By Kay Bell
Most working parents are well aware they get a tax break to help cover the costs of sending Jimmy or Janie to day care. But some parents overlook the tax advantage of summer day camp costs.
During school vacations, many parents turn to these supervised programs to provide child care while they work. Overnight camps don't count, but the Internal Revenue Service says day camp expenses do qualify for this popular credit.
Regardless of whether you paid for after-class child care during the school year or a week of day camp during summer break, you can apply the costs to the Child and Dependent Care tax credit and use it to cut your tax bill at filing time.
And while this credit also applies to care for dependents other than children, there are limits -- on what you spend as well as how much you earn -- that reduce the actual amount of the credit. Plus, you must make sure you and the person being cared for meet IRS eligibility guidelines.
In addition to summer day camp, here are some care services that are eligible for the credit.
Care services eligible for credit
* Private home nurses.
* Licensed dependent-care centers.
* Nursery school and kindergarten costs. In these cases, if the costs of school are separate from child care expenses, only the child care portion qualifies.
* Household help as long as the services are necessary for the well-being and protection of the qualifying individual.
Actual care cost limits
The first thing to keep in mind is that the credit probably will not pay for all of your child care costs. The IRS limits the dollar amount you can claim and you only get to count a percentage of that amount.
You can claim only up to $3,000 for the care of one person and $6,000 for two or more. Then this amount is further reduced based on your overall income (more on this later).
There is some good news, however. If you paid someone to watch over your two (or more) kids, you can combine all your care costs to reach the $6,000 limit.
In the case of Janie and Jimmy, their folks could count the $2,800 for Janie's care and $3,200 for Jimmy's in order to claim a total of $6,000, instead of only $5,800 by adding $2,800 plus $3,000. By using the total amount rather than splitting the actual costs and then applying the limits and figuring the credit, they'll get a larger tax break.
Percentage restrictions
The second limit is the percentage of costs that you can claim. Once you determine your allowable expense amount, your actual credit is limited to a percentage of that figure.
So regardless of how much you pay, the potential maximum child and dependent care credit is $1,050 (35 percent of $3,000) for the care of one person, twice that for two or more. Depending upon your income, the percentage range drops from 35 percent to 20 percent of your allowable care costs.
The 35 percent rate is only for lower-income taxpayers. If you make more than $15,000, the credit percentage is incrementally phased down by salary range until it hits 20 percent for those earning more than $43,000.
And even if your care costs come up to the maximum credit amount, you may not get it all if your tax bill is less than your allowable credit. The dependent care credit is not refundable, meaning it can only take your tax bill to zero. Any excess credit is not usable.
For example, if you claim a $1,050 maximum credit for the care of one child and owe $750, the IRS will use your credit to wipe out your tax bill, but you won't get the extra $300 as a refund.
Defining dependents
If you pay for child care, you can claim this credit to help offset some of your costs as long as your child meets IRS guidelines.
The youngster must be younger than 13. He or she also must meet the requirements set out in the IRS' dependent requirements. Basically, this means the child must be related to you and live with you most of the time. There are exceptions in the cases of divorced or separated parents, so read the tax filing instructions carefully or consult your tax adviser if this is your situation.
Wednesday, June 29, 2011
Friday, June 24, 2011
IRS Updates Nonresident Alien Form Instructions
There is now a June 2011 version of the Form 8233 instructions, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, on the IRS website.
Compensation paid to a nonresident alien individual for independent personal services (self-employment) performed in the U.S. is generally subject to a 30% withholding rate, or to graduated tax rates (see Code Sec. 1441). However, some payments may be exempt from withholding due to a tax treaty or personal exemption amount. Form 8233 is used to request exemption from withholding. Nonresident alien students, teachers, and researchers performing dependent personal services also use Form 8233 to request exemption from withholding.
Form 8233 should now be sent to the following address: Department of the Treasury, Internal Revenue Service, Philadelphia, PA 19255-0725. The fax number has been changed to: (267) 941-1365.
The form itself has not been revised. Nonresident aliens should continue to use the March 2009 version of the form.
Compensation paid to a nonresident alien individual for independent personal services (self-employment) performed in the U.S. is generally subject to a 30% withholding rate, or to graduated tax rates (see Code Sec. 1441). However, some payments may be exempt from withholding due to a tax treaty or personal exemption amount. Form 8233 is used to request exemption from withholding. Nonresident alien students, teachers, and researchers performing dependent personal services also use Form 8233 to request exemption from withholding.
Form 8233 should now be sent to the following address: Department of the Treasury, Internal Revenue Service, Philadelphia, PA 19255-0725. The fax number has been changed to: (267) 941-1365.
The form itself has not been revised. Nonresident aliens should continue to use the March 2009 version of the form.
Insurance Agent Exempt from Overtime Despite Regulatory Restrictions on How He Performed His Job
A federal district court has granted summary judgment to New York Life Insurance Company (New York Life) in a dispute involving whether an insurance agent with “Series 6” and “Series 63” licenses was eligible for overtime under federal and New York State labor laws. However, the court said that the agent could pursue his claim that New York Life had made improper deductions from his pay [Gold v. New York Life Insurance Co., DC NY, Dkt. No. 1:09-cv-03210-WHP, 5/19/11].
The facts. Avraham Gold worked for New York Life as an insurance agent between 2001 and 2004. He was compensated on a commission basis only. In addition to licenses that permitted him to sell traditional “fixed” insurance policies and annuities, Gold had obtained “Series 6” and “Series 63” licenses which permitted him to sell “registered” products, including variable life insurance policies, mutual funds, and other products regulated by the Financial Industry Regulatory Authority (FINRA). With these licenses, Gold became a “registered representative,” a title that encompassed certain enhanced duties to clients. These duties included the “Know Your Customer Rule,” which required registered representatives to “use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization and every person holding power of attorney over any account accepted or carried by such organization.”
The law. New York State law mandates that overtime be paid according to the provisions in the federal Fair Labor Standards Act (FLSA). Under the FLSA, an employee classified as an “outside salesman” may not receive overtime. One requirement to be classified as an outside salesman under 29 CFR 541.500(a) in the FLSA is that the employee's primary duty must either be making sales, or obtaining orders or contracts for services.
Gold argued that his primary duty was to provide financial advice, rather than sales.
The ruling. The court cited its ruling in Chenensky v. New York Life Insurance Co., DC NY, Dkt. No. 1:07-cv-11504, 12/21/07, and held that Gold was an outside salesman. It said that the facts in both cases were very similar. The court also said that the fact that Gold's employment was subject to certain regulatory requirements in the FINRA did not mean that compliance with the regulations was his primary duty under the FLSA. These regulations simply place restrictions on how Gold performs his employment duties; they do not convert a sales position into an advisory one.
In addition, the court believed that Gold's argument was undermined by his commission-based compensation. He was paid solely on commission. If he did not make any sales, he would not be paid. He received no compensation for pure financial advice in the absence of a sale. Such advice was not his primary duty — “it was simply one mark of a good salesman.”
Deductions from pay. In Pachter v. Bernard Hodes Group, NYS Ct. App., 10 N.Y. 3d 609, 6/10/08, the New York Court of Appeals determined that when an employee is paid by commission, N.Y. Lab. Law §193 does not prohibit deductions “if they were made before the commissions were earned.” New York Life argued that commissions were not fully earned until after the policyholder died and it was determined that the insurance policy could be paid. Therefore, New York Life claimed that it was allowed to deduct expenses from Gold's commissions, such as computer support, liability insurance, office space, and telephone service. The federal district court ruled that even if Gold was aware that New York Life could make these deductions right up until the policyholder died, Gold may not have understood “its drastic and arguably unreasonable consequences.” As a result, the court denied summary judgment to New York Life on this issue.
The facts. Avraham Gold worked for New York Life as an insurance agent between 2001 and 2004. He was compensated on a commission basis only. In addition to licenses that permitted him to sell traditional “fixed” insurance policies and annuities, Gold had obtained “Series 6” and “Series 63” licenses which permitted him to sell “registered” products, including variable life insurance policies, mutual funds, and other products regulated by the Financial Industry Regulatory Authority (FINRA). With these licenses, Gold became a “registered representative,” a title that encompassed certain enhanced duties to clients. These duties included the “Know Your Customer Rule,” which required registered representatives to “use due diligence to learn the essential facts relative to every customer, every order, every cash or margin account accepted or carried by such organization and every person holding power of attorney over any account accepted or carried by such organization.”
The law. New York State law mandates that overtime be paid according to the provisions in the federal Fair Labor Standards Act (FLSA). Under the FLSA, an employee classified as an “outside salesman” may not receive overtime. One requirement to be classified as an outside salesman under 29 CFR 541.500(a) in the FLSA is that the employee's primary duty must either be making sales, or obtaining orders or contracts for services.
Gold argued that his primary duty was to provide financial advice, rather than sales.
The ruling. The court cited its ruling in Chenensky v. New York Life Insurance Co., DC NY, Dkt. No. 1:07-cv-11504, 12/21/07, and held that Gold was an outside salesman. It said that the facts in both cases were very similar. The court also said that the fact that Gold's employment was subject to certain regulatory requirements in the FINRA did not mean that compliance with the regulations was his primary duty under the FLSA. These regulations simply place restrictions on how Gold performs his employment duties; they do not convert a sales position into an advisory one.
In addition, the court believed that Gold's argument was undermined by his commission-based compensation. He was paid solely on commission. If he did not make any sales, he would not be paid. He received no compensation for pure financial advice in the absence of a sale. Such advice was not his primary duty — “it was simply one mark of a good salesman.”
Deductions from pay. In Pachter v. Bernard Hodes Group, NYS Ct. App., 10 N.Y. 3d 609, 6/10/08, the New York Court of Appeals determined that when an employee is paid by commission, N.Y. Lab. Law §193 does not prohibit deductions “if they were made before the commissions were earned.” New York Life argued that commissions were not fully earned until after the policyholder died and it was determined that the insurance policy could be paid. Therefore, New York Life claimed that it was allowed to deduct expenses from Gold's commissions, such as computer support, liability insurance, office space, and telephone service. The federal district court ruled that even if Gold was aware that New York Life could make these deductions right up until the policyholder died, Gold may not have understood “its drastic and arguably unreasonable consequences.” As a result, the court denied summary judgment to New York Life on this issue.
Case Roundup
New rulings have been issued on: (1) the U.S.-China income tax treaty teacher compensation exemption; (2) whether an employer can pay nurses at different pay rates depending on how many hours they work; and (3) whether employees may be compensated for donning and doffing time during a meal break.
U.S.-China income tax treaty teacher compensation exemption. In Liaosheng Zhang v. Commissioner, (2011) TC Memo 2011-118, the U.S. Tax Court ruled that Chinese citizen Liaosheng Zhang, who was a computer programmer/researcher working for an employer in the U.S., did not qualify for the federal income tax exemption in Article 19 of the U.S.-China income tax treaty. Under Article 19, remuneration that a resident of one country receives for teaching, lecturing, or researching at an accredited educational or scientific research institution in the other country during a visit of three years or less is exempt from tax by the other country. The exemption applies only if teaching, lecturing, or research was the primary purpose of the visit.
In issuing its ruling, the Tax Court noted that the exemption in Article 19 is available only for persons who are “temporarily present” in the United States. After visiting around 1988, Zhang moved to the U.S. in 1990 and has resided in the U.S. ever since. She completed her studies in 1998, worked for a U.S. employer from 1998 to 2005, and moved from Phoenix to Seattle in 2005. The Tax Court said there was no indication that either she or the company intended her employment to last only a short time, and Zhang did not claim to have had any plans to move out of the United States. The Tax Court determined that by 2003, 2004, and 2005, Zhang's presence in the U.S. could no longer be considered temporary.
Payment of nurses at different pay rates. The U.S. Supreme Court will not review a U.S. Court of Appeals for the Ninth Circuit ruling that a hospital did not violate the Fair Labor Standards Act (FLSA) by allowing nurses to work a 12-hour shift (rather than an 8-hour shift) in exchange for receiving a lower base hourly salary that at all times exceeded the minimum wage rate. The nurses were paid time-and-a-half pay for hours worked in excess of eight per day [Parth v. Pomona Valley Hospital, U.S. Sup. Ct., cert. denied, Dkt. No. 10-1041, 5/23/11].
In issuing its ruling, the Ninth Circuit noted that the 12-hour shift scheduling practice was first initiated by the nurses so they would have more days away from the hospital. The new practice was then memorialized into a collective bargaining agreement after negotiations between the nurses' union and the hospital (again initiated at the nurses' request). The court said that there was nothing in federal law or public policy that supported the invalidation of this arrangement.
Donning and doffing compensation. The U.S. Court of Appeals for the Fourth Circuit has ruled that poultry workers may be compensated for the donning and doffing of protective and sanitary gear at the beginning and end of their work shifts, but they cannot be compensated for such time during their mid-shift meal breaks [Perez v. Mountaire Farms, Inc., CA4, Dkt. No. 09-1917, 6/7/11].
In IBP, Inc. v. Alvarez, 546 U.S. 21, 11/8/05, the U.S. Supreme Court determined that activities performed either before or after the regular work shift are compensable under the FLSA “if those activities are an integral and indispensable part of the principal activities.” The Fourth Circuit concluded that the pre- and post-work donning and doffing time were an integral and indispensable part of the poultry workers' principal activities because the employees were required as a matter of federal law to wear certain protective gear on the production line. These legal requirements are based on United States Department of Agriculture regulations about sanitation, and on safety regulations issued by the Occupational Safety and Health Administration (OSHA). The Fourth Circuit also noted that the activities primarily benefited the employer by: (1) protecting the products from contamination; (2) helping to keep workers' compensation payments down; and (3) reducing missed work time.
The Fourth Circuit denied compensation on the mid-shift donning and doffing time based on its ruling in Sepulveda v. Allen Family Foods, Inc., CA4, Dkt No. 08-2256, 12/29/09. In Sepulveda, the Fourth Circuit held, as a matter of law, that acts of donning and doffing occurring before and after employees eat their meals are non-compensable because these acts are part of the “bona fide meal period” under 29 CFR 785.19. Bona fide meal periods are not work time.
U.S.-China income tax treaty teacher compensation exemption. In Liaosheng Zhang v. Commissioner, (2011) TC Memo 2011-118, the U.S. Tax Court ruled that Chinese citizen Liaosheng Zhang, who was a computer programmer/researcher working for an employer in the U.S., did not qualify for the federal income tax exemption in Article 19 of the U.S.-China income tax treaty. Under Article 19, remuneration that a resident of one country receives for teaching, lecturing, or researching at an accredited educational or scientific research institution in the other country during a visit of three years or less is exempt from tax by the other country. The exemption applies only if teaching, lecturing, or research was the primary purpose of the visit.
In issuing its ruling, the Tax Court noted that the exemption in Article 19 is available only for persons who are “temporarily present” in the United States. After visiting around 1988, Zhang moved to the U.S. in 1990 and has resided in the U.S. ever since. She completed her studies in 1998, worked for a U.S. employer from 1998 to 2005, and moved from Phoenix to Seattle in 2005. The Tax Court said there was no indication that either she or the company intended her employment to last only a short time, and Zhang did not claim to have had any plans to move out of the United States. The Tax Court determined that by 2003, 2004, and 2005, Zhang's presence in the U.S. could no longer be considered temporary.
Payment of nurses at different pay rates. The U.S. Supreme Court will not review a U.S. Court of Appeals for the Ninth Circuit ruling that a hospital did not violate the Fair Labor Standards Act (FLSA) by allowing nurses to work a 12-hour shift (rather than an 8-hour shift) in exchange for receiving a lower base hourly salary that at all times exceeded the minimum wage rate. The nurses were paid time-and-a-half pay for hours worked in excess of eight per day [Parth v. Pomona Valley Hospital, U.S. Sup. Ct., cert. denied, Dkt. No. 10-1041, 5/23/11].
In issuing its ruling, the Ninth Circuit noted that the 12-hour shift scheduling practice was first initiated by the nurses so they would have more days away from the hospital. The new practice was then memorialized into a collective bargaining agreement after negotiations between the nurses' union and the hospital (again initiated at the nurses' request). The court said that there was nothing in federal law or public policy that supported the invalidation of this arrangement.
Donning and doffing compensation. The U.S. Court of Appeals for the Fourth Circuit has ruled that poultry workers may be compensated for the donning and doffing of protective and sanitary gear at the beginning and end of their work shifts, but they cannot be compensated for such time during their mid-shift meal breaks [Perez v. Mountaire Farms, Inc., CA4, Dkt. No. 09-1917, 6/7/11].
In IBP, Inc. v. Alvarez, 546 U.S. 21, 11/8/05, the U.S. Supreme Court determined that activities performed either before or after the regular work shift are compensable under the FLSA “if those activities are an integral and indispensable part of the principal activities.” The Fourth Circuit concluded that the pre- and post-work donning and doffing time were an integral and indispensable part of the poultry workers' principal activities because the employees were required as a matter of federal law to wear certain protective gear on the production line. These legal requirements are based on United States Department of Agriculture regulations about sanitation, and on safety regulations issued by the Occupational Safety and Health Administration (OSHA). The Fourth Circuit also noted that the activities primarily benefited the employer by: (1) protecting the products from contamination; (2) helping to keep workers' compensation payments down; and (3) reducing missed work time.
The Fourth Circuit denied compensation on the mid-shift donning and doffing time based on its ruling in Sepulveda v. Allen Family Foods, Inc., CA4, Dkt No. 08-2256, 12/29/09. In Sepulveda, the Fourth Circuit held, as a matter of law, that acts of donning and doffing occurring before and after employees eat their meals are non-compensable because these acts are part of the “bona fide meal period” under 29 CFR 785.19. Bona fide meal periods are not work time.
IRS Makes Revision to Fringe Benefits Publication
Employers who downloaded IRS Publication 15-B, Employer's Tax Guide to Fringe Benefits, before May 27, 2011, should note the following revision to the publication:
* On page 6 (previously page 7), under Accident or health plan, the first sentence has been changed to read as follows: “This is an arrangement that provides benefits for your employees, their spouses, their dependents, and their children (under age 27) in the event of personal injury or sickness.”
