cases far more expensive. Most cases are simple.

No two of these situations look the same. A deduction that is completely defensible for one business is a flag for another, and the same goes for your entity structure, your payroll setup, and how your contractors are recorded.

What a consultation looks like:

• One hour with a senior advisor 
• We go through your last two filed returns, your payroll setup, and any IRS correspondence you have received
• You leave with a list of where your exposure actually sits and what documentation you would need if a notice arrived

If you have received a letter – please respond with a deadline of the letter response. If you have questions regarding minimizing audit risk – please respond “Have Questions” and we’ll schedule a free 15 minute call with our senior tax advisor to map out where your exposure sits and what a plan would look like from here, as we still have a few spots for August.

Sincerely,

—

George Dimov, CPA

Licensed and Insured

(833) 829-1120 toll free

(212) 994-8081 Fax

www.dimovtax.com