IRS Payroll Tax Audits – How Does the IRS Select Employers for Audit?

Mention IRS audit and most people think of being summoned to an IRS office, toting a box of receipts, to justify their deductions on their 1040. IRS audits cover a wide range of tax returns to include payroll tax returns. Form 940 for federal unemployment taxes. Form 941/944 for federal income tax withholding, FICA and Medicare taxes.

This blog post, the first in a series, covers what to expect when expecting an IRS audit of your payroll tax returns.

How the IRS Selects Returns for Audit

The first question that crosses most taxpayers’ minds is: how did the IRS choose my return for audit? The answer is: mostly by chance. Most taxpayers are selected using computer software; sometimes the IRS uses compliance projects to develop a pool of taxpayers to audit. 

Occasionally the IRS gets wind that an employer is a bad apple and schedules them for an audit.  For the most part, if your company is selected for audit that isn’t because the IRS thinks you are lying or that there is errors on your return. Just keep that in mind. Most examinations are random selections from the pool of possible audits.

Once your company is selected for audit, you will either have an in-person audit or a correspondence audit.

How are the Payroll Tax Audits Conducted and Where?

Unlike 1040 audits, most IRS payroll tax audits are conducted at the taxpayer’s principal place of business. This is called an in-person audit. Typically this is the location where you store your books and records. The IRS agent will come to your office to interview you and your staff as well as look at your records.

If you have reservations about the IRS coming to your office, because it is your home or it cause a disruption in your business, than you can request a change in venue (normally to a local IRS office, which may or may not be better for you).

Correspondence audits are conducted by mail. Generally, the IRS sends a list of requested information and you respond with the requested information. Sometimes you may talk with the IRS agent on the phone but for the most part your only contact will be by mail.


If you have any questions please contact my firm. I help Maine taxpayers in trouble to resolve their tax debts. If you or someone you know in the Greater Portland, Maine area wants more information on how to handle an IRS payroll tax audit, please feel free to contact me directly at 207-299-0515 or by filling out my contact form. A Maine tax attorney can help you consider all of your options.

James D. Wade, Esq.
Law Office of James D. Wade
53 Exchange St., Ste 400
Portland, ME 04101