Prior to the revision, the first sentence read as follows: “This is an arrangement that provides benefits for your employees, their spouses, and their dependents (under age 27) in the event of personal injury or sickness.”
The revision takes into account legislation in the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) that amended Code Sec. 105(b), effective March 30, 2010, to extend the gross income exclusion for medical care reimbursements under an employer-provided accident or health plan to include reimbursements for an employee's child who has not attained age 27 as of the end of the tax year. Prior to the above legislation, an employee wouldn't have received these benefits unless the child was the employee's dependent.
IRS Publication 15-B contains detailed information on the employment tax treatment of various fringe benefits, including accident and health benefits, employee stock options plans, health savings accounts, meals and lodging expenses, moving expense reimbursements, and transportation (commuting) benefits [IRS website, Forms and Publications, Changes to Current Tax Products, Correction to Publication 15-B, Employer's Tax Guide to Fringe Benefits (For use in 2011), 6/13/11].
* On page 6 (previously page 7), under Accident or health plan, the first sentence has been changed to read as follows: “This is an arrangement that provides benefits for your employees, their spouses, their dependents, and their children (under age 27) in the event of personal injury or sickness.”
Prior to the revision, the first sentence read as follows: “This is an arrangement that provides benefits for your employees, their spouses, and their dependents (under age 27) in the event of personal injury or sickness.”
The revision takes into account legislation in the Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) that amended Code Sec. 105(b), effective March 30, 2010, to extend the gross income exclusion for medical care reimbursements under an employer-provided accident or health plan to include reimbursements for an employee's child who has not attained age 27 as of the end of the tax year. Prior to the above legislation, an employee wouldn't have received these benefits unless the child was the employee's dependent.
IRS Publication 15-B contains detailed information on the employment tax treatment of various fringe benefits, including accident and health benefits, employee stock options plans, health savings accounts, meals and lodging expenses, moving expense reimbursements, and transportation (commuting) benefits [IRS website, Forms and Publications, Changes to Current Tax Products, Correction to Publication 15-B, Employer's Tax Guide to Fringe Benefits (For use in 2011), 6/13/11].
IRS Posts YouTube Video on W-2 Health Insurance Reporting Requirements
The IRS has recently posted a short video on YouTube called “Health Care: W-2 Health Insurance Reporting.” The video is less than two minutes and covers some of the key points in Notice 2011-28, 2011-16 IRB 656. Reporting of employer-sponsored health insurance coverage on Form W-2 is optional for all employers in the 2011 tax year. The reporting requirement continues to be optional for “smaller employers” in the 2012 tax year. A “smaller employer” is an employer that filed less than 250 W-2 forms in the 2011 tax year. The IRS made the reporting requirement optional to allow employers more time to make changes to their payroll systems.
The IRS also notes on the video that the new Form W-2 reporting requirements have no tax ramifications. The purpose of the reporting requirement is to provide useful and comparable consumer information to employees on the cost of their health insurance coverage. The reporting requirement does not cause excludable employer-provided health insurance coverage to become taxable.
The IRS also notes on the video that the new Form W-2 reporting requirements have no tax ramifications. The purpose of the reporting requirement is to provide useful and comparable consumer information to employees on the cost of their health insurance coverage. The reporting requirement does not cause excludable employer-provided health insurance coverage to become taxable.
Report Says that IRS Should Focus More on Increasing Electronic Filing of Employment Tax Returns
The Electronic Tax Administration Advisory Committee (ETAAC) has filed its annual report to Congress. The report notes that the low number of electronically-filed employment tax returns continues to be an obstacle for the IRS in meeting its goal of an overall 80% electronic participation rate for all major types of tax returns. ETAAC estimates that only 24% of employment tax returns (Forms 940 and 941) will be filed electronically in 2011. This percentage is lower than the percentages for all other types of tax returns [Publication 3415, ETAAC Annual Report to Congress, 6-2011; IR 2011-68].
To increase the number of electronically-filed employment tax returns, ETAAC believes that the IRS should: (1) increase its education and outreach; (2) expand its promotion of software and service providers that provide a free Forms 94X e-filing capability; (3) work with tax filers, and software and service providers, to review the end-to-end Forms 94X registration and e-file processes, and identify easy-to-implement improvements; and (4) investigate the most cost effective ways to increase the electronic filing rates.
The report mentioned that ETAAC conducted a survey to gain insights on this issue from the two main components of the employment tax return filing community: (i) in-house tax filers (employers that file employment returns on their own behalf), and (ii) employment tax service providers (payroll firms, accountants, tax preparers, bookkeepers, and others that file employment returns for third parties). Respondents who don't currently file employment tax returns electronically were asked what would make them reconsider. The most popular answers were: (a) if there was a free online filing method; (b) more training was provided on the Forms 94X electronic filing registration process; and (c) the overall employment return electronic filing process was easier and more user friendly. Many respondents noted that they can electronically file their state employment tax returns for free.
The IRS Oversight Board issued a similar report earlier this year.
To increase the number of electronically-filed employment tax returns, ETAAC believes that the IRS should: (1) increase its education and outreach; (2) expand its promotion of software and service providers that provide a free Forms 94X e-filing capability; (3) work with tax filers, and software and service providers, to review the end-to-end Forms 94X registration and e-file processes, and identify easy-to-implement improvements; and (4) investigate the most cost effective ways to increase the electronic filing rates.
The report mentioned that ETAAC conducted a survey to gain insights on this issue from the two main components of the employment tax return filing community: (i) in-house tax filers (employers that file employment returns on their own behalf), and (ii) employment tax service providers (payroll firms, accountants, tax preparers, bookkeepers, and others that file employment returns for third parties). Respondents who don't currently file employment tax returns electronically were asked what would make them reconsider. The most popular answers were: (a) if there was a free online filing method; (b) more training was provided on the Forms 94X electronic filing registration process; and (c) the overall employment return electronic filing process was easier and more user friendly. Many respondents noted that they can electronically file their state employment tax returns for free.
The IRS Oversight Board issued a similar report earlier this year.
Bipartisan Bill Would Provide Tax-Free Health Benefits to Domestic Partners
On June 9, Senators Charles Schumer (D-NY) and Susan Collins (R-ME) introduced H.R. 2088, the “Tax Parity for Health Plan Beneficiaries Act of 2011.” The bill would provide federal tax-free health benefits to domestic partners.
Under current federal law, when a company provides health benefits to an employee's spouse and dependents, the value of the entire premium is considered a tax-free fringe benefit for federal tax purposes. However, if the company elects to offer a health plan that covers a domestic partner, the partner's portion of the insurance premium is treated as taxable income. The new bill would amend the Internal Revenue Code so that same-sex and opposite-sex domestic partners who are covered by their partner's employer-based health plan would no longer be treated differently. The bill would not compel any businesses that don't already offer health coverage to domestic partners to do so.
A Schumer/Collins press release on the bill noted that when gay or lesbian workers calculate their payroll tax liability, the value of the coverage provided to their domestic partner is included in their wage base. As a result, both employee and employer payroll tax obligations increase.
The press release also noted that more and more employers are making the business decision to voluntarily provide health benefits to the domestic partners of their employees. As of March 2011, 291 of the Fortune 500 companies, or 58%, were providing such coverage. This is more than a 13-fold increase since 1995.
Some states do recognize same-sex marriages. There is a chart in Payroll Tax Create-a-Chart on this topic.
Under current federal law, when a company provides health benefits to an employee's spouse and dependents, the value of the entire premium is considered a tax-free fringe benefit for federal tax purposes. However, if the company elects to offer a health plan that covers a domestic partner, the partner's portion of the insurance premium is treated as taxable income. The new bill would amend the Internal Revenue Code so that same-sex and opposite-sex domestic partners who are covered by their partner's employer-based health plan would no longer be treated differently. The bill would not compel any businesses that don't already offer health coverage to domestic partners to do so.
A Schumer/Collins press release on the bill noted that when gay or lesbian workers calculate their payroll tax liability, the value of the coverage provided to their domestic partner is included in their wage base. As a result, both employee and employer payroll tax obligations increase.
The press release also noted that more and more employers are making the business decision to voluntarily provide health benefits to the domestic partners of their employees. As of March 2011, 291 of the Fortune 500 companies, or 58%, were providing such coverage. This is more than a 13-fold increase since 1995.
Some states do recognize same-sex marriages. There is a chart in Payroll Tax Create-a-Chart on this topic.
Some Talk in Washington About Providing Payroll Tax Break to Employers
Published reports indicate that the White House is considering additional payroll tax breaks to stimulate the economy.
Section 601 in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily reduced the employee Social Security withholding tax rate on wages from 6.2% to 4.2% for one year, effective with wages earned beginning Jan. 1, 2011. There is some talk in Washington about extending this break, and/or possibly providing this break to employers as well. In a June 7 joint press conference with German Chancellor Merkel, President Obama said that some “of the steps that we took during the lame duck session, the payroll tax, the extension of unemployment insurance, the investment in — or the tax breaks for business investment in plants and equipment — all those things have helped. And one of the things that I'm going to be interested in exploring with the members of both parties in Congress is how do we continue some of these policies to make sure that we get this recovery up and running in a robust way.”
In a May speech at Stanford University, Christina Romer, former Chairwoman of President Obama's Council of Economic Advisers, said that “my particular favorite additional short-run stimulus would be a cut in the employer side of the payroll tax. Congress cut the payroll tax for employees in the budget compromise last December. A similar cut in what firms have to contribute for payroll taxes would make hiring workers cheaper and would therefore likely be particularly helpful for employment growth.” Former Treasury Secretary Larry Summers also supports a payroll tax cut to employers. He stated in a June 12 opinion piece that “raising the share of the payroll tax cut from 2 percent to 3 percent would be desirable as well.”
Section 601 in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily reduced the employee Social Security withholding tax rate on wages from 6.2% to 4.2% for one year, effective with wages earned beginning Jan. 1, 2011. There is some talk in Washington about extending this break, and/or possibly providing this break to employers as well. In a June 7 joint press conference with German Chancellor Merkel, President Obama said that some “of the steps that we took during the lame duck session, the payroll tax, the extension of unemployment insurance, the investment in — or the tax breaks for business investment in plants and equipment — all those things have helped. And one of the things that I'm going to be interested in exploring with the members of both parties in Congress is how do we continue some of these policies to make sure that we get this recovery up and running in a robust way.”
In a May speech at Stanford University, Christina Romer, former Chairwoman of President Obama's Council of Economic Advisers, said that “my particular favorite additional short-run stimulus would be a cut in the employer side of the payroll tax. Congress cut the payroll tax for employees in the budget compromise last December. A similar cut in what firms have to contribute for payroll taxes would make hiring workers cheaper and would therefore likely be particularly helpful for employment growth.” Former Treasury Secretary Larry Summers also supports a payroll tax cut to employers. He stated in a June 12 opinion piece that “raising the share of the payroll tax cut from 2 percent to 3 percent would be desirable as well.”
Upcoming State Payroll Tax Changes
Many states will soon be revising key payroll tax figures and procedures. Here are some of the highlights:
Arizona
Effective July 20, 2011, employers may pay employees by either direct deposit or paycard, rather than by paper check, if certain requirements are met.
Arkansas
A 0.2% advance interest tax will be added to all employers' unemployment tax rates (except reimbursing employers), beginning with the second quarter return filed in July. The tax will help Arkansas pay the interest due on its federal unemployment insurance loans.
Colorado
The Colorado Department of Labor and Employment will be sending a bill to employers called “Unemployment Insurance Notice of Trust Fund Assessment” in early July to help the State pay the interest due on its outstanding federal unemployment insurance loans.
Florida
The Florida minimum wage rate recently increased from $7.25 to $7.31 per hour.
Hawaii
Effective July 1, 2011, professional employer organizations (PEOs) must register with the Hawaii Department of Labor and Industrial Relations before entering into a PEO agreement with a client company in Hawaii.
Idaho
Effective July 1, 2011, a PEO that fails to submit a separate quarterly wage report for each of its clients will be subject to a $100 penalty for each client that it fails to separately report. The maximum penalty in any quarter may not exceed $5,000.
Illinois
Effective for the tax year beginning on July 1, 2011, any employee making less than $4,300 per calendar quarter should not be included in the taxable employee counts for purposes of the $4 monthly Chicago employer's expense tax. Effective July 1, 2011, employers are required to make payments for the tax on or before the 15th day following the end of the quarterly tax period. Previously, the payments were due on or before the last day of the month following the end of the quarterly tax period [Chicago Department of Revenue Tax Alert, 11/17/10].
Michigan
The unclaimed property report must be filed by July 1, 2011, for the period beginning July 1, 2010, and ending on March 31, 2011.
Mississippi
Beginning July 1, 2011, all private employers must use the federal E-Verify system to verify the employment eligibility of new hires.
Missouri
Employers will pay an additional assessment with their second quarter unemployment tax return to help Missouri pay the interest due on its federal unemployment insurance loans.
Nebraska
Effective July 1, 2011, employers who made over $16,000 in withholding tax payments in a previous tax year must make all withholding tax payments by EFT.
Ohio
Effective July 1, 2011, the Ada Village (Hardin County) tax rate will increase from 1.15% to 1.65%; the Tipp City (Miami County) tax rate will increase from 1.25% to 1.5%; and the Franklin City (Warren County) tax rate will increase from 1.5% to 2.0%.
Utah
Utah's Taxpayer Access Point (TAP) is replacing WebExpress as a means to file, pay, and manage withholding taxes. Employers must register in the TAP system on or after June 27 to prevent filing and payment delays [STC Announcement, Taxpayer Access Point (TAP) is Replacing WebExpress, 5/5/11].
Virginia
Effective July 1, 2011, semi-weekly filers are required to file all withholding tax returns and make payments electronically [L. 2010, H1500 (c. 890)].
West Virginia
Beginning July 1, 2011, a 1% occupation tax must be withheld from all persons working in the City of Huntington. The occupation tax replaces the city service fee of $3.00 per week.
Arizona
Effective July 20, 2011, employers may pay employees by either direct deposit or paycard, rather than by paper check, if certain requirements are met.
Arkansas
A 0.2% advance interest tax will be added to all employers' unemployment tax rates (except reimbursing employers), beginning with the second quarter return filed in July. The tax will help Arkansas pay the interest due on its federal unemployment insurance loans.
Colorado
The Colorado Department of Labor and Employment will be sending a bill to employers called “Unemployment Insurance Notice of Trust Fund Assessment” in early July to help the State pay the interest due on its outstanding federal unemployment insurance loans.
Florida
The Florida minimum wage rate recently increased from $7.25 to $7.31 per hour.
Hawaii
Effective July 1, 2011, professional employer organizations (PEOs) must register with the Hawaii Department of Labor and Industrial Relations before entering into a PEO agreement with a client company in Hawaii.
Idaho
Effective July 1, 2011, a PEO that fails to submit a separate quarterly wage report for each of its clients will be subject to a $100 penalty for each client that it fails to separately report. The maximum penalty in any quarter may not exceed $5,000.
Illinois
Effective for the tax year beginning on July 1, 2011, any employee making less than $4,300 per calendar quarter should not be included in the taxable employee counts for purposes of the $4 monthly Chicago employer's expense tax. Effective July 1, 2011, employers are required to make payments for the tax on or before the 15th day following the end of the quarterly tax period. Previously, the payments were due on or before the last day of the month following the end of the quarterly tax period [Chicago Department of Revenue Tax Alert, 11/17/10].
Michigan
The unclaimed property report must be filed by July 1, 2011, for the period beginning July 1, 2010, and ending on March 31, 2011.
Mississippi
Beginning July 1, 2011, all private employers must use the federal E-Verify system to verify the employment eligibility of new hires.
Missouri
Employers will pay an additional assessment with their second quarter unemployment tax return to help Missouri pay the interest due on its federal unemployment insurance loans.
Nebraska
Effective July 1, 2011, employers who made over $16,000 in withholding tax payments in a previous tax year must make all withholding tax payments by EFT.
Ohio
Effective July 1, 2011, the Ada Village (Hardin County) tax rate will increase from 1.15% to 1.65%; the Tipp City (Miami County) tax rate will increase from 1.25% to 1.5%; and the Franklin City (Warren County) tax rate will increase from 1.5% to 2.0%.
Utah
Utah's Taxpayer Access Point (TAP) is replacing WebExpress as a means to file, pay, and manage withholding taxes. Employers must register in the TAP system on or after June 27 to prevent filing and payment delays [STC Announcement, Taxpayer Access Point (TAP) is Replacing WebExpress, 5/5/11].
Virginia
Effective July 1, 2011, semi-weekly filers are required to file all withholding tax returns and make payments electronically [L. 2010, H1500 (c. 890)].
West Virginia
Beginning July 1, 2011, a 1% occupation tax must be withheld from all persons working in the City of Huntington. The occupation tax replaces the city service fee of $3.00 per week.
IRS Increases Standard Mileage Rates
The IRS has increased the optional standard mileage rates for the final six months of 2011 due to the sharp rise in gasoline prices. The rate will increase to 55.5¢ per mile (previously 51¢ cents per mile) for all business miles driven between July 1 and Dec. 31, 2011. The new six-month rate for computing deductible medical or moving expenses will be 23.5¢ per mile, up from 19¢ for the first half of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14¢ per mile [IR 2011-69; Ann. 2011-40, 2011-29 IRB].
An employer that requires employees to supply their own autos may reimburse them at a rate that doesn't exceed 55.5¢ per mile for employment-connected business mileage in the second half of 2011, and the reimbursement will be treated as a tax-free accountable plan reimbursement. The employee must substantiate the time, place, business purpose, and mileage of each trip. Additionally, an employee's personal use of lower-priced company autos during the second half of 2011 may be valued at 55.5¢ per mile if the conditions specified in Reg. §1.61-21(e)(1) are met.
