It’s a fact of life that physicians and dental professionals operate under an increased level of scrutiny. Increasingly, compliance checks are digging in to more than charts and coding. The IRS is paying particular attention to these hot-button compliance areas:
Worker misclassification
Is your practice classifying hired physicians as independent contractors? The IRS may come knocking for a look at your payroll records. Violations can result in practice owners and officers being held individually liable for back payroll taxes (including withholding taxes) plus penalties and interest.
Generally, for professionals, the IRS looks at three important factors to make the legal distinction between the employee vs. contractor status of a physician/dentist:
- Does the practice direct and control how the medical/dental professional does the job? For example, does the employer specify when and where the worker provides services?
- How much control does the employer have over the business and financial aspects of the worker’s job? Determine if the worker has invested in his/her own business, has other clients and is not dependent on the employer.
- What is the relationship between the employer and the worker? Generally contractors work on projects, not open-ended jobs and usually do not provide core services of the employer.
Experts in employment law say that, against this backdrop, most hired physicians/dentists legally fall under the category of employee. Obvious exceptions include physicians and dentists who do locum tenens or who have their own professional medical entities and bring their own ancillary personnel to the job.
Action: To avoid sending up an audit red flag, don’t convert an existing physician employee to contractor status unless he or she has a significant change in job duties. And if you have workers doing the same job, don’t classify some as employees and others as contractors. Consult your attorney regarding appropriate classification and contracts.
Read More: To learn more about this important issue, see our January, 2016, article here.
Medical buildings
Physicians who own their medical building are facing increased IRS scrutiny. In particular, auditors are looking for the cozy transactions that can occur when the medical practice is both the tenant and the landlord.
Action: Experts say the best approach is to treat it as if you were renting office space from someone you didn't know. Have a formal lease in place and make payments by physically writing a check or transferring money from your practice account into a separate medical building account.
Sales and use tax
Most states impose a “use tax” on certain personal property that was purchased from a seller outside of the state for use in that state. Essentially, it taxes the use of goods on which no sales tax has been paid. Unlike sales taxes, which are charged and collected by the vendor, the use tax is self-reported by the purchaser.
Action: If you purchase supplies or equipment from out-of-state vendors, determine whether state and local sales tax applies to these items. Then report any taxable sales on your monthly or quarterly sales tax report. Ask your CPA for guidance in this critical area.
Retirement plan audits
Managing the typical 401(k) plan can be incredibly challenging, and the IRS (and Department of Labor) cuts offenders no slack. Penalties for noncompliance — even unintentional errors — may be severe, and can even result in the loss of a plan’s tax-deferred status.
One of the most common compliance errors involves failing to follow the terms of your original plan document — either taking actions that aren’t covered or allowed, or making changes to the plan document and then not following them in day-to-day practice. For example, maybe you’ve begun allowing participants to take out loans and hardship distributions, even though these weren’t included in your original written plan.
Action: Make sure you understand how to detect — and correct — errors in plan administration. Start by downloading the IRS’ comprehensive 401(k) Fix-It Guide at http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.
Head off an audit before it occurs by taking steps now to identify potential compliance problem areas. Contact our office for guidance in ensuring that your practice remains compliant in all areas of operation.
