IRS Audits and the Nanny Tax

The IRS reports that audits of tax returns with income over $200,000 increased by 13% in 2012 over the prior year. The Wall Street Journal's Market Watch recently published advice on 5 steps to take to avoid an IRS audit on your Federal income tax return.

Item #4 is failure to report and pay the "nanny taxes." The IRS believes fewer than 1 in 10 households who owe nanny taxes actually pay them, and they fail to collect an estimated $3 Billion in household employment taxes. Given the size of Federal budget deficits, the IRS is under pressure to improve collections and close the 'tax gap' - the difference between the amount of tax owed and that collected.

Families who paid a household worker - nanny, senior caregiver, housekeeper, cleaning lady and others - $1800 or more in 2012 are obligated to report these wages paid and to include a Schedule H with their personal income tax filing. This filing is made under penalty of perjury, a felony offense.

In addition to improving collections of the "nanny taxes," the Obama administration has made enforcement action on misclassification - the practice by some employers of calling their employees independent contractors to avoid payroll taxes - an administration priority. Formal lines of communication and information sharing between the Federal and state governments have been established to facilitate this enforcement effort.

HomeWork Solutions has assisted families with "nanny tax compliance" for twenty years. We offer free telephone consultation - if you want to know if the nanny taxes apply to you or your tax practice clients, please give us a call.