Employers paying a mileage allowance in excess of the standard rate must report the excess on Form W-2.
Taxpayers always have the option of calculating the actual costs of using their vehicle, rather than using the standard mileage rates.
The IRS generally only revises the standard mileage rates once a year (in the fall).
An employer that requires employees to supply their own autos may reimburse them at a rate that doesn't exceed 55.5¢ per mile for employment-connected business mileage in the second half of 2011, and the reimbursement will be treated as a tax-free accountable plan reimbursement. The employee must substantiate the time, place, business purpose, and mileage of each trip. Additionally, an employee's personal use of lower-priced company autos during the second half of 2011 may be valued at 55.5¢ per mile if the conditions specified in Reg. §1.61-21(e)(1) are met.
Employers paying a mileage allowance in excess of the standard rate must report the excess on Form W-2.
Taxpayers always have the option of calculating the actual costs of using their vehicle, rather than using the standard mileage rates.
The IRS generally only revises the standard mileage rates once a year (in the fall).
IRS Can't Apply Certain Overpayments to Other Tax Periods if Taxpayer Remits Taxes But Fails to File a Return
The Court of Appeals for the Fifth Circuit has denied an employer's refund claim, even though the employer had overpayments in certain quarters that were not applied to its withholding tax liability [Nicholas Acoustics & Specialty Company, Inc. v. U.S., CA5, 107 AFTR 2d ¶2011-950, 6/15/11].
The facts. Between 1999 and 2003, Nicholas Acoustics & Specialty Company, Inc. (Nicholas) remitted payroll taxes to the IRS, but failed to file any tax returns. The funds remitted were not for the exact amount owed, but were instead an estimate of the amount due. The company occasionally paid taxes in excess of its liability. Nicholas erroneously assumed that the IRS could apply all of its overpayments to other quarters in which it had underpaid its tax liability.
In 2003, the IRS audited Nicholas due to its failure to file its tax returns. After the audit, Nicholas filed returns for the missing quarters, which allowed the IRS to refund overpayments or credit the overpayments to certain quarters in which a deficit had occurred. The IRS said that it could only refund or credit Nicholas's overpayments for returns due within the past three years because of the statute of limitations. Nicholas still owed taxes for the period in question, even after the IRS made the adjustments. The IRS filed a lien against Nicholas, which Nicholas paid before seeking a refund. Nicholas contended that the shortfall wouldn't have occurred if the IRS had applied all of the company's overpayments to future or past quarters.
IRS methodology. The IRS classifies a remittance of taxes as either a payment or a deposit. If a tax remittance is determined to be a deposit, it is treated like a cash bond, which the IRS simply holds, and a taxpayer may seek a refund of the deposit at any time (see Rosenman v. U.S., U.S. Sup. Ct., 33 AFTR 314, 1/29/45). But if a remittance is deemed a payment, the taxpayer may only recover the money by filing a timely claim for refund (see Miller v. U.S., Ct Fed Cl, 86 AFTR 2d 2000-7058, 11/09/00).
Previous court rulings. In Deaton v. Comm., CA5, 97 AFTR 2d 2006-984, 2/9/06, and Baral v. U.S., U.S. Sup. Ct., 85 AFTR 2d 2000-941, 2/22/00, federal courts determined that a remittance that discharges or pays a deemed or assessed tax liability constitutes a payment. In addition, a remittance also constitutes a payment if it's made under an Internal Revenue Code section for which the statute's plain language states that the remittance is to be “deemed paid.”
In Baral, the Supreme Court looked at an individual's refund claim for income tax partially paid through his employer's wage withholding and partially paid through his own remittance of the estimated tax. The Supreme Court held that the tax was paid when the money was remitted, not when the tax was assessed. The Supreme Court focused on Code Sec. 6513(b)(1) and Code Sec. 6513(b)(2) , which govern employee withholding taxes. It noted that remittances which are governed by a “deemed paid” provision akin to Code Sec. 6513 are “payments” subject to Code Sec. 6511. Under Code Sec. 6511(a), a claim for credit or refund of an overpayment must be filed by the taxpayer within two years from the time the tax was paid if no return was filed by the taxpayer.
The ruling. The Court of Appeals for the Fifth Circuit agreed with the IRS that the employment tax remittances constituted payments and that refunds of the payments were subject to the statute of limitations period in Code Sec. 6511. The Fifth Circuit looked at the plain language in Code Sec. 6513(c)(2) and said that it was a “deemed paid” provision subject to Code Sec. 6511 's limitations period for refunds. Similarly, Reg. §31.6302-1(h)(9) deems a remittance of employment taxes to be a payment.
The facts. Between 1999 and 2003, Nicholas Acoustics & Specialty Company, Inc. (Nicholas) remitted payroll taxes to the IRS, but failed to file any tax returns. The funds remitted were not for the exact amount owed, but were instead an estimate of the amount due. The company occasionally paid taxes in excess of its liability. Nicholas erroneously assumed that the IRS could apply all of its overpayments to other quarters in which it had underpaid its tax liability.
In 2003, the IRS audited Nicholas due to its failure to file its tax returns. After the audit, Nicholas filed returns for the missing quarters, which allowed the IRS to refund overpayments or credit the overpayments to certain quarters in which a deficit had occurred. The IRS said that it could only refund or credit Nicholas's overpayments for returns due within the past three years because of the statute of limitations. Nicholas still owed taxes for the period in question, even after the IRS made the adjustments. The IRS filed a lien against Nicholas, which Nicholas paid before seeking a refund. Nicholas contended that the shortfall wouldn't have occurred if the IRS had applied all of the company's overpayments to future or past quarters.
IRS methodology. The IRS classifies a remittance of taxes as either a payment or a deposit. If a tax remittance is determined to be a deposit, it is treated like a cash bond, which the IRS simply holds, and a taxpayer may seek a refund of the deposit at any time (see Rosenman v. U.S., U.S. Sup. Ct., 33 AFTR 314, 1/29/45). But if a remittance is deemed a payment, the taxpayer may only recover the money by filing a timely claim for refund (see Miller v. U.S., Ct Fed Cl, 86 AFTR 2d 2000-7058, 11/09/00).
Previous court rulings. In Deaton v. Comm., CA5, 97 AFTR 2d 2006-984, 2/9/06, and Baral v. U.S., U.S. Sup. Ct., 85 AFTR 2d 2000-941, 2/22/00, federal courts determined that a remittance that discharges or pays a deemed or assessed tax liability constitutes a payment. In addition, a remittance also constitutes a payment if it's made under an Internal Revenue Code section for which the statute's plain language states that the remittance is to be “deemed paid.”
In Baral, the Supreme Court looked at an individual's refund claim for income tax partially paid through his employer's wage withholding and partially paid through his own remittance of the estimated tax. The Supreme Court held that the tax was paid when the money was remitted, not when the tax was assessed. The Supreme Court focused on Code Sec. 6513(b)(1) and Code Sec. 6513(b)(2) , which govern employee withholding taxes. It noted that remittances which are governed by a “deemed paid” provision akin to Code Sec. 6513 are “payments” subject to Code Sec. 6511. Under Code Sec. 6511(a), a claim for credit or refund of an overpayment must be filed by the taxpayer within two years from the time the tax was paid if no return was filed by the taxpayer.
The ruling. The Court of Appeals for the Fifth Circuit agreed with the IRS that the employment tax remittances constituted payments and that refunds of the payments were subject to the statute of limitations period in Code Sec. 6511. The Fifth Circuit looked at the plain language in Code Sec. 6513(c)(2) and said that it was a “deemed paid” provision subject to Code Sec. 6511 's limitations period for refunds. Similarly, Reg. §31.6302-1(h)(9) deems a remittance of employment taxes to be a payment.
Hiring Children to Work in the Family Business May Generate Some Employment Tax Savings
Summer is here and your kids need something to do. Why not hire them to work in your family business? If you do, it may help build their self-esteem. Plus your employment tax liability may also be a little less than it would have been if you had hired an unrelated individual to perform the task.
Income tax withholding. Regardless of how the family business is organized, it probably will have to withhold federal income taxes on the child's wages. Usually, an employee who had no federal income tax liability for the prior year, and expects to have none for the current year, can claim exempt status. However, exemption from withholding can't be claimed if: (1) the employee's income exceeds $950 and includes more than $300 of unearned income (such as dividends), and (2) the employee may be claimed as a dependent on someone else's return (whether or not the child is actually claimed as a dependent). Keep in mind that the child probably will get a refund for part or all of the withheld tax when he or she files a personal income tax return for the year.
Payments for domestic work in a parent's home are not subject to withholding tax. Withholding from remuneration for “services not in the course of the employer's trade or business” is only required if $50 or more cash remuneration is paid for such services performed by the child in the calendar quarter, and the child is regularly employed by the parent to perform the services (see Code Sec. 3401(a)(4)).
FICA and FUTA taxes. Employment for FICA tax purposes doesn't include services performed by a child under the age of 18 while employed by a parent in a trade or business that is a sole proprietorship, or a partnership in which each partner is a parent of the child (see Code Sec. 3121(b)(3)(A) ). This can generate some employment tax savings for the parent. For example, let's say a sole proprietor who averages $120,000 of earnings from the business pays $4,750 to his or her 17-year-old child in 2011. The sole proprietor's self-employment income would be reduced by $4,750, a saving of $137.75 (the 2.9% health insurance portion of the self-employment tax he or she would have paid on the $4,750 shifted to the child). This doesn't take into account a sole proprietor's income tax deduction for one-half of his or her own Social Security taxes. That's on top of the $268.38 (.0565 × $4,750) in employee FICA tax that the child saves by working for a parent instead of someone else. A similar but more liberal exemption applies for FUTA, which exempts earnings paid to a child under age 21 while employed by his or her parent (see Reg. §31.3306(c)(5)-1).
There is no FICA or FUTA tax exemption for employing a child in a corporation, even if it is controlled by the child's parent, or in a partnership that includes non-parent partners. The children are subject to the same rules that apply to all other employees.
Income tax withholding. Regardless of how the family business is organized, it probably will have to withhold federal income taxes on the child's wages. Usually, an employee who had no federal income tax liability for the prior year, and expects to have none for the current year, can claim exempt status. However, exemption from withholding can't be claimed if: (1) the employee's income exceeds $950 and includes more than $300 of unearned income (such as dividends), and (2) the employee may be claimed as a dependent on someone else's return (whether or not the child is actually claimed as a dependent). Keep in mind that the child probably will get a refund for part or all of the withheld tax when he or she files a personal income tax return for the year.
Payments for domestic work in a parent's home are not subject to withholding tax. Withholding from remuneration for “services not in the course of the employer's trade or business” is only required if $50 or more cash remuneration is paid for such services performed by the child in the calendar quarter, and the child is regularly employed by the parent to perform the services (see Code Sec. 3401(a)(4)).
FICA and FUTA taxes. Employment for FICA tax purposes doesn't include services performed by a child under the age of 18 while employed by a parent in a trade or business that is a sole proprietorship, or a partnership in which each partner is a parent of the child (see Code Sec. 3121(b)(3)(A) ). This can generate some employment tax savings for the parent. For example, let's say a sole proprietor who averages $120,000 of earnings from the business pays $4,750 to his or her 17-year-old child in 2011. The sole proprietor's self-employment income would be reduced by $4,750, a saving of $137.75 (the 2.9% health insurance portion of the self-employment tax he or she would have paid on the $4,750 shifted to the child). This doesn't take into account a sole proprietor's income tax deduction for one-half of his or her own Social Security taxes. That's on top of the $268.38 (.0565 × $4,750) in employee FICA tax that the child saves by working for a parent instead of someone else. A similar but more liberal exemption applies for FUTA, which exempts earnings paid to a child under age 21 while employed by his or her parent (see Reg. §31.3306(c)(5)-1).
There is no FICA or FUTA tax exemption for employing a child in a corporation, even if it is controlled by the child's parent, or in a partnership that includes non-parent partners. The children are subject to the same rules that apply to all other employees.
IRS Panel Discusses Employment Tax Return Examination Process
On June 22, the IRS conducted a webinar called “The Examination Process for Employment Tax Returns.” The webinar was conducted by a panel of four experts, including Anita Bartels, IRS Program Manager in Employment Tax Compliance Policy, and Laird Macmillan, IRS Senior Policy Analyst in Employment Tax Compliance Policy.
What triggers an audit? Bartels discussed some of the circumstances that might trigger an audit. For example, if an employer files many 1099 forms but only one Form W-2, that might trigger an audit. The IRS may also look closely at an S corporation income tax return that reports very little compensation but has a lot of distributions. A Form W-2 and Form 1099 issued to the same person might also pique the IRS's interest, but it possible for a person to receive both of these forms if he or she performs more than one service for the company. Bartels mentioned that some small businesses make the mistake of reporting a bonus to an employee on Form 1099 that should have been reported on Form W-2. Industry trends might also trigger an audit.
Accountable plan. Worker classification (employee vs. independent contractor) is generally a hot employment tax return examination topic, along with whether an employer has a legitimate accountable plan. Reimbursements (e.g., a mileage or tool allowance) are tax-free to the employee and aren't subject to withholding or payroll taxes if made under an accountable plan. To be treated as made under an accountable plan, a reimbursement must meet all of the following requirements: (1) the reimbursed expense must be allowable as an income tax deduction and must be paid or incurred in connection with performing services as an employee of the employer (business connection), (2) each reimbursed expense must be adequately accounted for to the employer within a reasonable period of time (substantiation), and (3) any amounts in excess of expenses must be returned within a reasonable period of time (return of excess requirement) [Reg. §1.62-2].
Michael M. Lloyd, who works for the law firm of Miller & Chevalier, said that the accountable plan issue comes up in almost every employment tax audit that his firm participates in. If the IRS determines that an employer did not have a valid accountable plan, all of the reimbursements will be reclassified as taxable compensation that is subject to withholding taxes.
State ramifications. The results of an IRS examination are shared with many state workforce agencies as part of the Questionable Employment Tax Practice (QETP) initiative. More than 35 states have entered into individual information-sharing agreements with the IRS.
Further information. There are many resources available to help employers obtain a better understanding of the IRS examination process. IRS Publication 3498 , The Examination Process, includes the following topics: (1) “Your Return Is Going To Be Examined,” (2) “What to Do When You Receive a Bill from the IRS,” (3) “What To Do if You Agree or Disagree with the Examination Results,” (4) “How Do You Appeal a Decision?,” and (5) “After the Examination.” Page 11 of IRS Publication 594, The IRS Collection Process, has information on the collection of employment taxes. There is a video on the IRS Video Portal called “Your Guide to an IRS Audit.”
The June 22 webinar will be archived on the IRS website.
What triggers an audit? Bartels discussed some of the circumstances that might trigger an audit. For example, if an employer files many 1099 forms but only one Form W-2, that might trigger an audit. The IRS may also look closely at an S corporation income tax return that reports very little compensation but has a lot of distributions. A Form W-2 and Form 1099 issued to the same person might also pique the IRS's interest, but it possible for a person to receive both of these forms if he or she performs more than one service for the company. Bartels mentioned that some small businesses make the mistake of reporting a bonus to an employee on Form 1099 that should have been reported on Form W-2. Industry trends might also trigger an audit.
Accountable plan. Worker classification (employee vs. independent contractor) is generally a hot employment tax return examination topic, along with whether an employer has a legitimate accountable plan. Reimbursements (e.g., a mileage or tool allowance) are tax-free to the employee and aren't subject to withholding or payroll taxes if made under an accountable plan. To be treated as made under an accountable plan, a reimbursement must meet all of the following requirements: (1) the reimbursed expense must be allowable as an income tax deduction and must be paid or incurred in connection with performing services as an employee of the employer (business connection), (2) each reimbursed expense must be adequately accounted for to the employer within a reasonable period of time (substantiation), and (3) any amounts in excess of expenses must be returned within a reasonable period of time (return of excess requirement) [Reg. §1.62-2].
Michael M. Lloyd, who works for the law firm of Miller & Chevalier, said that the accountable plan issue comes up in almost every employment tax audit that his firm participates in. If the IRS determines that an employer did not have a valid accountable plan, all of the reimbursements will be reclassified as taxable compensation that is subject to withholding taxes.
State ramifications. The results of an IRS examination are shared with many state workforce agencies as part of the Questionable Employment Tax Practice (QETP) initiative. More than 35 states have entered into individual information-sharing agreements with the IRS.
Further information. There are many resources available to help employers obtain a better understanding of the IRS examination process. IRS Publication 3498 , The Examination Process, includes the following topics: (1) “Your Return Is Going To Be Examined,” (2) “What to Do When You Receive a Bill from the IRS,” (3) “What To Do if You Agree or Disagree with the Examination Results,” (4) “How Do You Appeal a Decision?,” and (5) “After the Examination.” Page 11 of IRS Publication 594, The IRS Collection Process, has information on the collection of employment taxes. There is a video on the IRS Video Portal called “Your Guide to an IRS Audit.”
The June 22 webinar will be archived on the IRS website.
Thursday, June 23, 2011
IRS Announcement 2011-40
Announcement 2011-40 advises the public that the Internal Revenue Service is revising the optional standard mileage rates for computing the deductible costs of operating an automobile for business, medical, or moving expense purposes and for determining the reimbursed amount of these expenses that is deemed substantiated. This modification results from recent increases in the price of fuel. The revised standard mileage rates are 55.5 cents per mile for business use of an automobile and 23.5 cents for use of an automobile as a medical or moving expense. The mileage rate for use of an automobile as a charitable contribution is fixed by statute and remains 14 cents. The revised standard mileage rates apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes on or after July 1, 2011, and to mileage allowances that are paid both (1) to an employee on or after July 1, 2011, and (2) for transportation expenses an employee pays or incurs on or after July 1, 2011.
Announcement 2011-40 will be published in Internal Revenue Bulletin 2011-29 on July 18, 2011.
Announcement 2011-40 will be published in Internal Revenue Bulletin 2011-29 on July 18, 2011.
