irs tax law by wendy speelman 11/14/06 federal agencies state agencies municipal governments county...
TRANSCRIPT
IRS Tax Law
By Wendy Speelman11/14/06
Federal Agencies
State Agencies
Municipal Governments
County Governments
School Districts
Federal, State, & Local Government (FSLG)
Compliance Activities Outreach events
Compliance checks Review of adherence to recordkeeping
and information reporting requirements
Examinations What to expect IRS vs. State audit
IRS examination steps
Initial contact to set up appointment Information Document Request (IDR) Interview Review books and records Proposal of adjustments Closure
Agreed or Unagreed – Supervisor, Appeals
Common audit adjustments
Wages subject to FICA or Medicare Wages not reported for all employees
Part-time, seasonal workers, students Incorrect worker classification
Form 1099 vs. W-2
Common audit adjustments
Wages or withholding incorrectly reported Forms 941, W-2 and W-3
Bonuses, vacation pay or other pay not reported
FMV of non-cash compensation not reported Fringe benefits
Failure to file/furnish Forms 1099
Penalties IRC §6651 Failure to File
5% per month – 25% maximum Failure to Pay
½ of 1% per month - 25% maximum Failure to Deposit
2% - 10% based on number of days late
FRINGE BENEFITS Any benefit an employee receives
in addition to their normal wage Could be monetary, equipment
or services
Treasury Regulations 1.61-21(a)(3)
Taxable Fringe Benefits INCLUDE in Employee’s wages and on W-2
(Never on 1099-MISC) Subject to Federal Withholding, Social
Security and Medicare Even if benefit is received by/for spouse or
child of employee
Exclusions
Taxable unless excluded by law Medical Premiums IRC 106 Cafeteria Plans IRC 125 Education Assistance IRC 127 Dependent Care IRC 129 Certain Fringe Benefits IRC 132
Non-Taxable Fringe Benefits
No additional cost service Qualified employee discounts Working condition fringe De minimis fringe Qualified transportation expenses Qualified Moving Expense
Reimbursements
De Minimis Benefit
Property or service, the value of which (after taking to into account frequency) is so small that accounting for it would be unreasonable
Must be small and infrequent Frequency defined - an event which is not
haphazard but regularly reoccurring
Cash Allowances
Also knows as “Stipends” Do Not qualify as a working
condition fringe benefit Do Not qualify as de minimis fringe
benefit Taxable to the Employee
Unless paid under the accountable plan rules
Accountable Plan
Business Connection Adequate ‘accounting’ by
employee in reasonable time period
Excess reimbursement returned in a reasonable time period
IRC 62(c) & Treasury Regulations 1.62-2
Non-accountable Plan
Does not meet all 3 requirements for an accountable plan
Benefit is fully taxable when paid
Awards
Taxable: Cash prizes including gift certificates Performance awards Non-Cash prizes use Fair Market Value IRC 74
Nontaxable: if rules are followed Employee Achievement awards Length of service awards Treasury Regulations 1.274-8
Bonuses Taxable to the employee & included
in their wages/W-2 Never on Form 1099 Includes: All cash & check bonuses,
Christmas bonuses & gift certificates IRC 61 Treasury Regulation 1.61-2 & 1.132-
6(c)
Meal Money while Traveling on business:
Meals away from home that are paid for, reimbursed or given an allowance: Overnight
Accountable Plan - Not taxable Not Overnight
Taxable as wages Revenue Ruling 75-432 & 75-170 IRC 162(a)(2)
Meal Allowance when not traveling
Meals with business meetings - NOT taxable if:
clear business setting directly related
Employer buys you lunch - Taxable as wages
Cell phones
Listed property §280F(d)(4) Susceptible to personal use
Substantiation rules §274(d) Allocate cost between business and
personal use Personal use is taxable fringe
benefit
Cell phones
Need itemized bills Need written policy Employee reimburse or include in
wages Taxable even if usage is not over
monthly amount paid by employer
Cell Phone Examples
Plan is 500 min. & used 400 min. (100 personal) the personal use is still taxable
If using minutes during nights/weekends this is still personal use and is taxable
If allowance is given for using personal cell & no accountable plan then taxable
Automobile Expenses Employee car used for employer’s
