Knock, Knock; It’s the IRS: Early Contact for Taxpayers with Payroll Issues

October 23, 2015

In August 2015, the IRS announced a pilot initiative to make early contact with employers who may be falling behind in their payroll taxes. The Early Interactive Initiative will accelerate and enhance the Federal Tax Deposit (FTD) Alert process.

When it appears an employer may owe a balance at the end of the quarter, the IRS will be in contact before the quarterly payroll tax return (Form 941) is due. Sometimes this means a Revenue Officer (RO) will knock on a taxpayer’s door. The goal is to address payroll tax issues before they become unmanageable.

Though it appears the IRS is getting favorable results from the accelerated FTD Alerts (more payments and better taxpayer compliance), there are concerns from some tax practitioners about the process.

Since 2007, the IRS has performed FTD Alerts ( read TIGTA’s 2007 recommendations for improvement).

FTD Alerts are issued to taxpayers who are classified as semiweekly depositors and who have not made FTDs during the current quarter or who have made them in substantially reduced amounts. Often, the taxpayer has come into hardship and fallen behind on payroll taxes, but sometimes there are other logical reasons to explain the decline in deposits (for example, payroll cutbacks).  

As indicated in Internal Revenue Manual 5.7.1, FTD Alerts, in the past, the IRS’s Master File conducts the FTD Alert analysis in the twelfth cycle week of each calendar quarter: March, June, September, and December. However, under the new pilot program, the IRS is accelerating that timeline and, when necessary, ROs are knocking on a taxpayer’s door earlier than before – sometimes as early as five weeks after an issue is detected.

The IRS doesn’t have the resources to visit every employer whose payroll tax deposits decline. Instead, many taxpayers receive a letter from the IRS indicating that deposits appear to have decreased. The letter asks the employer to contact the IRS (by phone or letter) and explain the reason for the decrease in deposits. The letter also reminds the taxpayer of consequences for failure to comply with payroll responsibilities.

Other FTD Alerts are assigned to Field Collection with a priority given to cases where the employer has a history of compliance issues. The IRS is using a complex algorithm that factors in many different variables. And, when necessary, an RO will come talk to the taxpayer (and his or her representative, if applicable).

Concerns for practitioners  
We’ve heard concerns from practitioners regarding the FTD Alert process. Sometimes ROs visit an employer, seemingly out of the blue. The taxpayer may not have time to gather needed information (making the RO’s trip less productive), or even worse, the taxpayer may not have time to contact his or her CPA to get representation and advice. Sometimes the client doesn’t even realize there is a payroll problem, yet the IRS shows up to their place of business. For instance, the taxpayer could use a third-party payroll service who has fallen behind on making their deposits, and when the IRS shows up, it’s the first time the taxpayer becomes aware of the problem. Though ultimately it is good for the taxpayer to be contacted early on in the process to avoid deepening payroll issues with the IRS, at times clients may still feel intimated or scared and need their CPA (power of attorney representative) to help them.

The IRS is following standard power of attorney procedures and will try to work with the representative in regard to the FTD Alert (just like they would for any IRS matter). A practitioner should consider proactively filing a power of attorney ( Form 2848) for clients who pay employment taxes, especially for clients who rely on him or her for all payroll tax matters.  Practitioners should also inform business clients of the IRS’s FTD Alert process and emphasize the importance of paying payroll taxes on time.

Special Thank You: We thank the members of the 2014-2015 Tax Practice and Procedures Committee (TPPC) for sharing their collective expertise on practice and procedures matters with a special thank you to Larry Wolfe, CPA for sharing his practical experiences regarding FTD Alerts. TPPC members are: Jan Lewis, CPA, Chair; Mark Cook, CPA; Frederick Davis Jr., CPA; Robert DiGiantommaso, CPA; Jason Freeman, JD, CPA; David Hove, CPA; Marshall Hunt, CPA; Donna Sauter, CPA; Larry Wolfe, CPA; Susan Allen, CPA, CITP, CGMA, staff liaison.