IRS Increases Mileage Rate to 55.5 Cents per Mile
WASHINGTON — The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
The new rates are contained in Announcement 2011-40 on the optional standard mileage rates.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Mileage Rate Changes
Purpose Rates 1/1 through 6/30/11
Business — 51
Medical/Moving — 19
Charitable — 14
Rates 7/1 through 12/31/11
Business — 55.5
Medical/Moving — 23.5
Charitable — 14
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
The new rates are contained in Announcement 2011-40 on the optional standard mileage rates.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Mileage Rate Changes
Purpose Rates 1/1 through 6/30/11
Business — 51
Medical/Moving — 19
Charitable — 14
Rates 7/1 through 12/31/11
Business — 55.5
Medical/Moving — 23.5
Charitable — 14
Doing Business With the IRS?
How to prepare for an office audit.
by Wendy Kravit, CPA
In the case of an office audit, a taxpayer is typically sent a letter that his return has been selected for audit. The letter details the items on the return that are being examined and requests that the taxpayer produce specific records pertaining to those items in person at an Internal Revenue Service (IRS) office at a specified time on a particular date.
The date and time of the audit is easily changed. The IRS does not expect most people to be available at the random date and time that it chose to put on the letter. Therefore, there is no negative connotation placed upon a taxpayer or representative who calls to change the appointment.
An Overview of the Typical IRS Office Audit
Prior to meeting with the taxpayer or his representative, the IRS Tax Auditor should have inspected the return and the classification check sheet created during the classification process when the return was selected for audit. While the audits are often confined to the items on the classification checklist (which are the same items that are detailed in the letter to the taxpayer), IRM 4.10.2.6.1 instructs the auditor that the scope of the examination should not be limited to the classified items if other significant issues are revealed during the examination. Therefore, an audit may be expanded depending on what the auditor discovers. The IRM urges the auditor to get managerial permission before expanding the scope of the audit. If the scope of the audit is expanded to another tax period, the taxpayer is to be notified in writing.
Office audits are not as complex as field examinations. Most office audits are allotted initial time slots of a few hours. The examiner has a worksheet that he will fill out upon examining the evidence that the taxpayer or representative presents for the items listed on the audit letter.
Preparing for an Office Audit
Generally, the meeting at the IRS office is fairly informal and relaxed. Most office audits do not involve complex issues and the auditor is verifying gross income and documentation to verify deductions. The auditor has to complete a form to create his report. He uses Form 4700 to record what he has seen and verified. The key to a successful office audit outcome is organization. A representative should have thoroughly reviewed all documentation that will be presented to the auditor. If there are multiple receipts to verify a particular expense, they should be organized together preferably with an adding machine tape to show the totals. The auditor may test some of the tapes to verify the accuracy.
Common areas for an office audit include itemized deductions, employee business deductions, and less complex Schedule C and Schedule E issues.
The representative should have a copy of the Power of Attorney (POA) with him even if it has already been submitted. The POA should include all open tax years for the taxpayer. If the auditor finds a significant issue in one year, he is very likely to look at the same issue in any other years that are currently open by statute.
The auditor will generally go through his check sheet. If there is disagreement between the representative and the auditor regarding the final audit findings, the representative may request a meeting with the auditor’s manager. If no adjustments are made, the case will be closed and a “no change” letter will be issued to the taxpayer. If there are adjustments to be made to the return, obtain a copy of the report and review it with the taxpayer. Do not sign reports on behalf of your client, always discuss the report with the client and, if agreed, have the client sign the report.
If the taxpayer agrees with the adjustment, he may sign and pay the tax immediately or sign the form, consenting to the assessment and wait for a bill. If the total amount due is less than $100,000, the taxpayer will have 21 calendar days to pay the bill without incurring additional interest. If the amount is at least $100,000 or more, he may pay the bill within 10 business days without incurring additional interest charges.
Handling Audit Disagreements
IRS Publication 556 outlines taxpayer appeal options.
As mentioned earlier, the first step to be taken to resolve a disagreement with the auditor is to meet with the auditor’s manager. However, if that resolution is not satisfactory, there are different options available depending upon the amount of money in dispute. The examiner will write up the case explaining your objection and close it out. A case is closed subject to managerial approval.
The taxpayer will receive a “30-day letter.” The letter proposes the adjustments that the auditor found and requests that the taxpayer either sign his agreement to the assessment of the additional tax or request an appeal.
If the taxpayer does not respond to the 30-day letter, he will receive a “90-day letter.” The 90- day letter is a “statutory notice of deficiency.” It contains information and instructions for filing a Tax Court petition. If the taxpayer does not respond to the 90-day letter and does not file a tax court petition, the tax will be assessed.
Field Examinations
Field examinations are handled by revenue agents and are generally more complex audits involving a business. Usually these are done at either the taxpayer’s place of business or the representative’s office. The taxpayer may be initially contacted by the agent by telephone or letter, depending on the practices of that area. Once a Power of Attorney has been submitted to the IRS all communications should be done through the representative.
The agent will submit a rather exhaustive request of books and records that he wants to examine to the taxpayer on an IDR, Information Document Request Form. Obviously, he will not be able to examine all of those records on the first day, so it is not unreasonable to ask him which records he really expects to be examining for that first day. Assuming the audit will take more than one day, he will typically issue a new IDR at the end of that first day detailing more specific records requests.
Often an issue arises because the revenue agent wants to speak to the taxpayer even though the representative has a valid Power of Attorney on file.
IRM 4.10.1.6.1 states that “Honoring a valid power-of-attorney submitted by a taxpayer is always required unless the criteria for bypassing the power-of-attorney has been met.”
Furthermore, IRM 4.10.4.3.3.2 provides the following information to IRS auditors:
Internal Revenue Code section 7521(c) states that an examiner cannot require a taxpayer to accompany an authorized representative to an examination interview in the absence of an administrative summons. However, the taxpayer’s voluntary presence can be requested through the representative as a means to expedite the examination process.
Should an examiner find that a representative has unreasonably delayed or hindered an examination, an examiner can bypass the representative and deal directly with the taxpayer.
Revenue agents are trained to request an interview with the taxpayer. However, if the representative is well prepared and knowledgeable about the taxpayer’s business and sources of income such a meeting should not be necessary.
The initial interview will include questions concerning possible nontaxable sources of funds as well as unreported sources of income. Therefore, the representative should be familiar enough with his client’s financial picture to be able to answer questions regarding loans, family gifts, inheritances and so on.
IRM 4.10.1.3.3.3 instructs the auditor to conduct a tour of the business site. The agent is instructed to visit the principal location and any other locations acquired during the period under examination. This is not required for office audits, although a visit may be conducted if appropriate. The purpose of the tour is for the revenue agent to gain familiarity with the taxpayer’s business operations and internal controls, identify potential sources of unreported income and to confirm the existence of assets.
Field audits of small businesses usually last several days or longer, depending upon the complexity of the business. The agent will have conducted a survey of the return before the visit; however, he will determine the scope of the audit based upon the initial interview and subsequent findings.
This article has been excerpted from The Adviser’s Guide to Doing Business With the IRS. You can purchase the publication at cpa2biz.com.
by Wendy Kravit, CPA
In the case of an office audit, a taxpayer is typically sent a letter that his return has been selected for audit. The letter details the items on the return that are being examined and requests that the taxpayer produce specific records pertaining to those items in person at an Internal Revenue Service (IRS) office at a specified time on a particular date.
The date and time of the audit is easily changed. The IRS does not expect most people to be available at the random date and time that it chose to put on the letter. Therefore, there is no negative connotation placed upon a taxpayer or representative who calls to change the appointment.
An Overview of the Typical IRS Office Audit
Prior to meeting with the taxpayer or his representative, the IRS Tax Auditor should have inspected the return and the classification check sheet created during the classification process when the return was selected for audit. While the audits are often confined to the items on the classification checklist (which are the same items that are detailed in the letter to the taxpayer), IRM 4.10.2.6.1 instructs the auditor that the scope of the examination should not be limited to the classified items if other significant issues are revealed during the examination. Therefore, an audit may be expanded depending on what the auditor discovers. The IRM urges the auditor to get managerial permission before expanding the scope of the audit. If the scope of the audit is expanded to another tax period, the taxpayer is to be notified in writing.
Office audits are not as complex as field examinations. Most office audits are allotted initial time slots of a few hours. The examiner has a worksheet that he will fill out upon examining the evidence that the taxpayer or representative presents for the items listed on the audit letter.
Preparing for an Office Audit
Generally, the meeting at the IRS office is fairly informal and relaxed. Most office audits do not involve complex issues and the auditor is verifying gross income and documentation to verify deductions. The auditor has to complete a form to create his report. He uses Form 4700 to record what he has seen and verified. The key to a successful office audit outcome is organization. A representative should have thoroughly reviewed all documentation that will be presented to the auditor. If there are multiple receipts to verify a particular expense, they should be organized together preferably with an adding machine tape to show the totals. The auditor may test some of the tapes to verify the accuracy.
Common areas for an office audit include itemized deductions, employee business deductions, and less complex Schedule C and Schedule E issues.
The representative should have a copy of the Power of Attorney (POA) with him even if it has already been submitted. The POA should include all open tax years for the taxpayer. If the auditor finds a significant issue in one year, he is very likely to look at the same issue in any other years that are currently open by statute.
The auditor will generally go through his check sheet. If there is disagreement between the representative and the auditor regarding the final audit findings, the representative may request a meeting with the auditor’s manager. If no adjustments are made, the case will be closed and a “no change” letter will be issued to the taxpayer. If there are adjustments to be made to the return, obtain a copy of the report and review it with the taxpayer. Do not sign reports on behalf of your client, always discuss the report with the client and, if agreed, have the client sign the report.
If the taxpayer agrees with the adjustment, he may sign and pay the tax immediately or sign the form, consenting to the assessment and wait for a bill. If the total amount due is less than $100,000, the taxpayer will have 21 calendar days to pay the bill without incurring additional interest. If the amount is at least $100,000 or more, he may pay the bill within 10 business days without incurring additional interest charges.
Handling Audit Disagreements
IRS Publication 556 outlines taxpayer appeal options.
As mentioned earlier, the first step to be taken to resolve a disagreement with the auditor is to meet with the auditor’s manager. However, if that resolution is not satisfactory, there are different options available depending upon the amount of money in dispute. The examiner will write up the case explaining your objection and close it out. A case is closed subject to managerial approval.
The taxpayer will receive a “30-day letter.” The letter proposes the adjustments that the auditor found and requests that the taxpayer either sign his agreement to the assessment of the additional tax or request an appeal.
If the taxpayer does not respond to the 30-day letter, he will receive a “90-day letter.” The 90- day letter is a “statutory notice of deficiency.” It contains information and instructions for filing a Tax Court petition. If the taxpayer does not respond to the 90-day letter and does not file a tax court petition, the tax will be assessed.
Field Examinations
Field examinations are handled by revenue agents and are generally more complex audits involving a business. Usually these are done at either the taxpayer’s place of business or the representative’s office. The taxpayer may be initially contacted by the agent by telephone or letter, depending on the practices of that area. Once a Power of Attorney has been submitted to the IRS all communications should be done through the representative.
The agent will submit a rather exhaustive request of books and records that he wants to examine to the taxpayer on an IDR, Information Document Request Form. Obviously, he will not be able to examine all of those records on the first day, so it is not unreasonable to ask him which records he really expects to be examining for that first day. Assuming the audit will take more than one day, he will typically issue a new IDR at the end of that first day detailing more specific records requests.
Often an issue arises because the revenue agent wants to speak to the taxpayer even though the representative has a valid Power of Attorney on file.
IRM 4.10.1.6.1 states that “Honoring a valid power-of-attorney submitted by a taxpayer is always required unless the criteria for bypassing the power-of-attorney has been met.”
Furthermore, IRM 4.10.4.3.3.2 provides the following information to IRS auditors:
Internal Revenue Code section 7521(c) states that an examiner cannot require a taxpayer to accompany an authorized representative to an examination interview in the absence of an administrative summons. However, the taxpayer’s voluntary presence can be requested through the representative as a means to expedite the examination process.
Should an examiner find that a representative has unreasonably delayed or hindered an examination, an examiner can bypass the representative and deal directly with the taxpayer.
Revenue agents are trained to request an interview with the taxpayer. However, if the representative is well prepared and knowledgeable about the taxpayer’s business and sources of income such a meeting should not be necessary.
The initial interview will include questions concerning possible nontaxable sources of funds as well as unreported sources of income. Therefore, the representative should be familiar enough with his client’s financial picture to be able to answer questions regarding loans, family gifts, inheritances and so on.
IRM 4.10.1.3.3.3 instructs the auditor to conduct a tour of the business site. The agent is instructed to visit the principal location and any other locations acquired during the period under examination. This is not required for office audits, although a visit may be conducted if appropriate. The purpose of the tour is for the revenue agent to gain familiarity with the taxpayer’s business operations and internal controls, identify potential sources of unreported income and to confirm the existence of assets.
Field audits of small businesses usually last several days or longer, depending upon the complexity of the business. The agent will have conducted a survey of the return before the visit; however, he will determine the scope of the audit based upon the initial interview and subsequent findings.
This article has been excerpted from The Adviser’s Guide to Doing Business With the IRS. You can purchase the publication at cpa2biz.com.
Wednesday, June 22, 2011
IRS Advisory Panel Offers Recommendations Related To Tax-Exempt And Government Entities
The IRS Advisory Committee on Tax Exempt and Government Entities (ACT) presented final recommendations and its annual report at a June 15 public meeting. The year-long projects that culminated in the recommendations covered topics related to the following: tax-exempt bonds; federal, state, and local governments; Indian tribal governments; exempt organizations; and employee plans. The ACT report and recommendations are available at http://www.irs.gov/pub/irs-tege/tege_act_rpt10.pdf.
IRS Names Low Income Taxpayer Clinic Grant Recipients
IRS has awarded $10 million in matching Low Income Taxpayer Clinic (LITC) grants to 165 organizations for the 2011 grant cycle. (IR 2011-65) The grant cycle covers calendar year 2011. As described by the agency, LITCs are organizations that represent low-income taxpayers in federal tax controversies with IRS at no cost or for a nominal charge. They also may offer tax education and outreach for taxpayers who speak English as a second language. IRS awards matching grants of up to $100,000 a year to qualifying organizations. Additional information, including the names of grantees, is located at http://www.irs.gov/newsroom/article/0,,id=240433,00.html.
TIGTA Finds IRS Does Not Have A Perfect Record Regarding Seizure Provisions Of The Code
IRS does not always comply with the seizure provisions of Code Sec. 6330 through Code Sec. 6344, the Treasury Inspector General for Tax Administration (TIGTA) said in a recent audit. (Audit Report No. 2011-30-049) TIGTA arrived at this conclusion after reviewing a random sample of 50 of the 578 seizures conducted from July 1, 2009, through June 30, 2010. In the majority of seizures, the agency followed all legal and internal guidelines, the audit said, adding that TIGTA was unable to identify any cases in which taxpayers were adversely affected. However, auditors found instances in which the amount of the liability for which the seizure was made was not the amount on the notice of seizure. In addition, there were cases where the sale of the seized property was not advertised as required. “When legal and internal guidelines are not followed, it could result in the abuse of taxpayers' rights,” TIGTA said. The audit noted that in recent years, IRS has “implemented procedures and controls significantly improving compliance with legal and internal guidelines.” The audit can be found at http://www.treasury.gov/tigta/auditreports/2011reports/201130049fr.pdf.
Tax Breaks Are Available For Travelers Who Mix A Bit Of Pleasure With Their Business Travel
Although video conferencing has made inroads in the ranks of business travelers, there still are many situations where it's necessary to travel away-from-home overnight for face-to-face meetings with staff, management, or customers. Businesspeople or professional who must travel for work reasons should keep in mind that they may be able to qualify for a travel bargain by piggybacking a vacation onto an out-of-town business trip. In effect, the business traveler gets free vacation airfare if the trip is set up the right way. And if the travel is undertaken for an employer, a properly set up reimbursement arrangement for the business portion of the trip will be income- and payroll-tax-free. This Practice Alert takes a closer look at how this combination works for domestic travel, along with a review of other business travel strategies that may yield personal savings. It doesn't cover some of the more specialized rules, such as those that apply to travelers in the transportation industry, or the per diem reimbursement rules.
Deductions for trip undertaken primarily for business. A taxpayer who mixes a bit of pleasure with business while away from home nonetheless may deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. (Reg. §1.162-2(b)(1)) The cost of lodging plus 50% of meals while on business status is deductible. Additionally, if the traveler is an employee reimbursed for all expenses under an accountable plan that requires a timely accounting of the time, place, and business purpose of the travel, plus receipts, the reimbursement is tax-free to the traveler (but the personal portion of the trip yields no tax benefit to the traveler).
Observation: In effect, the 100% deduction for the round-trip travel costs works as a kind of tax subsidy for a personal vacation, or as a partially tax-free perk.
Illustration 1: Jane, a self-employed information technology specialist, flies from the East Coast to Los Angeles for a 5-day business trip. She takes in three days of vacation and sight-seeing after the business part of the trip is over.
Result: Because Jane can deduct the entire air fare, part of her mini-vacation is, in effect, subsidized by the tax break.
Illustration 2: The facts are the same as in illustration (1), except that Jane is employed by a corporation that reimburses her for the business portion of the trip after she submits detailed records and receipts. She pays for the personal portion of the trip (meals and lodging during the three personal days).
Result: Under the accountable plan rules, the reimbursement for the round-trip airfare (as well as for meals and lodging while on business status) is tax-free to Jane, and is not subject to FICA or income tax withholding. (Reg. §1.62-2(c)(2)(i), Reg. §1.62-2(d)(1)) That's true even though she took a mini-vacation after her business trip ended. The corporation deducts the travel costs it pays (but only 50% of the cost of meals is deductible).