business 2006 Federal Mileage Rate - .445
At this rate or less: Non-taxable to employee
Excess over rate: Taxable to employee - only the excess amount
Substantiation Required Employee reports to Employer:
Date, Purpose, Place of each trip
Mileage Examples: Diary, log, trip
sheet, expense statement or similar record
IRC 274(d) – IRC 280F(d)(4)
Employer-Provided Vehicles Personal Use is taxable
Includes commuting Business Use is not taxable Employee can reimburse
Employer for personal use or have included in wages
Exception: Qualified nonpersonal use vehicles
Examples of qualified Non-personal use Vehicles
Clearly marked police and fire vehicles
Unmarked vehicles used by law enforcement officers
The officer must be: 1. Authorized & regularly carries a
firearms 2. Execute search warrants 3. Make arrests (not citizen’s arrest)
Examples of Vehicles continued
Ambulance Dump truck Flatbed trucks Utility repair
truck (not a pickup truck)
Passenger buses (at least 20 passenger)
Delivery trucks with driver seat only or driver & folding jump seat
Vehicle designed to carry cargo - loaded gross vehicle weight over 14,000 lbs
Qualified Non-personal Use Vehicles
Must have policy on restricting personal use of the vehicle
Commuting is nontaxable to the employee
Substantiation and record keeping is not required
1.274-5T(k)
Personal Usage
If employer provided vehicle does not meet the qualifications for non-personal use vehicle, and
Employee is not restricted from using the vehicle for personal use, then
Personal use is usually a non-cash taxable fringe benefit
Example
Town owns pickup truck with town name marked on vehicle
Employee is allowed to take the vehicle home because he is “on call”
No personal use is allowed Commuting is included in wages
as a fringe benefit
Personal Use
If No record kept: Value of ALL use is
taxable If record kept:
Only Personal Use is taxable
Automobile Valuation Rules
Cents-Per-Mile Rule Treasury Regulations 1.61-21(d)
Commuting Rule Treasury Regulations 1.61-21(e)
Automobile Lease Valuation Rule Treasury Regulations 1.61-21(f)
Cents-Per-Mile Rule Vehicle “regularly used” in business OR Vehicle driven 10,000 miles a year and FMV in 2005 limited to $14,800
Regularly used means 50% or more of mileage is for business or Vehicle is used to transport at least 3
employees to work
Commuting Rule
$1.50 per one-way commute if: Vehicle owned or leased by employer Employer requires the employee to
commute for bona fide noncompensatory business reasons
Written policy on personal use No control employees (elected
officials)
Commuting example
Supervisor takes home truck every day and is using the commuting method of $1.50 each way. He is called out to check on a problem at 6AM. He leaves from home goes to where problem is and then goes into the office. In the afternoon goes from office to home. He would include $1.50 commuting for that day. The morning driving was business not commuting.
Lease Valuation Rule
1. Determine FMV of vehicle2. Use table in Reg. 1.61-21(d)(iii) or
Publication 15-B3. Determine % of personal use4. Multiple Annual Lease Value by %
of personal use5. Value the fuel if provided 5.5 cents
Uniforms
Cost and upkeep of clothes are excluded from employee’s income if:1. Condition of employment2. Not suitable for everyday wear and3. Not worn while away from work
IRC 162 & 262 Donnelly v. Commissioner 262 F.2d 411 Yeomans v. Commissioner 30 T.C. 757
Uniforms
If suitable to replace regular clothing then include in wages Mella v. Commissioner T.C. Memo 1968-
594 Pevsner v. Commissioner 628 F.2d 467
Must meet accountable plan rules Treasury regulations 1.62-2(c)(1)
Uniform law IRC 162 & 262 Regulation 1.62-2(c)(1) Donnelly v. Commissioner 262 F.2d 411 Yeomans v. Commissioner 30 T.C. 757 Revenue Ruling 70-474 Mella v. Commissioner T.C. Memo 1968-
594 Pevsner v. Commissioner 628 F.2d 467 Drill v. Commissioner 8 T.C. 902
Timing of Fringe Benefits
Pay period, quarterly, semi-annually, annually or other basis
Don’t need same election for each employee
May change election during the year as long as treat as being paid by 12/31
Timing of Fringe Benefits
A single fringe benefit received may be paid on more than one date
Include in regular wages or treat as supplemental wages
