Check out the 4 digital steps to prevent your payroll tax audit

While it is important to stay safe and avoid a payroll tax audit, it may be impossible to completely eliminate your chances of being audited as the IRS often conducts random audits. But random audits are extremely rare, so you may not need to worry about them.

Payroll audits are often conducted in an organization or business if the IRS suspects underreporting or incorrect reporting of taxes. The good news is, these types of audits are avoidable. 

If you are looking to minimize the chances of your business being audited by the taxman, this article is a good read for you.

What is a tax payroll audit?

A tax payroll audit is the scrutiny or review of an organization's accounts and financial accounts to ensure that the information reported by the organization when filing its tax returns is correct. 

In most instances, businesses or individuals receive an audit notice if their filled returns are flagged by the Internal Revenue Service system for potential errors based on the algorithms used by their system. Some common errors that may warrant an audit include:

• Improper classification of workers
• Overtime wages miscalculations
• Payment of wrong tax rates
• Late filing

Why should you be worried about a payroll tax audit?

If you have been randomly selected for an audit by the IRS, there isn't much to worry about. But if an audit is triggered by suspicion of errant tax reporting, you have every reason to feel worried because things can get messy if their suspicions are confirmed.

The consequences of failing a payroll tax audit can be devastating to your business, especially if incorrect reporting is proved to be intentional. Besides making up for the underreported or unreported taxes, the IRS will impose penalties and interests.

Possible penalties include failure to deposit, failure to file, and accuracy-related penalties that range up to 15%, 25%, and 20%, respectively.

How to prevent a payroll tax audit with digital tools

The best way to reduce the possibility of payroll errors is to ensure there are very few or no errors in your payroll. Some of the steps you can take to eliminate the mistakes in your payroll effectively include: 

1. Perform regular in-house audits using online payroll software, which can help catch errors when filing taxes.
2. Use an online paystub creator to generate pay stubs for your employees at the end of every pay period. 
3. Invest in reliable employee time management software to eliminate overtime wage miscalculations
4. Invest in an IRS-approved payroll tax filing software to simplify and eliminate human errors in the tax filing process.

Your rights as an employer

Even if the IRS is auditing your business, you are entitled to certain rights, as explained in publication 1. Some of these rights include:

• The right to be treated courteously and professionally by the Internal Revenue Service officials
• The right to confidentiality and privacy of your tax matters
• The right to know why the IRS is asking for information from you, how it intends to use it, and what happens to you if you do not provide that information
• The right to representation which can be either yourself or an appointed representative
• The right to appeal decisions reached by the IRS within the IRS or in a court of law

Even with all these rights guaranteed, nothing beats avoiding an audit in the first place. The only sure way to ensure that you stay safe is to incorporate technology in your payroll to eliminate tax errors that could trigger an audit.