Illustration 3: The facts are the same as in illustration (2), except that the corporation reimburses Jane for the cost of the entire trip, including the 3-day mini-vacation.
Result: Her cost for the personal portion of the trip consists of the tax she pays on the personal portion's value (hotel, meals, etc.), which must be treated as compensation income. The corporation's deduction consists of 50% of the meal costs while Jane is on business travel status, 100% of the round-trip air fare, 100% of the lodging costs while she is on travel status, and (assuming that her entire compensation package is “reasonable”) 100% of the cost of the mini-vacation since that was treated as compensation paid to Jane.
When is a trip treated as undertaken primarily for business? There is no hard-and-fast rule. It depends on the facts and circumstances of each case. The regs do say, however, that the way travelers split their time between business and personal pursuits is “an important factor.” (Reg. §1.162-2(b)(2))
Illustration 4: Fred works in Atlanta and travels to New Orleans on business. On his way home, he stops in Mobile to visit his parents. During the nine days he is away from home, he spends $1,999 for travel, meals, lodging, and other travel expenses. Had he not stopped in Mobile, Fred would have been away from home for only six days and his trip would have cost only $1,699.
Result: Fred can deduct $1,699 for his trip, including the round-trip transportation to and from New Orleans. The 50% deduction limit applies to his meals while on business status. (IRS Pub. 463 (2010), p. 6)
Observation: As is evident from illustration (4), the personal part of a trip need not occur at the business destination. It can take place on the way home from the business destination (or, for that matter, en route to the business destination).
Caution: Taxpayers who make a stop for personal reasons en route to a business location or on the way home should be sure to keep records of what their round-trip transportation costs would have been without the personal stop.
Saturday night stayovers. Although an employee's out-of-town business chores conclude on Friday, he may extend his business trip to take advantage of a low-priced fare requiring a Saturday night stayover, where the savings in airfare are higher than the costs of the weekend meals and lodging. The employee doesn't pay tax on the reimbursement for his Saturday meal and lodging expenses. (PLR 9237014) In this case, IRS said that under a “common sense test,” payments to the employee for the Saturday stay were deductible if a “hardheaded business person would have incurred such expenses under like circumstances.”
When a personal day may not be a personal day. An away-from-home business trip may straddle a weekend. For example, a traveler may have to attend business meetings on Thursday, Friday, and Monday. He is too far away to travel home and then come back (and besides, the trip back and forth would cost more than staying put), so he spends the weekend relaxing at the out-of-town location. Because he must remain at the location for business reasons, the weekend days (Saturday and Sunday) should under the “common sense test” be treated as business days the expenses for which are deductible (50% of meal costs, 100% for other expenses) or excludible if the traveler is reimbursed under an accountable plan. Note that in the context of foreign travel, IRS Pub. 463 (2010), p. 8, treats such standby days as business days.
Tax break for weekend travel home. A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with family or friends. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location. Note, however, that this rule applies only if the traveler checks out of the out-of-town hotel before leaving for the weekend trip home, and then re-registers. If the traveler retains the hotel room, its cost is deductible, but the deduction for the weekend trip home (i.e., the air fare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location. (IRS Pub. 463 (2010), p. 4)
Tax breaks when spouse or companion comes along. The expenses of a spouse or other companion accompanying a traveler aren't deductible unless (1) the spouse or other companion is an employee of the taxpayer and travels for a bona fide business purpose, and (2) the expenses would otherwise be deductible by the spouse or other companion. (Code Sec. 274(m)(3)) Nevertheless, even if the spouse's or other companion's travel expenses aren't deductible, a tax benefit may still be salvaged from traveling together. That's because the business traveler's deduction isn't based on 50% of the trip expenses. The deduction is based on what it would have cost the taxpayer to travel alone. (Rev Rul 56-168, 1956-1 CB 93) This rule can be a money saver on accommodations. For example, where the cost of a hotel room is $200 for one occupant and $149 for two, a taxpayer on business status may deduct $149 per night, not $100, when he gets a room for two. (IRS Pub. 463 (2010), p. 5)
Similarly, where the taxpayer travels out of town on business via rental car, and his spouse or other companion accompanies him for nonbusiness purposes, the entire cost of the rental is deductible, because the cost would have been the same for the taxpayer even if his spouse did not join him on the trip. (Pohl, Kenneth, (1990) TC Memo 1990-298, PH TCM ¶90298, IRS Pub. 463 (2010), p. 5)
Observation: For client letters related to business travel, see FTC Client Letters ¶2130 (business travel away from home within the U.S.), and FTC Client Letters ¶2133 (deducting the costs of a spouse on a business trip).
Deductions for trip undertaken primarily for business. A taxpayer who mixes a bit of pleasure with business while away from home nonetheless may deduct all of the round-trip transportation costs as long as the trip was undertaken primarily for business reasons. (Reg. §1.162-2(b)(1)) The cost of lodging plus 50% of meals while on business status is deductible. Additionally, if the traveler is an employee reimbursed for all expenses under an accountable plan that requires a timely accounting of the time, place, and business purpose of the travel, plus receipts, the reimbursement is tax-free to the traveler (but the personal portion of the trip yields no tax benefit to the traveler).
Observation: In effect, the 100% deduction for the round-trip travel costs works as a kind of tax subsidy for a personal vacation, or as a partially tax-free perk.
Illustration 1: Jane, a self-employed information technology specialist, flies from the East Coast to Los Angeles for a 5-day business trip. She takes in three days of vacation and sight-seeing after the business part of the trip is over.
Result: Because Jane can deduct the entire air fare, part of her mini-vacation is, in effect, subsidized by the tax break.
Illustration 2: The facts are the same as in illustration (1), except that Jane is employed by a corporation that reimburses her for the business portion of the trip after she submits detailed records and receipts. She pays for the personal portion of the trip (meals and lodging during the three personal days).
Result: Under the accountable plan rules, the reimbursement for the round-trip airfare (as well as for meals and lodging while on business status) is tax-free to Jane, and is not subject to FICA or income tax withholding. (Reg. §1.62-2(c)(2)(i), Reg. §1.62-2(d)(1)) That's true even though she took a mini-vacation after her business trip ended. The corporation deducts the travel costs it pays (but only 50% of the cost of meals is deductible).
Illustration 3: The facts are the same as in illustration (2), except that the corporation reimburses Jane for the cost of the entire trip, including the 3-day mini-vacation.
Result: Her cost for the personal portion of the trip consists of the tax she pays on the personal portion's value (hotel, meals, etc.), which must be treated as compensation income. The corporation's deduction consists of 50% of the meal costs while Jane is on business travel status, 100% of the round-trip air fare, 100% of the lodging costs while she is on travel status, and (assuming that her entire compensation package is “reasonable”) 100% of the cost of the mini-vacation since that was treated as compensation paid to Jane.
When is a trip treated as undertaken primarily for business? There is no hard-and-fast rule. It depends on the facts and circumstances of each case. The regs do say, however, that the way travelers split their time between business and personal pursuits is “an important factor.” (Reg. §1.162-2(b)(2))
Illustration 4: Fred works in Atlanta and travels to New Orleans on business. On his way home, he stops in Mobile to visit his parents. During the nine days he is away from home, he spends $1,999 for travel, meals, lodging, and other travel expenses. Had he not stopped in Mobile, Fred would have been away from home for only six days and his trip would have cost only $1,699.
Result: Fred can deduct $1,699 for his trip, including the round-trip transportation to and from New Orleans. The 50% deduction limit applies to his meals while on business status. (IRS Pub. 463 (2010), p. 6)
Observation: As is evident from illustration (4), the personal part of a trip need not occur at the business destination. It can take place on the way home from the business destination (or, for that matter, en route to the business destination).
Caution: Taxpayers who make a stop for personal reasons en route to a business location or on the way home should be sure to keep records of what their round-trip transportation costs would have been without the personal stop.
Saturday night stayovers. Although an employee's out-of-town business chores conclude on Friday, he may extend his business trip to take advantage of a low-priced fare requiring a Saturday night stayover, where the savings in airfare are higher than the costs of the weekend meals and lodging. The employee doesn't pay tax on the reimbursement for his Saturday meal and lodging expenses. (PLR 9237014) In this case, IRS said that under a “common sense test,” payments to the employee for the Saturday stay were deductible if a “hardheaded business person would have incurred such expenses under like circumstances.”
When a personal day may not be a personal day. An away-from-home business trip may straddle a weekend. For example, a traveler may have to attend business meetings on Thursday, Friday, and Monday. He is too far away to travel home and then come back (and besides, the trip back and forth would cost more than staying put), so he spends the weekend relaxing at the out-of-town location. Because he must remain at the location for business reasons, the weekend days (Saturday and Sunday) should under the “common sense test” be treated as business days the expenses for which are deductible (50% of meal costs, 100% for other expenses) or excludible if the traveler is reimbursed under an accountable plan. Note that in the context of foreign travel, IRS Pub. 463 (2010), p. 8, treats such standby days as business days.
Tax break for weekend travel home. A business traveler on an extended out-of-town assignment may decide to fly home for a weekend to be with family or friends. The cost of the weekend trip home is deductible up to the amount the traveler would have spent on meals and lodging at the out-of-town location. Note, however, that this rule applies only if the traveler checks out of the out-of-town hotel before leaving for the weekend trip home, and then re-registers. If the traveler retains the hotel room, its cost is deductible, but the deduction for the weekend trip home (i.e., the air fare) is limited to what the traveler would have spent on meals during the weekend at the out-of-town location. (IRS Pub. 463 (2010), p. 4)
Tax breaks when spouse or companion comes along. The expenses of a spouse or other companion accompanying a traveler aren't deductible unless (1) the spouse or other companion is an employee of the taxpayer and travels for a bona fide business purpose, and (2) the expenses would otherwise be deductible by the spouse or other companion. (Code Sec. 274(m)(3)) Nevertheless, even if the spouse's or other companion's travel expenses aren't deductible, a tax benefit may still be salvaged from traveling together. That's because the business traveler's deduction isn't based on 50% of the trip expenses. The deduction is based on what it would have cost the taxpayer to travel alone. (Rev Rul 56-168, 1956-1 CB 93) This rule can be a money saver on accommodations. For example, where the cost of a hotel room is $200 for one occupant and $149 for two, a taxpayer on business status may deduct $149 per night, not $100, when he gets a room for two. (IRS Pub. 463 (2010), p. 5)
Similarly, where the taxpayer travels out of town on business via rental car, and his spouse or other companion accompanies him for nonbusiness purposes, the entire cost of the rental is deductible, because the cost would have been the same for the taxpayer even if his spouse did not join him on the trip. (Pohl, Kenneth, (1990) TC Memo 1990-298, PH TCM ¶90298, IRS Pub. 463 (2010), p. 5)
Observation: For client letters related to business travel, see FTC Client Letters ¶2130 (business travel away from home within the U.S.), and FTC Client Letters ¶2133 (deducting the costs of a spouse on a business trip).
E-Filing Advisory Committee's Report To Congress Urges Boosted E-Filing Of Employment Tax Returns
The Electronic Tax Administration Advisory Committee (ETAAC) has filed its annual report to Congress. The 2011 report notes improvement in the e-filing rate, and, among other things, recommends a new push for e-filing of employment tax returns. It also cautions Congress to consider the impact of any new information reporting requirements on businesses, urges Code simplification, and criticizes Congress for its pattern of late-passed legislation.
Following are highlights of ETAAC's findings and suggestions:
... Back in’98, the IRS Restructuring and Reform Act of’98 (P.L. 105-206, 7/22/98) gave IRS a goal of having 80% of tax returns filed electronically by 2007. ETAAC reports that IRS actually is getting closer to achieving that goal. For 2011, it estimates a 65.8% e-file rate for all major return types, mostly driven by a 77.31% e-file rate for individuals. However, ETAAC critiqued IRS for its 15-20% e-file reject rate and called on it to enhance its collaborative efforts with the tax preparation industry to reduce the number of e-file rejections next filing season.
... IRS will achieve an 80% e-filing rate only if it manages to boost the e-filing rate for employment tax returns (Forms 940 and 941), which currently stands at about 24%. ETAAC's detailed recommendations include finding ways to simplify the e-filing process; developing incentives for tax filers, software developers, and services providers to adopt, promote, or increase the e-filing rate; and establishing an e-filing portal on IRS's website to enable employers to file Forms 940 and 941 without charge.
... ETAAC observes that Congress has legislatively reversed its expansion of certain 1099 reporting obligations because of the increased business burden. It recommends that any future consideration of expanded or accelerated information reporting fully evaluate the impact of acceleration on both taxpayers and businesses, especially small businesses that have limited resources. Consideration must also be given to IRS's readiness and the investment required to handle any significant increase or acceleration in electronically filed information returns.
... ETAAC renewed its call for “real tax reform and simplification,” such as simplifying the Code by consolidating the credits and deductions affecting low and middle income individuals and families. ETAAC also criticized Congress for its pattern of late passed tax legislation, which creates taxpayer anxiety and can prevent them from receiving their refunds as planned. It said that late legislation also adversely impacts states, and restricts the amount of time that both IRS and software developers have to program and test their systems.
Following are highlights of ETAAC's findings and suggestions:
... Back in’98, the IRS Restructuring and Reform Act of’98 (P.L. 105-206, 7/22/98) gave IRS a goal of having 80% of tax returns filed electronically by 2007. ETAAC reports that IRS actually is getting closer to achieving that goal. For 2011, it estimates a 65.8% e-file rate for all major return types, mostly driven by a 77.31% e-file rate for individuals. However, ETAAC critiqued IRS for its 15-20% e-file reject rate and called on it to enhance its collaborative efforts with the tax preparation industry to reduce the number of e-file rejections next filing season.
... IRS will achieve an 80% e-filing rate only if it manages to boost the e-filing rate for employment tax returns (Forms 940 and 941), which currently stands at about 24%. ETAAC's detailed recommendations include finding ways to simplify the e-filing process; developing incentives for tax filers, software developers, and services providers to adopt, promote, or increase the e-filing rate; and establishing an e-filing portal on IRS's website to enable employers to file Forms 940 and 941 without charge.
... ETAAC observes that Congress has legislatively reversed its expansion of certain 1099 reporting obligations because of the increased business burden. It recommends that any future consideration of expanded or accelerated information reporting fully evaluate the impact of acceleration on both taxpayers and businesses, especially small businesses that have limited resources. Consideration must also be given to IRS's readiness and the investment required to handle any significant increase or acceleration in electronically filed information returns.
... ETAAC renewed its call for “real tax reform and simplification,” such as simplifying the Code by consolidating the credits and deductions affecting low and middle income individuals and families. ETAAC also criticized Congress for its pattern of late passed tax legislation, which creates taxpayer anxiety and can prevent them from receiving their refunds as planned. It said that late legislation also adversely impacts states, and restricts the amount of time that both IRS and software developers have to program and test their systems.
Low-Income Housing Credit Requirements Are Suspended To Help Missouri Storm Victims
Notice 2011-47, 2011-27 IRB
In a Notice, IRS has suspended certain requirements under Code Sec. 42 for low-income housing credit projects as a result of the devastation caused by severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011.
Request for low-income housing relief. Missouri has asked, and IRS has agreed, to allow owners of low-income housing credit projects to provide temporary housing in vacant units to individuals who lived in areas of that state designated for individual assistance in Missouri by FEMA (Federal Emergency Management Agency) and who have been displaced because their residences were destroyed or damaged as a result of severe storms, tornadoes, and flooding (displaced individuals).
Relief for owners of low-income housing. Notice 2011-47 provides for:
... The suspension of income limits for low-income housing projects approved by the Missouri Housing Development Commission (Commission), in which vacant units are rented to displaced individuals. The Commission will determine the appropriate period of temporary housing for each project, not to extend beyond July 30, 2012 (temporary housing period). (Notice 2011-47)
... A displaced individual temporarily occupying a unit during the first year of the credit period will be deemed a qualified low-income tenant in determining the project's qualified basis under Code Sec. 42(c)(1) and in meeting the project's 20-50 test or 40-60 test under Code Sec. 42(g)(1). During the temporary housing period established by the Commission, the status of a vacant unit (i.e., market-rate, low-income, or never previously occupied) after the first year of the credit period that becomes temporarily occupied by a displaced individual remains the same as the unit's status before the displaced individual moved in. (Notice 2011-47, Sec. II)
... The suspension of the non-transient use requirement of Code Sec. 42(i)(3)(B)(i) for any unit providing temporary housing to a displaced individual during the temporary housing period determined by the Commission. (Notice 2011-47, Sec. III)
To qualify for relief, the following requirements must be met: (1) the displaced individual must have resided in a jurisdiction designated for Individual Assistance by FEMA as a result of the severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011; (2) the project owner must obtain approval for the relief from the Commission; (3) the project owner must maintain and certify certain information on each displaced individual temporarily housed in the project; (4) rents for the low-income units housing displaced individuals can't exceed the existing rent-restricted rates established under Code Sec. 42(g)(2); and (5) existing tenants in occupied low-income units cannot be evicted or have their tenancy terminated to provide temporary housing for displaced individuals. (Notice 2011-47, Sec. IV)
All other Code Sec. 42 rules and requirements continue to apply during the temporary housing period established by the Commission. After the end of that period, the applicable income limitations in Code Sec. 42(g)(1), the available unit rule under Code Sec. 42(g)(2)(D)(ii), the non-transient requirement of Code Sec. 42(i)(3)(B)(i), and the requirement to make reasonable attempts to rent vacant units to low-income individuals will resume. (Notice 2011-47, Sec. IV)
Effective date. Notice 2011-47 is effective May 9, 2011 (the date of the President's major disaster declarations as a result of the severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011).
References: For the low-income housing credit, see FTC 2d/FIN ¶L-15701; United States Tax Reporter ¶424; TaxDesk ¶383,001; TG ¶15200.
In a Notice, IRS has suspended certain requirements under Code Sec. 42 for low-income housing credit projects as a result of the devastation caused by severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011.