IRC 451(a) & Announcement 85-113, 1985-31 IRB 31
Form W-9 To obtain a correct Taxpayer
Identification Number (TIN) Anyone required to file an information
return with IRS must use the form Substitute form is acceptable Applies to any US person including
resident aliensIRC 6041A(f) requires vendor to furnish
information
No W-9 Information No TIN provided — Payments subject to
Backup Withholding IRC §3406(a)
Backup Withhold rate is 28% for 2006
Publication 1281 and Form 1099 instructions
Reporting Backup Withholding
Report withholding to payee and to IRS in Box 4 of Form 1099-MISC
Form 945 to pay the IRS annual return, due 1/31/xx ordinary deposit rules apply make Form 945 deposits separate
from Form 941 deposits
Backup Withholding Begins when aggregate
payments for the year equal or exceed $600, or
immediately if: payee was paid >$600 in prior
year and an information return was issued, or
payee was subject to backup withholding in the prior year
Form 1099 Paid in the course of your trade or
business Including payments made by Federal,
State and Local Governments Payment of $600 or more to:
Individuals Partnerships Estates and Trusts
Form 1099-MISC
Payments of $600 or more for the year for: Rents Services or a combination of services
and products (including parts and materials)
Prizes/Awards Other Income Medical and Health Care Payments
IRC 6041
Examples of Service Auto repair Construction Custodial Maintenance Landscapers Locksmiths Referees
Printing Services Professional
Services Accountants Appraisers Architects Consultants Engineers Advertising
Medical & Healthcare Payments
$600 or more in Box 6 Report payments to all
individuals, partnerships, and corporations
Medical payments include doctor fees, drug testing, lab fees, physical therapy, etc.
Treasury Regulations §1.6041-3
* Do not report payments to pharmacies or tax exempt hospitals
Payments to Attorneys
Section 1031 of the House Bill and Proposed Regulation 1.6041-3 codify the requirement to report payments to attorneys (individuals and corporations) gross proceeds, and payments for
services regardless if they are a corporation
Effective for 1998 and later years
Payments to Attorneys
Attorney’s Fees Reported in Box 7 Payments of $600 or more
Gross Proceeds paid to Attorneys Report in Box 14 Any Amount Paid Don’t report in Box 14 if reported in
box 7 IRC 6045(f)
LLC’s & Reportable payments
LLC can be taxed as sole proprietorship, partnership, or corporation
Obtain a W-9 to determine status Report payments to sole
proprietors and partnerships (sometimes corp.)One or
more owners
Shouldn’t be on 1099-MISC
Payments to employees Fringe benefits Travel reimbursements
if not paid as part of an accountable plan, travel reimbursements and auto expenses should be included in wages and reported on W-2
Exemptions to filing form 1099
• Payments for only merchandise • Ex: Office or Cleaning Supplies
• Wages• Payments to a corporation except:
• Medical, health care providers and Attorneys
Filing Requirements
Payments on calendar year basis Provide copy to recipient by Jan. 31 File with IRS by Feb. 28 Form 1096 transmittal form with Forms
1099 to IRS
Common Errors
Failure to obtain identifying information before making payment (use Form W-9)
Failure to aggregate payments from all expense categories (use vendor files)
Assuming payee is a corporation: because name is “Company or
Associates” because an EIN is furnished
Behavioral Control - how, when and where to do the work; training
Financial Control - significant investment, expenses, opportunity for profit or loss
Relationship of the Parties - employee benefits, written contracts
Independent Contractor or Employee
Employees
Required to wear uniforms Required to work certain hours Owner provides training Owner provides supplies and
materials Can quit job without liability to
employer No financial risk of loss
Independent Contractor
Makes own schedule Has own phone number Advertises Buys own products Furnishes own equipment &
supplies Makes a profit or loss as a result
of his own business decisions
Resources
Publication 1779 - determination on status of worker as either an independent contractor or an employee
Publication 963 Chapter 3 Revenue Ruling 87-41 – 20 factors IRC 3401
Employee or Contractor??
