IRS Targets Small Businesses on Self-Employment Tax

"The Internal Revenue Service is targeting small businesses. Concerned about widespread noncompliance with employment tax rules, the IRS in February unveiled a new form for filing employment taxes, it hopes will simplify payroll tax reporting and reduce errors.

The IRS also hopes the new form will make it easier for auditors to spot inappropriate transactions and questionable reporting as they step up their auditing efforts of small businesses. According to Financial-Planning.com, among the specific targets on the audit list are:

S Corporations. Some taxpayers appear to be structuring businesses as S corporations so they can pay themselves low salaries, which are subject to payroll taxes, and pay out the company's remaining profits as corporate dividends, which are not subject to payroll taxes. According to the IRS this is inappropriate tax avoidance because the low salary does not reflect the economic reality of the worker's contribution to the business. Under the tax code, the IRS has the power to re-allocate income to better reflect the economic reality and to collect related payroll taxes, penalties and interest."
Read more in this accountingweb.com post found via this ESD post.