Employment tax initiatives: Helping small business and self-employed taxpayers

Get a closer look into the work of the IRS SB/SE Examination division and employment taxes.

Get to know the IRS, its people and the issues that affect taxpayers

By Scott Irick
CL-21-19, June 25, 2021

As the Director of Examination, I have the privilege of leading over 9,600 employees in applying the tax law fairly and with integrity for Small Business and Self-Employed (SB/SE) taxpayers. The tax law can be complex for these taxpayers, and part of my role as Director is to use a variety of tools to help people understand and meet their tax obligations. In my 36-plus year career with the Internal Revenue Service, I have witnessed innovation and improvements to improve the taxpayer experience, and I’ve also had to align resources to address emerging issues. The constant, however, is SB/SE’s need to remain diligent to help small business owners and self-employed taxpayers comply with their responsibilities for employment taxes while maintaining fairness in the system by enforcing the law where taxpayers do not comply.

Income withholding and Federal Insurance Contributions Act (FICA) taxes, including the employer’s FICA match, accounted for 70.3 % of gross collections in 2020, as noted in the IRS 2020 Data Book. With more than two-thirds of IRS collections being paid through tax withholdings, we recognize the importance of engaging industries and employers to help properly withhold and remit all employment taxes timely. We have a variety of outreach efforts and compliance programs to help employers meet their employment tax responsibilities.

Certified Professional Employer Organizations (CPEO). SB/SE created the Certified Professional Employer Organization (CPEO) Program as a result of the Achieving a Better Life Experience (ABLE) Act of 2014. A CPEO handles various payroll administration and tax reporting responsibilities for their business clients and are typically paid a fee based on payroll costs. Generally, a CPEO is solely liable for paying the client’s employment taxes, filing returns, and making deposits and payments for the taxes reported. In Exam, we receive, review, certify and monitor the application and renewal process of CPEOs. To improve the process, we recently announced that Form 8973, Certified Professional Employer Organization/Customer Reporting Agreement PDF can now be signed electronically.

Gaming Industry Tip Compliance Agreements (GITCA). The National Tip Reporting Compliance (NTRC) Program is part of SB/SE Specialty Examination. The NTRC oversees the IRS Tip Program covering large and small businesses and uses both enforcement and voluntary programs to improve tip reporting compliance. Since May 2003, IRS has used GITCAs to partner with casinos and related businesses in establishing accurate tip rates, allowing gaming employers to report the correct amount of employee tips on W-2 forms.

During the pandemic, many states ordered businesses to close and then later had restrictions for reopening. Businesses and employees in the gaming industry were impacted greatly. Because we knew modifications were needed to ensure businesses with tip agreements were not harmed during the economic downturn, Examination developed and offered an Economic Rate Reduction (ERR) to taxpayers with tip agreements, allowing for temporarily reduced tip rates. The ERR that was implemented in March 2020 has been extended, and we will continue to monitor economic activity and adjust and offer additional extensions to the ERRs as needed.

Update:  The ERR noted in this article expired on September 30, 2021.  All qualified tip agreement employers offered a pandemic ERR were notified by the IRS prior to their expiration date.

Centralized Employment Tax Operations (CETO) is a correspondence operation that facilitates and supports compliance efforts. One of CETO’s programs includes the receipt and processing of Voluntary Classification Settlement Program (VCSP) applications. VCSP is a voluntary program that gives taxpayers an opportunity to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate, the taxpayer must meet certain eligibility requirements and apply by filing Form 8952, Application for Voluntary Classification Settlement Program PDF, and enter into a closing agreement with the IRS. The program is meant to be easy, quick, and inclusive for taxpayers. This program is a great avenue for taxpayers who are interested in correcting the treatment of their workers without penalties or an audit. A withdrawn or rejected application will not increase the likelihood of an audit. CETO also provides essential support to the National Tip Reporting Compliance (NTRC) Program by conducting correspondence audits.

COVID Business Relief: SB/SE has led the IRS effort to make sure businesses know about important COVID tax relief available to them as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The legislative changes have allowed businesses to claim the Credit for Sick and Family Leave and the Employee Retention Credit in advance by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19. SB/SE employees are working to ensure Form 7200 filers are claiming the credits accurately and appropriate amounts are paid. The provisions have already resulted in nearly $18 billion in credits to employers so they can continue operating their businesses and paying their employees.

Field and Specialty Examination. Employment tax compliance is addressed in all SB/SE audits. General program revenue agents and tax compliance officers review the taxpayer’s compliance for all required returns, including employment tax returns. When we determine there is employment tax noncompliance, examiners will begin an employment tax audit or refer the case to an employment tax specialist. Employment tax specialists in Specialty Examination conduct examinations of SB/SE and Large Business and International (LB&I) employers. They ensure employment tax reporting, filing and payment compliance by auditing filed returns, securing delinquent returns, and ensuring taxpayers understand their reporting and filing obligations.

Combined Annual Wage Reporting. We identify reporting discrepancies through our Combined Annual Wage Reporting (CAWR) program. Employment tax amounts reported to the IRS are compared to amounts reported to the Social Security Administration (SSA). This program also helps us to identify employment tax return non-filers, and I’m proud of the gains we are making in this area. We recently partnered with the Social Security Administration to streamline the transmission of data between our agencies and modify how the data can be used. Even with reduced resources, we have been able to increase the percentage of CAWR cases worked since 2013. We have also established an indicator to identify employers with both a current year and prior year discrepancy case to aid in compliance efforts.

SS-8 program. When employers are unsure how to treat workers for employment tax purposes or a worker questions how an employer has classified their employment status, the SS-8 program helps both employers and workers determine the correct status. Examination technicians assess information provided on Form SS-8 PDF to make a determination on whether workers are employees subject to FICA taxes or independent contractors subject to self-employment tax. We recently evaluated the program and are revising the SS-8 instructions and letters to assist taxpayers. The revisions will provide clear and specific guidance to help filers complete the form accurately, thus decreasing the time to receive a final determination.

Backup Withholding. Payers don’t usually withhold taxes on payments such as non-employee compensation and miscellaneous income. However, there are certain situations that require payers to withhold taxes. For instance, a business is required to withhold taxes when it fails to obtain the taxpayer identification number (TIN) from the income recipient or when the IRS provides a notice to the payer that a payee TIN may be incorrect or missing. These instances require what is referred to as back-up withholding. We are doing our part to help businesses comply with backup withholding tax requirements. We have engaged with and educated businesses, taxpayers and other stakeholders via tax-forums, e-News articles, and postings on IRS.gov, social media and other platforms to increase awareness of backup withholding requirements. We have also established a new backup withholding compliance group and are continuing to increase our staffing and workload in this area. Our efforts have led to the number of information returns with missing or incorrect TINs decreasing by nearly 75,000 between Tax Year 2013 and 2018, which equates to a decrease in backup withholding and a $3 million increase in the amount of actual withholding during the same time period.

I hope this post has given you a closer look into the work of the Examination division and employment taxes. Similar to our approach with individuals, we are committed to helping small businesses and self-employed individuals meet their tax obligations and we have enforcement programs to ensure fairness and compliance with tax laws. I believe these programs work together to identify and resolve employment tax issues and support our voluntary tax compliance system.

Scott Irick
Director of Examination Division