As I noted in this blog a few weeks ago, the IRS is gearing up for the first stage of a massive audit sweep targeting employers’ payroll tax practices. Tax law firms are starting to turn out some useful alerts and advisories.

David R. Fuller and Jerry E. Holmes, of Morgan Lewis & Bockius LLP, are not mincing words about the scope of the IRS initiative: “Likening this project to a tsunami is an apt description,” they say.

They should know — they’re both former managers of the IRS National Office’s employment tax and fringe benefits practice group. The audits will be more stringent than any the agency has conducted since the 1980s, Fuller and Holmes note in a newsbrief this week. “Even the most conservative taxpayers and those most closely in compliance will not be spared the expense of defending themselves in one of these ‘comprehensive’ audits, since the IRS is trying to collect detailed audit data even from conservative taxpayers,” they add.

A client alert from Foley & Lardner LLP offers a list of employment-tax issues that the IRS will target, including fringe benefits, nonqualified deferred compensation, Section 280G “golden parachute” payments, and employment tax issues for non-U.S. citizens.

And this analysis from employment law firm Littler Mendelson includes steps for preparing for a payroll tax audit, should one come your way.

The IRS is characterizing the initiative as essentially a research effort aimed at gauging the extent of compliance, but the agency certainly sees payroll tax as an underexploited revenue source, and one that’s just too big to ignore in these days of rocketing deficits. Payroll tax accounts for by far the biggest slice of unpaid business taxes — fully 53 percent, or $58 billion — according to a July 2008 report from the Government Accountability Office (click here for a summary). ###