Many state and local government officials are employees by statute
Elected Officials are always employeesWithhold taxesReport on Form W-2
Medicare Wages
Mandatory Medicare Coverage: employees hired or rehired after 3/31/86 Coverage is mandatory, not voluntarily Even if paying into a retirement system
Medicare Exception: Hired prior to 4/1/86 and no break in
service
Medicare Example
Employee was hired in 1980 & therefore does not pay into Medicare. They retire on 6/30/06. They are rehired on 7/1/06. They never stop working. They MUST pay into Medicare starting on 7/1/06 because they are a new employee hired after 3/31/86.
Reconciling Forms
Reconcile Form 941, Form W-2 & Form W-3 Wages Social Security wages Medicare wages Federal income tax
When to Deposit Make payment with return if:
Less than $2,500 tax liability for quarter Line 10, Form 941
Pay in full with timely filed return Monthly depositor if:
Liability for look back period $2,500 to $50,000
Deposit by 15th of following month
When to Deposit Semiweekly depositor if (line 8):
Liability for look back period > $50,000 If payday Wed. Thurs. or Fri. deposit taxes by
following Wed. If payday is Sat. – Tues. deposit taxes by
following Friday Next day depositor if (line 10):
Accumulate $100,000 or more of taxes in a deposit period (even if monthly or semiweekly depositor)
Pub 15 Circular E
Look back period
How to Deposit
Payment with return Coupons
Form 8109 – get from IRS Deposit with authorized depositary
Electronic deposits EFTPS – Electronic Federal tax Payment
System WWW.EFTPS.GOV
Form 941 – Liability Summaries
Monthly depositor -Line 15 (2nd page)
Semiweekly depositor - schedule B
Schedule B total should match total liability on 941 (Line 10)
Trust Fund Recovery Penalty If taxes are withheld but not
remitted to IRS Penalty is 100% of tax assessed Applies to person responsible for
collecting, accounting, & paying the taxes and who acted willfully
Willfully = voluntarily, consciously, & intentionally
Form 941C – Common uses
Use to correct Medicare withholding errors Failed to withhold the tax Withheld in error
Use to correct FICA tax withholding Failed to withhold on elected official
opting out of OPERS
Form 941C
Form 941C cannot be filed by itself File with Form 941 in quarter error
discovered Make deposit based on date error
discovered May need to correct W-2s Adjustments on line 7D or 7E on 941
Form 941C
Do not use to correct errors previously reported on: Monthly Deposits on Form 941, 2nd
page line 15 Schedule B Number of employees on Form 941
line 1 Wages on Form 941 line 2
Forms W-4 Treasury Decision 9196 effective
4/15/2005 No longer required to send W-4s to
IRS IRS will use W-2 information to
determine problems Lock-In letters issued to both
employer and employee
Forms W-4 Maintain for every employee Determine amount of tax to withhold Specify filing status and allowances Update for life changing events Don’t need new W-4 each year IRC 3402(f) – requirement to get information Pub 505, Form W-4 worksheet
Forms W-4 If employee claimed exempt status
they must submit new Form W-4 by Feb. 15th
If not, change to Single Zero
If employee gets Advanced EIC, Form W-5 by December 31st
Health Insurance Premiums paid by employee
Excluded from Income If: Employer reimburses employee for
paying health insurance premiums Must require proof of prior payment Can’t receive cash in lieu of
premium reimbursements Revenue Ruling 61-146 and 75-241 Private Letter Ruling 9022060
Revenue Ruling 58-360
Court Reporters fees from the preparation & sale of transcripts
Income from trade or business Not treated as wages In addition to statutory wages Dual capacity – employee (W-2) &
independent contractor (Form 1099)
Recent Rulings
TAM 200437031 Gift Certificates
Revenue Ruling 2006-36 HSA accounts with beneficiaries
Revenue Ruling 2006-43 What is a valid pick up plan
Gift certificates
TAM 200437031 Employer provided holiday gift
coupon redeemable at local stores Intended to be used for ham or turkey Had restrictions on it (i.e. tobacco) Limited dates to redeem it
Determined to be taxable
Revenue Ruling 2006-36
Reimbursement from HSA taxable if: Plan permits amounts to be paid as
§213(d) medical benefits to designated beneficiary other than spouse/dependents after employee and surviving spouse/dependents die
All payments, including those to employee, would be taxable
Rev. Rul. 2006-36 plan details Employer sponsored Reimburses for medical expenses not
covered by another plan Covers employees, retirees, spouses,
dependents Provides for annual maximum limit Used amount carried forward Upon death of employee, surviving
spouse & dependents any unused amount is paid as reimbursement of substantiated medical care expenses to a designated beneficiary Because of this provision, all reimbursements
made are taxable to employee!