Request for low-income housing relief. Missouri has asked, and IRS has agreed, to allow owners of low-income housing credit projects to provide temporary housing in vacant units to individuals who lived in areas of that state designated for individual assistance in Missouri by FEMA (Federal Emergency Management Agency) and who have been displaced because their residences were destroyed or damaged as a result of severe storms, tornadoes, and flooding (displaced individuals).
Relief for owners of low-income housing. Notice 2011-47 provides for:
... The suspension of income limits for low-income housing projects approved by the Missouri Housing Development Commission (Commission), in which vacant units are rented to displaced individuals. The Commission will determine the appropriate period of temporary housing for each project, not to extend beyond July 30, 2012 (temporary housing period). (Notice 2011-47)
... A displaced individual temporarily occupying a unit during the first year of the credit period will be deemed a qualified low-income tenant in determining the project's qualified basis under Code Sec. 42(c)(1) and in meeting the project's 20-50 test or 40-60 test under Code Sec. 42(g)(1). During the temporary housing period established by the Commission, the status of a vacant unit (i.e., market-rate, low-income, or never previously occupied) after the first year of the credit period that becomes temporarily occupied by a displaced individual remains the same as the unit's status before the displaced individual moved in. (Notice 2011-47, Sec. II)
... The suspension of the non-transient use requirement of Code Sec. 42(i)(3)(B)(i) for any unit providing temporary housing to a displaced individual during the temporary housing period determined by the Commission. (Notice 2011-47, Sec. III)
To qualify for relief, the following requirements must be met: (1) the displaced individual must have resided in a jurisdiction designated for Individual Assistance by FEMA as a result of the severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011; (2) the project owner must obtain approval for the relief from the Commission; (3) the project owner must maintain and certify certain information on each displaced individual temporarily housed in the project; (4) rents for the low-income units housing displaced individuals can't exceed the existing rent-restricted rates established under Code Sec. 42(g)(2); and (5) existing tenants in occupied low-income units cannot be evicted or have their tenancy terminated to provide temporary housing for displaced individuals. (Notice 2011-47, Sec. IV)
All other Code Sec. 42 rules and requirements continue to apply during the temporary housing period established by the Commission. After the end of that period, the applicable income limitations in Code Sec. 42(g)(1), the available unit rule under Code Sec. 42(g)(2)(D)(ii), the non-transient requirement of Code Sec. 42(i)(3)(B)(i), and the requirement to make reasonable attempts to rent vacant units to low-income individuals will resume. (Notice 2011-47, Sec. IV)
Effective date. Notice 2011-47 is effective May 9, 2011 (the date of the President's major disaster declarations as a result of the severe storms, tornadoes, and flooding in Missouri beginning on Apr. 19, 2011).
References: For the low-income housing credit, see FTC 2d/FIN ¶L-15701; United States Tax Reporter ¶424; TaxDesk ¶383,001; TG ¶15200.
The Effect Of Mayo On The Precedential Value Of Regs And Other IRS Pronouncements
The Supreme Court's decision in Mayo Foundation v. U.S., (S Ct 1/11/2011) 107 AFTR 2d 2011-341, purported to resolve a long-standing dispute regarding the level of deference afforded to interpretive Treasury regs. This two-part Practice Alert examines various types of IRS pronouncements, their weight as authority, and their practical use to tax professionals and taxpayers. Part I, in this article, considers the effect of the Mayo case on their precedential value. Part II (see ¶43) continues the discussion of different types of IRS documents and also addresses which are “substantial authority” for purposes of the accuracy-related and return preparer penalties.
Regulations. These may be final (no prefix before the word “Reg.”), temporary (designated with the letter T in the citation), proposed (“Prop Reg”), or proposed reliance regs (designated as “Prop Reg... Taxpayers may rely”).
A final reg represents IRS's authoritative explanation and interpretation of a Code provision. Final regs sometimes are not amended until many years after enactment of tax laws (or court cases) that affect the subject of a final reg and, until then, may be of little use in interpreting a current Code provision.
Before the Supreme Court's decision in Mayo, the precedential value of a final reg depended on whether it was legislative (i.e., enacted pursuant to a specific grant of authority mandated by the Code itself) or interpretive (enacted under the IRS's general authority to issue Code-related rules and regs). Interpretive regs were typically subject to the standard set out in National Muffler, (S Ct 1979) 43 AFTR 2d 79-828, under which the reg was evaluated for whether it harmonized with the language, origin, and purpose of the statute, considering factors such as the consistency of IRS's interpretation and whether the reg was contemporaneous with the statute's enactment. Legislative regs were generally subject to “Chevron deference,” meaning that they were afforded controlling weight unless “arbitrary, capricious, or manifestly contrary to the statute.” (Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., (S Ct 1984) 467 U.S. 837) However, there was confusion among the courts and tax practitioners as to which standard governed interpretive regs following Chevron, especially in situations where IRS's authority to issue guidance was implicit (i.e., to address an ambiguity or fill in gaps in the enacted law). Many commentators reasoned that tax law was simply different from other types of law, and tax regs should continue to be analyzed under the National Muffler standard.
In early 2011, the Supreme Court spoke on the issue in the Mayo case. The Court clarified that Treasury regs, whether legislative or interpretive, that are issued under the Administrative Procedures Act's (APA's) “notice and comment” procedures (which was previously identified by the Supreme Court in Mead Corp., 553 US 218, as an indication that Chevron deference is warranted) and fall within the statutory grant of authority are entitled to Chevron deference. In so holding, the Court largely repudiated National Muffler and its factor-based test.
Observation: It's not completely clear, however, whether the National Muffler approach will still be viable for regs or other pronouncements that aren't subject to the notice and comment process.
However, despite the Supreme Court's seemingly clear pronouncement, subsequent case law has shown that there is still room for interpretation. For instance, there is currently a split among the courts as to the validity of regs stating that an overstatement of basis is an omission of income for purpose of the six-year limitations period under Code Sec. 6501(e)(1)(A). These retroactively effective regs were issued by IRS issued after a number of taxpayer victories on the issue. The Fourth Circuit, citing Mayo, stated that Chevron deference didn't apply to the reg since the underlying statute was unambiguous. (Home Concrete & Supply, LLC v. U.S., (CA 4 2/7/2011) 107 AFTR 2d 2011-767) The Tax Court, also citing Mayo, held that the Supreme Court's decision in Colony, Inc. v. Com., (S Ct 1958) 1 AFTR 2d 1894, that the extended limitations period applies to omissions and not overstatements, remained binding until clearly and unequivocally repudiated by IRS's regs. (Carpenter Family Investments, LLC, (2011) 136 TC No. 17) Thus, while Mayo has clarified a number of issues and arguably made it more difficult to challenge an IRS reg, its precise effect remains to be seen.
A temporary reg provides taxpayers with guidance they can follow pending issuance of final regs, and has the same precedential value as a final reg. (Temporary regs issued after Nov. 10,’88 expire three years after their issuance date, which is why they also must be issued as proposed regs.)
A proposed reg is issued to give taxpayers and practitioners notice of how IRS interprets a provision, and the opportunity to comment on and critique that interpretation. It has little precedential value. Courts have said proposed regs “carry no more weight than a position advanced on brief” and are “suggestions made for comment; they modify nothing.” The Court of Federal Claims similarly stated that “[i]n general, proposed regulations have no legal force or effect until they become final.” (Yocum v. U.S., (2006, Ct Fed Cl) 96 AFTR 2d 2005-5030)
Nevertheless, proposed regs are useful for tax planning. In many cases (although there have been notable exceptions), final regs follow the broad outline presented in proposed regs. One court has ruled that where a taxpayer relies on proposed regs, differing final regs cannot be imposed to his detriment. This was so even though the proposed regs were not ones IRS said the taxpayer could rely on. (Elkins, Paul, (1983) 81 TC 669) However, other courts have leaned the other way. For example, the Court of Appeals for the Federal Circuit held that where existing final regs provided an unfavorable result to a taxpayer while proposed amendments to those regs indicated a position more favorable to him, the taxpayer's reliance on the proposed regs wasn't justified. (Garvey Inc v. U.S., (1983, Cl Ct) 51 AFTR 2d 83-721, 1 Ct Cl 108, 83-1 USTC ¶9163, affd (1984, CA Fed Cir) 53 AFTR 2d 84-776, 726 F2d 1569, 84-1 USTC ¶9214)
A proposed reliance reg is one which states that taxpayers may rely on it, with any more stringent provisions in a later final reg to be effective only prospectively. These regs can be relied on as if they are final regs. In an infrequently used variation, IRS states that it will not challenge tax return positions that are consistent with a proposed reliance reg.
Revenue Ruling (“Rev Rul”). Rev Ruls are official interpretations by IRS that have been published in the Internal Revenue Bulletin (IRB) reflecting IRS's conclusion on how the law is applied to a specific set of facts. Because Rev Ruls are interpretive, IRS may issue then without complying with the notice and hearing requirements of the APA. (National Restaurant Assn. v. Simon, (1976, DC Dist Col) 37 AFTR 2d 76-1144) They are issued only by the Associate Office and are published for the information and guidance of taxpayers, IRS personnel, and others concerned. They may arise from various sources, e.g., private letter rulings to taxpayers, technical advice to district offices, or court decisions. Most Rev Ruls apply retroactively unless otherwise stated. (Code Sec. 7805(b)(8)) A Rev Rul's conclusions are limited to the pivotal facts stated in it.
Rev Ruls don't have the force and effect of regs, but may nonetheless be cited and relied on. (See Exxon Mobil Corp & Affiliated Co., (2011) 136 TC No. 5) Assuming that the facts and circumstances at issue are substantially the same as those in a Rev Rul, practitioners and their clients generally may rely on it and don't have to ask for a private ruling for their particular cases. However, Rev Ruls, like regs, can become outdated (e.g., by the passage of subsequent legislation) and may be modified or distinguished by subsequent rulings.
The Supreme Court stated in Skidmore v. Swift & Co., (1944) 323 U.S. 134, that it was not bound by Rev Ruls, and that the weight that they are afforded is dependent on their persuasiveness and the consistency of IRS's position over time. However, this standard has done little to resolve the precise level of deference afforded, and is often cited for the proposition that Rev Ruls are entitled to “some” deference. (See, e.g., U.S. v. Mead, (2001, Sup Ct) 533 U.S. 218)
Cases over the past decade have afforded Rev Ruls varying degrees of deference. For instance, in Ammex, Inc., (2004, CA6) 93 AFTR 2d 2004-2187, the Sixth Circuit held that Rev Ruls should get the same level of deference as regs, reasoning that they are issued in the same manner and under the same authority. (This reasoning is debated—commentators cite differences ranging from the submission of regs for public comment to who formulates and supervises each.) However, in PSB Holdings, Inc., (2007) 129 TC 131, the Tax Court stated that it isn't bound by an interpretation in a Rev Rul.
Revenue Procedure (“Rev Proc”). Rev Procs are statements of practice and procedure published in the IRB. They also are published in the Federal Register when required by the APA. They contain information that affects the rights or duties of taxpayers and other members of the public under the tax law and related statutes, or they contain information that should be made public even if it does not affect the rights and duties of the public. They address broad subjects such as accounting method changes, how to compute depreciation allowances, or how to obtain innocent-spouse equitable relief. The precedential value of a Rev Proc is the same as that of a Rev Rul. However, unlike Rev Ruls, Rev Procs fall outside of Code Sec. 7805(b) and apply prospectively.
Observation: Although Mayo didn't address the level of deference afforded to Rev Ruls or other similar types of IRS guidance, there was speculation following the decision that arguments advocating for such published rulings to receive Chevron deference would soon follow. However, on May 7, Gilbert, Rothenberg, appellate section chief in the Department of Justice's (DOJ's) Tax Division, announced that the DOJ would not argue that Chevron deference applies to Rev Ruls or Rev Procs.
Announcement (“Ann”) or Notice (“Not”). These address a timely topic of wide interest (e.g., extension of the period in which a Roth IRA can be recharacterized) and can be relied on and cited as precedent by taxpayers. IRS is bound to what it says in an Announcement or Notice to the same extent it would be with a Rev Rul or Rev Proc.
News release or information release (“IR”). This document is issued to the press to bring public attention to general-interest items, rather than items of a technical nature. IRS's statement of policy in an IR has been held to bind it in its dealings with taxpayers.
General Counsel Memorandum (“GCM”). This is a legal memo prepared by the IRS's Chief Counsel's Office in response to a formal request from within IRS ranks for legal advice. It can't be used or cited as precedent. Some courts have held that a GCM can be relied on for interpretive guidance, but IRS has resisted this conclusion. IRS stopped issuing GCMs after’95.
Observation: In a case of first impression, the Second Circuit relied substantially on what IRS had said in GCMs. It noted that while it wasn't giving precedential value to the GCMs cited, it was necessary to rely on them for interpretive advice. (Morganbesser v. U.S., (1993, CA2) 71 AFTR 2d 93-825) IRS subsequently nonacquiesced in the decision and revoked a GCM relied on in that case.
Action on Decision (“AOD”). This is a legal memo prepared by IRS Chief Counsel when IRS loses a court case. It sets forth the issue, a brief discussion of the facts, and the reasoning behind the recommendation to acquiesce (“acq,” follow) or nonacquiesce (“nonacq,” not follow) a decision, or to acquiesce in result only. IRS says that an AOD isn't an affirmative statement of its position, isn't intended to serve as public guidance and can't be cited as precedent. As a practical matter, acqs or nonacqs can be relied on (e.g., if the taxpayer's situation is the same as the one decided in a court case to which IRS has acquiesced, the taxpayer may assume his position won't be challenged by IRS).
Observation: However, in a December 2010 speech, Commissioner Douglas Shulman cautioned taxpayers not to “read too much” into IRS's AOD regarding the Tax Court's 2009 VERITAS transfer pricing decision (133 TC No. 14), stating that IRS's attorneys will continue to litigate these types of cases when appropriate to do so.
Regulations. These may be final (no prefix before the word “Reg.”), temporary (designated with the letter T in the citation), proposed (“Prop Reg”), or proposed reliance regs (designated as “Prop Reg... Taxpayers may rely”).
A final reg represents IRS's authoritative explanation and interpretation of a Code provision. Final regs sometimes are not amended until many years after enactment of tax laws (or court cases) that affect the subject of a final reg and, until then, may be of little use in interpreting a current Code provision.
Before the Supreme Court's decision in Mayo, the precedential value of a final reg depended on whether it was legislative (i.e., enacted pursuant to a specific grant of authority mandated by the Code itself) or interpretive (enacted under the IRS's general authority to issue Code-related rules and regs). Interpretive regs were typically subject to the standard set out in National Muffler, (S Ct 1979) 43 AFTR 2d 79-828, under which the reg was evaluated for whether it harmonized with the language, origin, and purpose of the statute, considering factors such as the consistency of IRS's interpretation and whether the reg was contemporaneous with the statute's enactment. Legislative regs were generally subject to “Chevron deference,” meaning that they were afforded controlling weight unless “arbitrary, capricious, or manifestly contrary to the statute.” (Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., (S Ct 1984) 467 U.S. 837) However, there was confusion among the courts and tax practitioners as to which standard governed interpretive regs following Chevron, especially in situations where IRS's authority to issue guidance was implicit (i.e., to address an ambiguity or fill in gaps in the enacted law). Many commentators reasoned that tax law was simply different from other types of law, and tax regs should continue to be analyzed under the National Muffler standard.
In early 2011, the Supreme Court spoke on the issue in the Mayo case. The Court clarified that Treasury regs, whether legislative or interpretive, that are issued under the Administrative Procedures Act's (APA's) “notice and comment” procedures (which was previously identified by the Supreme Court in Mead Corp., 553 US 218, as an indication that Chevron deference is warranted) and fall within the statutory grant of authority are entitled to Chevron deference. In so holding, the Court largely repudiated National Muffler and its factor-based test.
Observation: It's not completely clear, however, whether the National Muffler approach will still be viable for regs or other pronouncements that aren't subject to the notice and comment process.
However, despite the Supreme Court's seemingly clear pronouncement, subsequent case law has shown that there is still room for interpretation. For instance, there is currently a split among the courts as to the validity of regs stating that an overstatement of basis is an omission of income for purpose of the six-year limitations period under Code Sec. 6501(e)(1)(A). These retroactively effective regs were issued by IRS issued after a number of taxpayer victories on the issue. The Fourth Circuit, citing Mayo, stated that Chevron deference didn't apply to the reg since the underlying statute was unambiguous. (Home Concrete & Supply, LLC v. U.S., (CA 4 2/7/2011) 107 AFTR 2d 2011-767) The Tax Court, also citing Mayo, held that the Supreme Court's decision in Colony, Inc. v. Com., (S Ct 1958) 1 AFTR 2d 1894, that the extended limitations period applies to omissions and not overstatements, remained binding until clearly and unequivocally repudiated by IRS's regs. (Carpenter Family Investments, LLC, (2011) 136 TC No. 17) Thus, while Mayo has clarified a number of issues and arguably made it more difficult to challenge an IRS reg, its precise effect remains to be seen.
A temporary reg provides taxpayers with guidance they can follow pending issuance of final regs, and has the same precedential value as a final reg. (Temporary regs issued after Nov. 10,’88 expire three years after their issuance date, which is why they also must be issued as proposed regs.)
