IRS and States Agree to Share Employment Tax Examination Results (November 19, 2007)

The IRS recently announced that agreements have been reached with 29 states to share the results of employment tax examinations.  The agreements are the first result of the Questionable Employment Tax Practice (QETP) initiative, and provide a centralized, uniform means for the IRS and state employment officials to exchange data regarding federal and state employment tax requirements.  In addition to coordinating compliance, the agreements provide for collaborative outreach and education activities to help businesses understand their employment and unemployment tax responsibilities.

The 29 states that have signed partnership agreements with the IRS include: Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington, and Wisconsin.

Although North Carolina has not yet signed a memorandum of understanding, it was “part of the team that developed the strategy” and was “instrumental in helping make sure the agreements meet the needs of the participating states as well as the needs of the IRS.”[1]

In our last employer alert, we commented on recently introduced federal legislation that could lead to more and better coordinated enforcement of worker classification laws by state and federal agencies.  Likewise, these agreements to share employment tax examination results between the IRS and the states will mean increased and coordinated enforcement efforts and more federal and state agencies being notified of potential violations.  Employment tax violations may expose an employer to a number of claims, including state and federal payroll tax liability, withholding tax liability, workers compensation liability and overtime pay claim liability, as well as claims relating to the employer’s retirement plans and welfare plans.  The IRS announcement provides another reason for employers to carefully re-examine their classification of workers and their compliance with wage and tax laws. 

If you have any questions regarding the topic contained in this alert or other employment law issues, please contact Susie Gibbons at sgibbons@poynerspruill.com or 919.783.2813.