Healthcare Practice Strategies - Fall 2013 - Audit Alert: It’s More Than Charts You Need to Watch
Charts are pulled and practices are audited all the time. Increasingly, though, compliance checks are covering more than medical necessity. The IRS has hired additional auditors to specifically focus on some hot-button compliance areas, including these:
• Medical building audits – Physicians who own their medical building are facing increased IRS scrutiny. In particular, auditors are looking to see that you are dotting the "i's" and crossing the "t's" — things like having a formal lease in place and paying expenses for the building out of a practice account. To avoid the cozy transactions that raise IRS ire, experts say the best approach is to treat it as if you were renting office space from someone you didn't know.
Action: Make lease payments by physically writing a check or transferring money from your practice account into a separate medical building account.
• Payroll audits – So-called "worker misclassification" audits are on the rise as the IRS seeks out practices that are classifying their hired physicians as independent contractors when they are actually employees in the eyes of the law. Worse, there is no corporate shield — the IRS can seek recourse from the practice owners and officers individually for back payroll taxes plus penalties and interest.
Here, the IRS is very clear about the distinction of employee vs. contractor, using a three-factor test:
1. Behavioral control – Does the practice direct and control how the worker does the job (e.g., when and where to provide services, exactly how to provide services, who is to assist them in providing services)?
2. Financial control – Does the employer control the business and financial aspects of the worker's job (e.g., salary, mileage and equipment reimbursement)? Or does the worker manage his or her own business (including having other clients)?
3. Relationship – What type of relationship is there between the practice and the worker? For example, does the practice provide the worker with employee-type benefits (e.g., insurance, a pension plan, paid vacation)?
Experts in employment law say that, against the backdrop of these three factors, most hired physicians fall under the category of employee.
Action: Before deciding how to classify any worker in your practice, consult with your advisers and make sure you understand these categories. To avoid sending up an audit red flag, don't convert an existing physician employee to contractor status without 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.
• Sales and use tax audits – Most states impose a "use tax" on certain personal property purchased for use in their state. Typically, this is property that was purchased from a seller outside of the state. The use tax complements the sales tax by taxing the use of goods inside the state 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 what your local taxes are. Ask your CPA for guidance in this critical area.
• Retirement plan audits – Managing the typical 401(k) plan is incredibly challenging. The rules are complex and ever-changing, and the IRS 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 plan document — either taking actions that aren't covered or allowed in the plan document, 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.
An Ounce of Prevention
It's a fact of life that the IRS pays more attention to professionals like doctors and lawyers. And with a rise in non-routine audits, the odds are certainly high that the feds may come knocking some day. Spending the time and money now to review your practice's compliance in key areas may be a wise decision.
Healthcare Practice Strategies - Fall 2013