A proposed reg is issued to give taxpayers and practitioners notice of how IRS interprets a provision, and the opportunity to comment on and critique that interpretation. It has little precedential value. Courts have said proposed regs “carry no more weight than a position advanced on brief” and are “suggestions made for comment; they modify nothing.” The Court of Federal Claims similarly stated that “[i]n general, proposed regulations have no legal force or effect until they become final.” (Yocum v. U.S., (2006, Ct Fed Cl) 96 AFTR 2d 2005-5030)
Nevertheless, proposed regs are useful for tax planning. In many cases (although there have been notable exceptions), final regs follow the broad outline presented in proposed regs. One court has ruled that where a taxpayer relies on proposed regs, differing final regs cannot be imposed to his detriment. This was so even though the proposed regs were not ones IRS said the taxpayer could rely on. (Elkins, Paul, (1983) 81 TC 669) However, other courts have leaned the other way. For example, the Court of Appeals for the Federal Circuit held that where existing final regs provided an unfavorable result to a taxpayer while proposed amendments to those regs indicated a position more favorable to him, the taxpayer's reliance on the proposed regs wasn't justified. (Garvey Inc v. U.S., (1983, Cl Ct) 51 AFTR 2d 83-721, 1 Ct Cl 108, 83-1 USTC ¶9163, affd (1984, CA Fed Cir) 53 AFTR 2d 84-776, 726 F2d 1569, 84-1 USTC ¶9214)
A proposed reliance reg is one which states that taxpayers may rely on it, with any more stringent provisions in a later final reg to be effective only prospectively. These regs can be relied on as if they are final regs. In an infrequently used variation, IRS states that it will not challenge tax return positions that are consistent with a proposed reliance reg.
Revenue Ruling (“Rev Rul”). Rev Ruls are official interpretations by IRS that have been published in the Internal Revenue Bulletin (IRB) reflecting IRS's conclusion on how the law is applied to a specific set of facts. Because Rev Ruls are interpretive, IRS may issue then without complying with the notice and hearing requirements of the APA. (National Restaurant Assn. v. Simon, (1976, DC Dist Col) 37 AFTR 2d 76-1144) They are issued only by the Associate Office and are published for the information and guidance of taxpayers, IRS personnel, and others concerned. They may arise from various sources, e.g., private letter rulings to taxpayers, technical advice to district offices, or court decisions. Most Rev Ruls apply retroactively unless otherwise stated. (Code Sec. 7805(b)(8)) A Rev Rul's conclusions are limited to the pivotal facts stated in it.
Rev Ruls don't have the force and effect of regs, but may nonetheless be cited and relied on. (See Exxon Mobil Corp & Affiliated Co., (2011) 136 TC No. 5) Assuming that the facts and circumstances at issue are substantially the same as those in a Rev Rul, practitioners and their clients generally may rely on it and don't have to ask for a private ruling for their particular cases. However, Rev Ruls, like regs, can become outdated (e.g., by the passage of subsequent legislation) and may be modified or distinguished by subsequent rulings.
The Supreme Court stated in Skidmore v. Swift & Co., (1944) 323 U.S. 134, that it was not bound by Rev Ruls, and that the weight that they are afforded is dependent on their persuasiveness and the consistency of IRS's position over time. However, this standard has done little to resolve the precise level of deference afforded, and is often cited for the proposition that Rev Ruls are entitled to “some” deference. (See, e.g., U.S. v. Mead, (2001, Sup Ct) 533 U.S. 218)
Cases over the past decade have afforded Rev Ruls varying degrees of deference. For instance, in Ammex, Inc., (2004, CA6) 93 AFTR 2d 2004-2187, the Sixth Circuit held that Rev Ruls should get the same level of deference as regs, reasoning that they are issued in the same manner and under the same authority. (This reasoning is debated—commentators cite differences ranging from the submission of regs for public comment to who formulates and supervises each.) However, in PSB Holdings, Inc., (2007) 129 TC 131, the Tax Court stated that it isn't bound by an interpretation in a Rev Rul.
Revenue Procedure (“Rev Proc”). Rev Procs are statements of practice and procedure published in the IRB. They also are published in the Federal Register when required by the APA. They contain information that affects the rights or duties of taxpayers and other members of the public under the tax law and related statutes, or they contain information that should be made public even if it does not affect the rights and duties of the public. They address broad subjects such as accounting method changes, how to compute depreciation allowances, or how to obtain innocent-spouse equitable relief. The precedential value of a Rev Proc is the same as that of a Rev Rul. However, unlike Rev Ruls, Rev Procs fall outside of Code Sec. 7805(b) and apply prospectively.
Observation: Although Mayo didn't address the level of deference afforded to Rev Ruls or other similar types of IRS guidance, there was speculation following the decision that arguments advocating for such published rulings to receive Chevron deference would soon follow. However, on May 7, Gilbert, Rothenberg, appellate section chief in the Department of Justice's (DOJ's) Tax Division, announced that the DOJ would not argue that Chevron deference applies to Rev Ruls or Rev Procs.
Announcement (“Ann”) or Notice (“Not”). These address a timely topic of wide interest (e.g., extension of the period in which a Roth IRA can be recharacterized) and can be relied on and cited as precedent by taxpayers. IRS is bound to what it says in an Announcement or Notice to the same extent it would be with a Rev Rul or Rev Proc.
News release or information release (“IR”). This document is issued to the press to bring public attention to general-interest items, rather than items of a technical nature. IRS's statement of policy in an IR has been held to bind it in its dealings with taxpayers.
General Counsel Memorandum (“GCM”). This is a legal memo prepared by the IRS's Chief Counsel's Office in response to a formal request from within IRS ranks for legal advice. It can't be used or cited as precedent. Some courts have held that a GCM can be relied on for interpretive guidance, but IRS has resisted this conclusion. IRS stopped issuing GCMs after’95.
Observation: In a case of first impression, the Second Circuit relied substantially on what IRS had said in GCMs. It noted that while it wasn't giving precedential value to the GCMs cited, it was necessary to rely on them for interpretive advice. (Morganbesser v. U.S., (1993, CA2) 71 AFTR 2d 93-825) IRS subsequently nonacquiesced in the decision and revoked a GCM relied on in that case.
Action on Decision (“AOD”). This is a legal memo prepared by IRS Chief Counsel when IRS loses a court case. It sets forth the issue, a brief discussion of the facts, and the reasoning behind the recommendation to acquiesce (“acq,” follow) or nonacquiesce (“nonacq,” not follow) a decision, or to acquiesce in result only. IRS says that an AOD isn't an affirmative statement of its position, isn't intended to serve as public guidance and can't be cited as precedent. As a practical matter, acqs or nonacqs can be relied on (e.g., if the taxpayer's situation is the same as the one decided in a court case to which IRS has acquiesced, the taxpayer may assume his position won't be challenged by IRS).
Observation: However, in a December 2010 speech, Commissioner Douglas Shulman cautioned taxpayers not to “read too much” into IRS's AOD regarding the Tax Court's 2009 VERITAS transfer pricing decision (133 TC No. 14), stating that IRS's attorneys will continue to litigate these types of cases when appropriate to do so.
Code Sec. 6611 Overpayment Interest Allowable On Overpayment Through Date Of Tentative Refund
PLR 201123029
In a Technical Advice Memorandum, IRS has determined that where a taxpayer had an overpayment resulting from an IRS-initiated general adjustment that was preceded by a net operating loss (NOL) carryback and tentative refund that was later disallowed, interest was payable under Code Sec. 6611 from the date of the overpayment to the date of the tentative refund, subject to administrative adjustments.
Background. A taxpayer who receives a refund or a credit is entitled to interest at the rate prescribed under Code Sec. 6621 on the amount of the overpayment. (Code Sec. 6621(a)) For refunds, interest starts running from the date of the overpayment to a date (set by IRS) which is not more than 30 days before the date of the refund check. (Code Sec. 6621(b)(2)
The date of the overpayment is generally the point in time when a payment (or payments) of tax first exceeds the liability. (Reg. §301.6611-1(b)) If the payment that results in an overpayment is made before the last day prescribed for payment, then it's treated as made on the due date. (Code Sec. 6513(a)) If the overpayment results from an NOL carryback, the date of the overpayment is deemed to be no earlier than the filing date for the tax year in which the NOL is claimed. (Code Sec. 6611(f)(1))
IRS administratively establishes an end date of less than 30 days for interest computation purposes under the Internal Revenue Manual (IRM). For instance, for individual master file (IMF) accounts, overpayment interest stops 13 days before the refund, whereas for business master file (BMF) accounts, it stops nine days before.
When an overpayment is credited to another tax liability, interest on the overpayment runs from the overpayment date to the due date of the liability to which the overpayment is credited. (Code Sec. 6611(b)(1)) The due date for the liability credited is the last day by law or regs for the payment of the tax without regard to extensions (Reg. §301.6611-1(h)(2)), typically the unextended due date of the return on which the tax is required to be reported. (Code Sec. 6151(a))
However, when an overpayment results from an IRS-initiated adjustment, interest thereon is computed by subtracting 45 days from the period for which interest is allowable. (Code Sec. 6611(e)(3)) Additionally, no interest is payable from the date the refund claim is filed until the day the refund is made if the overpayment is refunded within 45 days after the taxpayer filed a credit or refund claim. (Code Sec. 6611(e)(2))
Facts. Taxpayer timely filed a federal income tax return for tax year 1 (TY1) and paid the liability shown thereon (Amount 1) prior to the due date of the return. Sometime after the due date, IRS issued taxpayer a tentative refund resulting from an NOL carryback from TY2. The requested amount was paid within 45 days of taxpayer's request, so no overpayment interest was paid under Code Sec. 6611(e)(2).
In a later examination, IRS disallowed the entire NOL carryback, assessed the amount that was previously refunded, and also made a general adjustment reducing taxpayer's TY1 liability. Around that time, IRS also abated an additional amount for TY1 resulting from a TY3 carryback. In the end, the combined amount of the general adjustment decrease and other abatement was slightly more than the disallowed NOL carryback.
IRS allowed overpayment interest arising from the general adjustment for the period beginning on the due date of the TY1 payment through the due date for the TY2 liability. Taxpayer argued that the overpayment interest on that amount should run until the date that IRS issued the tentative refund.
Taxpayer-favorable ruling. The TAM concluded that because the overpayment was attributable to IRS's general adjustment to taxpayer's TY1 liability, and the overpayment was effectively refunded to taxpayer, overpayment interest is allowable under Code Sec. 6611 from the date of the overpayment to the date of the tentative refund, subject to administrative adjustments.
The overpayment began, and interest was therefore allowable, beginning on the date that Amount 1 was considered to have been paid, and continuing until a date not more than 30 days before the overpayment was refunded to taxpayer. (Code Sec. 6611(b)(2)) In computing interest for that period, 45 days must be subtracted under Code Sec. 6611(e)(3) since the overpayment resulted from an IRS_initiated adjustment. The TAM clarified that since Code Sec. 6611(b)(2) was controlling, Code Sec. 6611(b)(1) didn't apply (because the overpayment wasn't credited to a liability), nor did the rules for determining the interest period in cases of NOL carrybacks. Rather, the actual overpayment was based on an adjustment to taxpayer's liability, and wasn't the result of an NOL.
The TAM analyzed and ultimately rejected the two cases cited in the request for advice—AT&T Corp. & Subsidiaries v. U.S., (Ct Fed Cl 10/18/2004) 94 AFTR 2d 2004-6444, and Marsh & McLennan Cos. v. U.S., (CA Fed Cir 9/6/2002) 90 AFTR 2d 2002-6216 —as factually distinguishable, notably based on the fact that both of those cases involved Code Sec. 6611(b)(1).
References: For the end of the interest period on overpayment, see FTC 2d/FIN ¶T-8031; United States Tax Reporter ¶66,114; TaxDesk ¶807,019; TG ¶70905.
In a Technical Advice Memorandum, IRS has determined that where a taxpayer had an overpayment resulting from an IRS-initiated general adjustment that was preceded by a net operating loss (NOL) carryback and tentative refund that was later disallowed, interest was payable under Code Sec. 6611 from the date of the overpayment to the date of the tentative refund, subject to administrative adjustments.
Background. A taxpayer who receives a refund or a credit is entitled to interest at the rate prescribed under Code Sec. 6621 on the amount of the overpayment. (Code Sec. 6621(a)) For refunds, interest starts running from the date of the overpayment to a date (set by IRS) which is not more than 30 days before the date of the refund check. (Code Sec. 6621(b)(2)
The date of the overpayment is generally the point in time when a payment (or payments) of tax first exceeds the liability. (Reg. §301.6611-1(b)) If the payment that results in an overpayment is made before the last day prescribed for payment, then it's treated as made on the due date. (Code Sec. 6513(a)) If the overpayment results from an NOL carryback, the date of the overpayment is deemed to be no earlier than the filing date for the tax year in which the NOL is claimed. (Code Sec. 6611(f)(1))
IRS administratively establishes an end date of less than 30 days for interest computation purposes under the Internal Revenue Manual (IRM). For instance, for individual master file (IMF) accounts, overpayment interest stops 13 days before the refund, whereas for business master file (BMF) accounts, it stops nine days before.
When an overpayment is credited to another tax liability, interest on the overpayment runs from the overpayment date to the due date of the liability to which the overpayment is credited. (Code Sec. 6611(b)(1)) The due date for the liability credited is the last day by law or regs for the payment of the tax without regard to extensions (Reg. §301.6611-1(h)(2)), typically the unextended due date of the return on which the tax is required to be reported. (Code Sec. 6151(a))
However, when an overpayment results from an IRS-initiated adjustment, interest thereon is computed by subtracting 45 days from the period for which interest is allowable. (Code Sec. 6611(e)(3)) Additionally, no interest is payable from the date the refund claim is filed until the day the refund is made if the overpayment is refunded within 45 days after the taxpayer filed a credit or refund claim. (Code Sec. 6611(e)(2))
Facts. Taxpayer timely filed a federal income tax return for tax year 1 (TY1) and paid the liability shown thereon (Amount 1) prior to the due date of the return. Sometime after the due date, IRS issued taxpayer a tentative refund resulting from an NOL carryback from TY2. The requested amount was paid within 45 days of taxpayer's request, so no overpayment interest was paid under Code Sec. 6611(e)(2).
In a later examination, IRS disallowed the entire NOL carryback, assessed the amount that was previously refunded, and also made a general adjustment reducing taxpayer's TY1 liability. Around that time, IRS also abated an additional amount for TY1 resulting from a TY3 carryback. In the end, the combined amount of the general adjustment decrease and other abatement was slightly more than the disallowed NOL carryback.
IRS allowed overpayment interest arising from the general adjustment for the period beginning on the due date of the TY1 payment through the due date for the TY2 liability. Taxpayer argued that the overpayment interest on that amount should run until the date that IRS issued the tentative refund.
Taxpayer-favorable ruling. The TAM concluded that because the overpayment was attributable to IRS's general adjustment to taxpayer's TY1 liability, and the overpayment was effectively refunded to taxpayer, overpayment interest is allowable under Code Sec. 6611 from the date of the overpayment to the date of the tentative refund, subject to administrative adjustments.
The overpayment began, and interest was therefore allowable, beginning on the date that Amount 1 was considered to have been paid, and continuing until a date not more than 30 days before the overpayment was refunded to taxpayer. (Code Sec. 6611(b)(2)) In computing interest for that period, 45 days must be subtracted under Code Sec. 6611(e)(3) since the overpayment resulted from an IRS_initiated adjustment. The TAM clarified that since Code Sec. 6611(b)(2) was controlling, Code Sec. 6611(b)(1) didn't apply (because the overpayment wasn't credited to a liability), nor did the rules for determining the interest period in cases of NOL carrybacks. Rather, the actual overpayment was based on an adjustment to taxpayer's liability, and wasn't the result of an NOL.
The TAM analyzed and ultimately rejected the two cases cited in the request for advice—AT&T Corp. & Subsidiaries v. U.S., (Ct Fed Cl 10/18/2004) 94 AFTR 2d 2004-6444, and Marsh & McLennan Cos. v. U.S., (CA Fed Cir 9/6/2002) 90 AFTR 2d 2002-6216 —as factually distinguishable, notably based on the fact that both of those cases involved Code Sec. 6611(b)(1).
References: For the end of the interest period on overpayment, see FTC 2d/FIN ¶T-8031; United States Tax Reporter ¶66,114; TaxDesk ¶807,019; TG ¶70905.
Defined Value Formula Clauses Set Value Of Charitable And Noncharitable Gifts
Hendrix, TC Memo 2011-133
In a case involving millions of dollars of asserted gift tax deficiencies, the Tax Court has held that defined value formula clauses properly set the fair market value of S corporation stock transferred by married donors to various family trusts and a charitable foundation. Rejecting IRS's arguments, the Court found that the formula clauses were reached at arm's length and were not void as contrary to public policy.
Facts. The dispute involved gifts of stock in the John H. Hendrix Corp. (JHHC) by John H. Hendrix and his wife, Karolyn M. Hendrix (Donors). IRS and Donors agreed to the facts, the key ones of which follow.
JHHC was incorporated in’76. Upon the advice of counsel, it converted to S status in’98 after changing its stock structure in a series of steps to voting and nonvoting common.
In’99, Donors sought estate planning advice from an attorney because they wanted to give some of their JHHC stock to their three adult daughters and to a charitable entity. Because the stock was hard to value, the attorney suggested that Donors use a formula clause to define the stock transfer at the time of the gift in terms of dollars rather than in percentages, while fixing for Federal gift tax purposes the value of the transfer of the stock. He also advised them to establish a donor-advised fund at a nonprofit community organization. They followed this advice and chose the Greater Houston Community Foundation (Foundation) to administer their contemplated donor-advised fund.
The attorney advised Foundation that Donors wanted to contribute (1) $20,000 to establish a donor-advised fund and (2) JHHC nonvoting stock. The donor-advised fund was established on Nov. 9,’99.
A draft agreement between Foundation and the Donors indicated that Donors would give JHHC stock to the Foundation and would transfer (part as a gift and part as a sale) JHHC stock to the trusts benefiting the daughters. The draft indicated that a formula clause would set the portion of JHHC stock transferred to the trusts and the remaining portion given to the Foundation.
After an appraiser was retained to estimate the value of the JHHC nonvoting stock, each Donor decided to give $50,000 of JHHC nonvoting stock to the Foundation and to transfer $10,519,136 of JHHC nonvoting stock to a generation-skipping tax (GST) trust and $4,213,710.10 of JHHC nonvoting stock to an issue trust benefitting the daughters. The trusts were executed on Dec. 29,’99. The trustees were two individuals, one of whom was a daughter of Donors.
