M E M O R A N D U M
April 3, 2009
TO: Distribution
FROM: Burt, Staples & Maner LLP
RE: IRS RAMPS UP WITHHOLDING TAX ENFORCEMENT
We reported last December that the IRS elevated withholding tax and
reporting issues to a “Tier 1” audit issue. This means these
issues generally are on par with tax shelters as issues of special
interest to both IRS examiners and National Office personnel. Many of
our clients report IRS audit teams now are raising withholding tax
issues routinely during their Form 1120 audits.
Heightened
attention to withholding and reporting issues was evidenced most
recently when the IRS announced plans to increase the number of staff at
the examination level and in the National Office who will focus on those
issues.
1) EXAMINATION LEVEL
HIRING – The IRS announced a few days ago that it is embarking on its
largest hiring program in recent history. It will hire more than
3,500 frontline enforcement employees, more than 2,000 of whom will be
revenue agents and officers. As many as 700 of the 2,000 will deal
with international issues. As recently reported, Linda Stiff, IRS
Deputy Commissioner for Services and Enforcement, said the IRS’s
compliance efforts will “ensure…taxpayers understand and fulfill their
withholding tax filing obligations.” The IRS is clearly moving to
make good on its promise to audit withholding tax compliance more
effectively.
2) NATIONAL OFFICE
HIRING - The IRS National Office also is addressing its shortage of
technical experts in the withholding area. They have begun hiring
attorneys from the private sector with withholding tax experience to
support the heightened audit activity and issue more timely guidance.
We know this for a fact because Chief Counsel has hired one of our
associate attorneys to join the group that specializes in international
withholding and reporting issues. She brings a wealth of
withholding tax experience to her new duties and will be able to provide
immediate support to IRS field audit teams.
RECOMMENDATION: Given the Tier 1 designation of withholding tax
issues and the increased staff levels that will be available to address
them, the relevant question is not whether one will face a Form 1042
audit (and, very likely, an audit of backup withholding compliance), but
when. All Form 1042 and Form 945 filers should be ready for IRS
scrutiny and should review their systems and procedures currently to
identify any problems.