Employers Can Remain in Control During Payroll Audits

While there can be many reasons why the Internal Revenue Service or a state undertakes a payroll-related audit, employers can prepare by determining how the audit will affect them and what documents they will provide to the auditor, a practitioner and a consultant said May 13.

Becky Harshberger, CPP, a payroll tax thought leader, emphasized that the employer should control what the auditor gets, how they can get it, and to whom they get access.

Harshberger outlined some of the many underlying reasons for audits, including if an employer is “weirdly enrolled” for a state tax account. Examples of that include if a corporate tax or benefits department inadvertently registered for the wrong tax types with a state, or if an independent contractor who used to work for an employer claims unemployment benefits and the state then creates an account for the employer, she said.

Frequent or unusual amendments and erroneous employment insurance or state disability claims may also be triggers if they are assigned to the wrong employer, she said.

In particular, asking to close a state tax account is comparable to telling the state, “Hey, I would like an audit!” Harshberger recommended instead filing “zero returns” — showing no income and no tax liability — until at least the end of the current year and letting the state close the account on its own.

But Mindy Mayo, a senior managing director at KPMG, cautioned that zero returns are only as good as somebody remembering to file them, and that if they are not filed the state might assume the employer still has an active account and then estimate the tax liability for the return period.

Harshberger and Mayo spoke at the 2025 Payroll Congress in Kissimmee, Florida.

When an audit occurs, the employer should do its own internal audit before the proceedings even begin, Harshberger said. “You want to know what you don’t know before you even talk to an auditor,” she said.

The employer should determine the entire scope of how the audit will affect the company, Harshberger said, and added that it could be worth bringing in a consultant or just paying the amount in dispute so an audit cannot find more instances of noncompliance.

Auditors will ask for much more documentation than they actually need, and the employer can push back on that and negotiate what they provide, Mayo said. She cautioned the audience to not provide anything that they haven’t reviewed themselves. Harshberger recommended asking the auditor what the three most important things are that they need to get started and providing those.

As a best practice, Harshberger recommended using a generic company email address to sign up for state portals and keeping passwords and PINs in a spreadsheet. That way, access to accounts won’t be interrupted by staff availability or turnover, which can be particularly troublesome during an audit.

The presenters mentioned that they were surprised how many practitioners did not know that they could have an IRS taxpayer advocate represent them, especially for unresolved ongoing issues. “You want to be very prescriptive. Tell them exactly what the issue is and what you want them to do,” Harshberger said. “Be really prescriptive, and you’ll usually get it resolved.”

A questioner from the audience asked what Mayo would put in an abatement letter requesting a reduced or canceled penalty. Mayo recommended knowing the state statutes around penalty abatement and stating what the employer did incorrectly, what it did to fix it, and how it will ensure it won’t happen again. In contrast, the IRS has lots of guidance and cases about what it considers good cause for abating a penalty, she said.

Harshberger recommended making the letter specific, getting the facts straight, and having someone in the company who is not a payroll person read the letter to make sure they understand it. “Make it interesting, don’t bore that person that’s going to read it,” she added.