On Dec. 31,’99, each Donor, the trustees, and Foundation executed an agreement that irrevocably assigned 287,620 shares of the Donors' JHHC nonvoting stock to the GST trust and to the Foundation. Each agreement effected the transfer pursuant to a formula. Under the formula, (1) a portion of the assigned shares having a fair market value as of the effective date equal to $10,519,136 was assigned to the trustees to be held in equal shares for the benefit of the daughters, and (2) any remaining portion of the assigned shares was assigned to the Foundation for the benefit of the donor-advised fund. The assignment agreements required that the trusts pay proportionally any gift taxes imposed as a result of the transfer. The assignment agreements required that the trustees sign promissory notes obligating the trustees to pay $9,090,000 to each Donor.
On the same day, a second set of assignment agreements was executed containing the same terms, except that each Donor transferred 115,622 of JHHC nonvoting stock to his or her issue trust and to the Foundation, and the fair market value of the stock for the benefit of the daughters was set at $4,213,710. The trustee had to deliver a note to each Donor in the amount of $3,641,233.
Donors had no right or responsibility for allocating the shares among the transferees on a per-share basis. The agreements left that allocation to the transferees under a dispute resolution and buy-sell agreement. It required that any dispute related to the fair market value between or among JHHC, the shareholders, assignees, or any party be resolved by arbitration, if it could not be resolved by agreement.
The trustees delivered the notes in exchange for the shares on Dec. 31,’99.
About a month after the transfers, following two appraisals setting the per-share value at $36.66, the Foundation and the trustees entered into confirmation agreements, effective as of Dec. 31,’99, that allocated the shares among them according to the $36.66 per-share value.
Each Donor claimed a charitable contribution deduction of $50,000 and a total taxable gift of $1,414,581 on’99 gift tax returns filed in April of 2000.
IRS and Donors agreed that if a final decision in this case determined that the defined value formula clauses do not control the valuation of the transferred shares, then the fair market value of the transferred shares would be based on a per-share value of $48.60 times the number of shares agreed to by each transferee in the confirmation agreements.
Dispute over validity of formula clauses. Before the Tax Court, the parties disputed the validity of the formula clauses. Donors contended that the formula clauses were valid because the clauses were used to fix the transferred amount of JHHC's hard-to-value stock and the parties to those clauses conducted themselves at arm's length. Donors claimed that the applicable value of the stock was $36.66 per share, as reported, and that they could deduct the $100,000 claimed as charitable contributions.
IRS argued that the formula clauses were invalid because they were not reached at arm's length and they were contrary to public policy. IRS said that the value of the stock was $48.60 per share and that each Donor could deduct charitable contributions totaling $66,285 (i.e., $48.60 multiplied by the number of shares transferred to the Foundation).
Observation: Had IRS prevailed on its claim that the shares were each worth $48.60, while the donors would have been allowed a higher charitable contribution deduction, they would have had to pay substantially more gift tax on the gift portion of the transfers to the trusts for their daughters.
Donors argued that the formula clauses were valid under precedent in the Fifth Circuit to which this case was appealable. Specifically, they argued that these clause were upheld in Succession of McCord, Jr. v. Comm., (CA 5 08/22/2006) 98 AFTR 2d 2006-6147 revg 120 TC 358 (2003). IRS argued that Succession of McCord was not controlling because the Fifth Circuit did not consider specific arguments IRS was making in this case. These arguments were that the formula clauses were invalid because they were not reached at arm's length and that they were void as contrary to public policy.
Clauses were at arm's length. IRS argued that they weren't at arm's length because Donors and their daughters (or their trusts) were close and lacked adverse interests, the daughters benefitted from Donors' estate plan, and the clauses were not thoroughly negotiated. The Tax Court disagreed. It said that the mere facts that Donors and their daughters were “close” and that Donors' estate plan was beneficial to the daughters did not necessarily mean that the formula clauses failed to be reached at arm's length. The Court also noted that economic and business risk assumed by the daughters' trusts as buyers of the stock (i.e., the daughters' trusts could receive less stock for their payment if the JHHC stock was overvalued) placed them at odds with Donors and the Foundation. In addition, for a variety of reasons, the Court found no collusion between Donors and Foundation.
Clauses were not void as against public policy. IRS argued that the formula clauses were void as contrary to public policy. The Tax Court disagreed. While the Court observed that it can disallow a deduction on public policy grounds if allowing such a deduction would severely and immediately frustrate sharply defined national or State policies proscribing certain conduct, the formula clauses at issue did not immediately and severely frustrate any national or State policy. To the contrary, they supported a fundamental public policy of encouraging gifts to charity.
IRS relied on Commissioner v. Procter, (CA 4 1994) 32 AFTR 750, which found a gift tax savings clause to be void. In that case, the clause provided that if any part of the transfer was found to be a gift, the property would remain property of the taxpayer. The Tax Court found Procter to be distinguishable from the current case. Unlike Procter, in the current case, there was no condition subsequent that would defeat the transfer. Moreover, the formula clauses encouraged charitable giving.
Accordingly, the Court held that the Donors could each deduct $50,000 as a charitable contribution. IRS argued that the parties agreed to a $48.60 per-share value. However, the Tax Court read the stipulation differently. Under its reading, the $48.60 value was inapplicable because the formula clauses control the valuation.
References: For disregarded gift adjustment clauses, see Federal Tax Coordinator 2d ¶Q-1982; TaxDesk ¶711,023; TG ¶40063.
In a case involving millions of dollars of asserted gift tax deficiencies, the Tax Court has held that defined value formula clauses properly set the fair market value of S corporation stock transferred by married donors to various family trusts and a charitable foundation. Rejecting IRS's arguments, the Court found that the formula clauses were reached at arm's length and were not void as contrary to public policy.
Facts. The dispute involved gifts of stock in the John H. Hendrix Corp. (JHHC) by John H. Hendrix and his wife, Karolyn M. Hendrix (Donors). IRS and Donors agreed to the facts, the key ones of which follow.
JHHC was incorporated in’76. Upon the advice of counsel, it converted to S status in’98 after changing its stock structure in a series of steps to voting and nonvoting common.
In’99, Donors sought estate planning advice from an attorney because they wanted to give some of their JHHC stock to their three adult daughters and to a charitable entity. Because the stock was hard to value, the attorney suggested that Donors use a formula clause to define the stock transfer at the time of the gift in terms of dollars rather than in percentages, while fixing for Federal gift tax purposes the value of the transfer of the stock. He also advised them to establish a donor-advised fund at a nonprofit community organization. They followed this advice and chose the Greater Houston Community Foundation (Foundation) to administer their contemplated donor-advised fund.
The attorney advised Foundation that Donors wanted to contribute (1) $20,000 to establish a donor-advised fund and (2) JHHC nonvoting stock. The donor-advised fund was established on Nov. 9,’99.
A draft agreement between Foundation and the Donors indicated that Donors would give JHHC stock to the Foundation and would transfer (part as a gift and part as a sale) JHHC stock to the trusts benefiting the daughters. The draft indicated that a formula clause would set the portion of JHHC stock transferred to the trusts and the remaining portion given to the Foundation.
After an appraiser was retained to estimate the value of the JHHC nonvoting stock, each Donor decided to give $50,000 of JHHC nonvoting stock to the Foundation and to transfer $10,519,136 of JHHC nonvoting stock to a generation-skipping tax (GST) trust and $4,213,710.10 of JHHC nonvoting stock to an issue trust benefitting the daughters. The trusts were executed on Dec. 29,’99. The trustees were two individuals, one of whom was a daughter of Donors.
On Dec. 31,’99, each Donor, the trustees, and Foundation executed an agreement that irrevocably assigned 287,620 shares of the Donors' JHHC nonvoting stock to the GST trust and to the Foundation. Each agreement effected the transfer pursuant to a formula. Under the formula, (1) a portion of the assigned shares having a fair market value as of the effective date equal to $10,519,136 was assigned to the trustees to be held in equal shares for the benefit of the daughters, and (2) any remaining portion of the assigned shares was assigned to the Foundation for the benefit of the donor-advised fund. The assignment agreements required that the trusts pay proportionally any gift taxes imposed as a result of the transfer. The assignment agreements required that the trustees sign promissory notes obligating the trustees to pay $9,090,000 to each Donor.
On the same day, a second set of assignment agreements was executed containing the same terms, except that each Donor transferred 115,622 of JHHC nonvoting stock to his or her issue trust and to the Foundation, and the fair market value of the stock for the benefit of the daughters was set at $4,213,710. The trustee had to deliver a note to each Donor in the amount of $3,641,233.
Donors had no right or responsibility for allocating the shares among the transferees on a per-share basis. The agreements left that allocation to the transferees under a dispute resolution and buy-sell agreement. It required that any dispute related to the fair market value between or among JHHC, the shareholders, assignees, or any party be resolved by arbitration, if it could not be resolved by agreement.
The trustees delivered the notes in exchange for the shares on Dec. 31,’99.
About a month after the transfers, following two appraisals setting the per-share value at $36.66, the Foundation and the trustees entered into confirmation agreements, effective as of Dec. 31,’99, that allocated the shares among them according to the $36.66 per-share value.
Each Donor claimed a charitable contribution deduction of $50,000 and a total taxable gift of $1,414,581 on’99 gift tax returns filed in April of 2000.
IRS and Donors agreed that if a final decision in this case determined that the defined value formula clauses do not control the valuation of the transferred shares, then the fair market value of the transferred shares would be based on a per-share value of $48.60 times the number of shares agreed to by each transferee in the confirmation agreements.
Dispute over validity of formula clauses. Before the Tax Court, the parties disputed the validity of the formula clauses. Donors contended that the formula clauses were valid because the clauses were used to fix the transferred amount of JHHC's hard-to-value stock and the parties to those clauses conducted themselves at arm's length. Donors claimed that the applicable value of the stock was $36.66 per share, as reported, and that they could deduct the $100,000 claimed as charitable contributions.
IRS argued that the formula clauses were invalid because they were not reached at arm's length and they were contrary to public policy. IRS said that the value of the stock was $48.60 per share and that each Donor could deduct charitable contributions totaling $66,285 (i.e., $48.60 multiplied by the number of shares transferred to the Foundation).
Observation: Had IRS prevailed on its claim that the shares were each worth $48.60, while the donors would have been allowed a higher charitable contribution deduction, they would have had to pay substantially more gift tax on the gift portion of the transfers to the trusts for their daughters.
Donors argued that the formula clauses were valid under precedent in the Fifth Circuit to which this case was appealable. Specifically, they argued that these clause were upheld in Succession of McCord, Jr. v. Comm., (CA 5 08/22/2006) 98 AFTR 2d 2006-6147 revg 120 TC 358 (2003). IRS argued that Succession of McCord was not controlling because the Fifth Circuit did not consider specific arguments IRS was making in this case. These arguments were that the formula clauses were invalid because they were not reached at arm's length and that they were void as contrary to public policy.
Clauses were at arm's length. IRS argued that they weren't at arm's length because Donors and their daughters (or their trusts) were close and lacked adverse interests, the daughters benefitted from Donors' estate plan, and the clauses were not thoroughly negotiated. The Tax Court disagreed. It said that the mere facts that Donors and their daughters were “close” and that Donors' estate plan was beneficial to the daughters did not necessarily mean that the formula clauses failed to be reached at arm's length. The Court also noted that economic and business risk assumed by the daughters' trusts as buyers of the stock (i.e., the daughters' trusts could receive less stock for their payment if the JHHC stock was overvalued) placed them at odds with Donors and the Foundation. In addition, for a variety of reasons, the Court found no collusion between Donors and Foundation.
Clauses were not void as against public policy. IRS argued that the formula clauses were void as contrary to public policy. The Tax Court disagreed. While the Court observed that it can disallow a deduction on public policy grounds if allowing such a deduction would severely and immediately frustrate sharply defined national or State policies proscribing certain conduct, the formula clauses at issue did not immediately and severely frustrate any national or State policy. To the contrary, they supported a fundamental public policy of encouraging gifts to charity.
IRS relied on Commissioner v. Procter, (CA 4 1994) 32 AFTR 750, which found a gift tax savings clause to be void. In that case, the clause provided that if any part of the transfer was found to be a gift, the property would remain property of the taxpayer. The Tax Court found Procter to be distinguishable from the current case. Unlike Procter, in the current case, there was no condition subsequent that would defeat the transfer. Moreover, the formula clauses encouraged charitable giving.
Accordingly, the Court held that the Donors could each deduct $50,000 as a charitable contribution. IRS argued that the parties agreed to a $48.60 per-share value. However, the Tax Court read the stipulation differently. Under its reading, the $48.60 value was inapplicable because the formula clauses control the valuation.
References: For disregarded gift adjustment clauses, see Federal Tax Coordinator 2d ¶Q-1982; TaxDesk ¶711,023; TG ¶40063.
IRS Gives Certain Individuals Extra Time To File Fbars For Pre-2010 Years
Notice 2011-54, 2011-29 IRB
In a Notice, IRS has extended the deadline for persons who have signature authority over, but no financial interest in, foreign financial accounts to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). They now have under Nov. 1, 2011, to report their signature authority over such accounts during 2009 and earlier years. The deadline for 2010, however, remains unchanged at June 30, 2011.
Background. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing TD F 90-22.1 with the Department of the Treasury on or before June 30th of the succeeding year.
In Notice 2009-62, 2009-35 IRB 260, IRS extended the deadline to June 30, 2010, to file a FBAR for years 2008 and earlier, for (i) persons with no financial interest in a foreign financial account but with signature or other authority over that account; and (ii) persons with a financial interest in or signature authority over a foreign financial account in which the assets are held in a commingled fund.
In Notice 2010-23, 2010-11 IRB 441, which modified and supplemented Notice 2009-62, IRS deferred the deadline for persons with signature authority over but no financial interest in a foreign financial account for which a FBAR would otherwise have been due on June 30, 2010, until June 30, 2011. This deadline applied to FBARs reporting foreign financial accounts for the 2010 and prior calendar years. Both of these extensions were provided to give Treasury more the time to develop comprehensive FBAR guidance.
On Feb. 24, 2011, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued a final rule to amend the Bank Secrecy Act (BSA) regs regarding FBAR reporting requirements. The rule was made effective as of Mar. 28, 2011 and applies to 2010 reports required to be filed by June 30, 2011, and those for subsequent years. It largely adopted the proposed regs issued on Feb. 26, 2010, which provided additional guidance and clarification regarding who must file FBARs.
Deadline further deferred. In response to comments that individuals with signature authority over, but no financial interest in, foreign financial accounts were having difficulty gathering the necessary information to file complete and accurate FBARs for 2009 and earlier calendar years by the June 30, 2011 deadline, IRS is pushing the deadline back to Nov. 1, 2011. However, the June 30, 2011, deadline for reporting either signature authority over, or financial interest in, foreign financial accounts for the 2010 year remains unchanged.
IRS specifies that the relief provided in Notice 2011-54, does not limit the relief provided in FinCEN's Notice 2011-1, which gave certain individuals with only signature authority until June 30, 2012, to file FBARs. IRS also stressed that Notice 2011-54, has no effect on the requirements to provide information or file FBARs in connection with IRS's 2009 or 2011 Offshore Voluntary Disclosure Programs.
References: For foreign financial accounts reporting requirements, see FTC 2d/FIN ¶S-3650; United States Tax Reporter ¶60,114.06; TaxDesk ¶815,516; TG ¶60611.
In a Notice, IRS has extended the deadline for persons who have signature authority over, but no financial interest in, foreign financial accounts to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). They now have under Nov. 1, 2011, to report their signature authority over such accounts during 2009 and earlier years. The deadline for 2010, however, remains unchanged at June 30, 2011.
Background. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing TD F 90-22.1 with the Department of the Treasury on or before June 30th of the succeeding year.
In Notice 2009-62, 2009-35 IRB 260, IRS extended the deadline to June 30, 2010, to file a FBAR for years 2008 and earlier, for (i) persons with no financial interest in a foreign financial account but with signature or other authority over that account; and (ii) persons with a financial interest in or signature authority over a foreign financial account in which the assets are held in a commingled fund.
In Notice 2010-23, 2010-11 IRB 441, which modified and supplemented Notice 2009-62, IRS deferred the deadline for persons with signature authority over but no financial interest in a foreign financial account for which a FBAR would otherwise have been due on June 30, 2010, until June 30, 2011. This deadline applied to FBARs reporting foreign financial accounts for the 2010 and prior calendar years. Both of these extensions were provided to give Treasury more the time to develop comprehensive FBAR guidance.
On Feb. 24, 2011, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued a final rule to amend the Bank Secrecy Act (BSA) regs regarding FBAR reporting requirements. The rule was made effective as of Mar. 28, 2011 and applies to 2010 reports required to be filed by June 30, 2011, and those for subsequent years. It largely adopted the proposed regs issued on Feb. 26, 2010, which provided additional guidance and clarification regarding who must file FBARs.
Deadline further deferred. In response to comments that individuals with signature authority over, but no financial interest in, foreign financial accounts were having difficulty gathering the necessary information to file complete and accurate FBARs for 2009 and earlier calendar years by the June 30, 2011 deadline, IRS is pushing the deadline back to Nov. 1, 2011. However, the June 30, 2011, deadline for reporting either signature authority over, or financial interest in, foreign financial accounts for the 2010 year remains unchanged.
IRS specifies that the relief provided in Notice 2011-54, does not limit the relief provided in FinCEN's Notice 2011-1, which gave certain individuals with only signature authority until June 30, 2012, to file FBARs. IRS also stressed that Notice 2011-54, has no effect on the requirements to provide information or file FBARs in connection with IRS's 2009 or 2011 Offshore Voluntary Disclosure Programs.
References: For foreign financial accounts reporting requirements, see FTC 2d/FIN ¶S-3650; United States Tax Reporter ¶60,114.06; TaxDesk ¶815,516; TG ¶60611.
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