“Pick up” of employee contributions by Employer
Revenue Ruling 2006-43 Requirements to conform with
§414(h)(2) Provides transition relief for pre-
existing “pick-ups” Only addresses federal income tax
Requirements of pick up plan
Must specify contributions, although designated as employee contributions are being paid by employer
Formal action required Employee not permitted to have cash or
deferred election with respect to designated contributions
Cannot opt out of “pick-up” Participation required
Questions??
Wendy Speelman (419) 526-2607
[email protected] Myers (419) 522-2259
[email protected] Billo (419) 522-2359
Wendy Speelman (419) 526-2607
Allen Ashtabula Auglaize Crawford Cuyahoga Darke Defiance Erie Fulton Geauga
Hancock Hardin Henry Huron Lake Lorain Lucas Medina Mercer Ottawa
Paulding Putnam Sandusky Seneca Trumbull Van Wert Williams Wood Wyandot
Amy Myers (419) 522-2259
Ashland Athens Belmont Carroll Columbiana Coshocton Fairfield Franklin Gallia Guernsey
Harrison Hocking Holmes Jefferson Knox Lawrence Licking Mahoning Meigs Monroe
Morgan Muskingum Noble Perry Portage Stark Summit Tuscarawas Washington Wayne
Trudee Billo (419) 522-2359 Adams Brown Butler Champaign Clark Clermont Clinton Delaware Fayette
Pickaway Pike Preble Richland Ross Scioto Shelby Union Vinton Warren
Greene Hamilton Highland Jackson Logan Madison Marion Miami Montgomery Morrow
Resources Business and Specialty Tax line 1-800-829-4933 EFTPS hotline 1-800-555-4477 Employee Plans Taxpayer Assistance 1-877-829-5500 Form 941 Online filing program (E-help) 1-866-255-
0654 To get IRS Forms 1-800-829-3676 Copy A, Form W-2 reporting questions, SSA employer
reporting service 1-800-772-6270 or [email protected]
Information reporting program customer service 1-866-455-7438 or [email protected]
Information reporting web page www.irs.gov/smallbiz
List of Resources The quarterly “Federal, State and Local
Governments Newsletter” is available on the IRS Web site at www.irs.gov/govts.
The Taxable Fringe Benefit Guide provides basic information for determining the taxability, withholding, and reporting requirements regarding employee fringe benefits. This resource guide can be found at www.irs.gov/govts , link to Educational Products, then on the Taxable Fringe Benefit Guide 117 pages
List of Resources e-Help Desk Toll Free Number 866-255-0654
Supports e-file, Electronic Federal Tax Payments System, and future e-Services customers. Operational hours of the e-Help Desk can be found at www.irs.gov/efile
Social Security Administration electronic filing of wage reports (Forms W-2/W-3) through SSA’s Online Wage Reporting Service (OWRS). Register for Internet filing at www.ssa.gov/employer/ then click on Employer Services Online. You will receive a PIN assigned by SSA. Within two weeks of your registration, you will receive in the mail from SSA, a Password.
List of Resources
IRS e-News for tax Professionals - OhioIf you want to subscribe to this mailing list, please send a blank e-mail to mailto: [email protected] to subscribe.
e-Services, including TIN Matching www.irs.gov link to Tax Professionals; scroll to bottom of page and link to e-services-New Products. Must register to access products.
List of Resources Questions relating to information returns
(forms 1099) contact Martinsburg Computing Center [email protected] or call 866-455-7238
Fire System www.irs.gov/efile or Reporting Program Customer Service at 866-455-7438 or email at [email protected]. Electronic submission of information returns (forms 1099) use FIRE system (Filing Information Returns Electronically)
IRS Government Call Site 1-877-829-5500
EFTPS www.eftps.gov