Thursday, July 28, 2011

Final Regulations Simplify Rules for Electing Reduced Research Tax Credit

By Liz White

The Internal Revenue Service issued final regulations (T.D. 9539) July 26 that simplify how taxpayers elect to claim the reduced research tax credit.

The final regulations follow proposed rules from July 2009 (REG-130200–08). There was no public hearing on the proposed regulations, but IRS considered written comments in revising the final rules.

The regulations simplify the Section 280C(c)(3) election by allowing taxpayers to make the reduced credit election on Form 6765, Credit for Increasing Research Activities. Before these regulations, taxpayers had to claim the reduced credit on the original return, which meant knowing the dollar amount of the research credit, Jim Shanahan, a partner at PricewaterhouseCoopers LLC in Washington, D.C., told BNA.

The final regulations, however, simplify significantly how taxpayers claim the reduced credit, he said. Rather than using the original return, the taxpayer claims the reduced credit by “clearly indicating an intent to make the election on Form 6765,” which is attached to the original return.

“So that's very good news, so there is certainty then with a taxpayer who wants to make this election in situations where they don't know the actual dollar amount of the credit, that they are able to express in words an intent to make this election,” he said.

The form should be included with an original return for the taxable year filed on or before the due date, including extensions, for filing the income tax return, IRS said. Once an election is made for any taxable year, it is irrevocable for that taxable year.

Election Beneficial to Clients

IRS added an example to the final regulations that is key to understanding how the election can be beneficial to clients. The example makes it clear that taxpayers can make the election whether or not they claim any amount of credit on the original return, said Shanahan, who heads the firm's global research incentives department.

Taxpayers should always consider making an intent-based election when filing an original return, he said.

Consolidated Group Questions Clarified

IRS received a comment suggesting that the controlled group rules in the proposed regulations could lead to administrative complexity for members of a controlled group filing a consolidated return because each member would have to file a separate form to make the election. In the proposed regulations, all members of the controlled group had to use the same calculation method—the Section 41(a)(1) method, the Section 41(c)(4) alternative incremental credit method, or the Section 41(c)(5) alternative simplified research credit method— to compute the group credit for the year.

To clarify and simplify the procedure for members of consolidated groups, the final regulations add that only a common parent, as defined by the Internal Revenue Code, of a consolidated group makes the election for the credit on behalf of the members of the consolidated group.

The regulations are not a significant regulatory action, so a regulatory assessment was not required. The final regulations will be published and will be effective July 27.

The complete text of this article can be found in the BNA Daily Tax Report, July 27, 2011.

Ferret Out Fraud

By Timothy P. Hedley, CPA, Ph.D. and Richard H. Girgenti, J.D.

Fraud poses a critical risk to organizations. Management can help mitigate that risk through a number of strategies designed to provide employees with multiple ways to report concerns about fraud or other misconduct.

Deploy telephone hotlines. A dedicated telephone hotline is the most popular reporting mechanism used by large organizations, according to KPMG’s Integrity Survey: 2008–2009, which found that 65% of such organizations used hotlines. The more successful hotlines are those with appropriate oversight and protocols that provide employees with confidentiality, anonymity and availability through toll-free, 24/7 and international service. Click here for a chart assessing how to implement a hotline.

Establish a Web-based reporting system. A dedicated Internet reporting system typically provides 24/7 access for employees to report fraud and misconduct candidly and anonymously.

Implement workshops or focus groups. These meetings elicit employee feedback on actions witnessed in the workplace and encourage brainstorming on what kinds of misconduct can occur on the job and how best to spot and stop it.

Conduct employee surveys. Confidential and anonymous employee surveys can help management spot potential risks based on employee attitudes, perceptions or behaviors.

Solicit third-party interviews. Soliciting information from customers, vendors, regulators, creditors, analysts or others who come into routine contact with employees can provide insight into business practices and risks for misconduct.

Keep in mind that auditing and monitoring in high-risk areas are important tools that management can use to help determine whether controls are working as intended and can often identify issues that may otherwise escape attention. Such auditing (evaluating past events) and monitoring (evaluating events in real time) can be conducted in areas where there is a specific concern, a history of fraud and misconduct, high employee turnover or organizational change.

Require exit interviews. Management can identify concerns through exit interviews with departing employees, who may provide input on issues they did not want to raise earlier.

Enhance management accessibility by walking around. This philosophy encourages a hands-on management style of visiting employees in their workspaces, listening to their concerns, asking questions and listening to their suggestions.

Create and publicize an open-door policy. This gives employees direct access to senior executives without having to go through multiple layers of bureaucracy. An open-door policy can help identify issues that may otherwise escape attention.

Deputize “ethics champions.” Geographically dispersed organizations should not presume that their telephone hotlines will be successful at uncovering fraud and misconduct at all organizational levels and locations. Such organizations may consider designating local resources as points of contact for transmitting concerns and allegations from the field directly to leadership.

—These recommendations come from the book Managing the Risk of Fraud and Misconduct in a chapter written by Timothy P. Hedley, CPA, Ph.D., ( a KPMG partner and global coordinator for Fraud Risk Management Services. The book is co-authored by Richard H. Girgenti, J.D., ( a KPMG principal who leads Forensic Services for KPMG’s Americas firm.

U.S. debt downgrade increasingly likely

Orlando Business Journal

The possibility of the U.S. being downgraded by credit rating agencies is increasingly looking likely as the impasse in Washington continues, the Associated Press reports.

The AP reported that analysts are becoming more concerned about the debt downgrade taking place, even if a deal is reached by the Aug. 2 deadline for staving off a default.

Any downgrade could have ripple effects through the economy, with interest rates rising and potentially slowing any economic recovery, according to reports.

Debt-limit debate wearing on Americans

By William M. Welch, Judy Keen and Rick Jervis, USA TODAY

Washington's latest stalemate has inflamed partisan passions over federal spending, with the threat of an economic calamity in the balance. Yet across the nation, many people see a wearyingly familiar fight — one they simply want to end.

"Just get it done. Work it out," Nicole McBride, 30, says with a touch of disgust as she lunches Tuesday at Al's Beef, a Chicago institution known for its Italian sandwiches.

Her view is widely shared.

At the renowned Café Du Monde just outside the French Quarter in New Orleans, a vacationing Joe Davis blames Democrats and Republicans equally for prolonging a political fight over whether to again raise a federal debt ceiling that has been raised scores of times before, usually without this level of dispute.

"I'm sick of it," says Davis, 73, a retired economist from San Antonio, as he polishes off an order of beignets on an outdoor patio.

"They're playing games. Here we are trying to pull ourselves out of recession, and they can't come to an agreement," Davis says.

As an Aug. 2 deadline draws closer and Washington's political brinkmanship only intensifies, Americans are discussing the potential consequences of failing to raise the debt ceiling, which authorizes the federal government's borrowing to meet expenses that tax collections aren't sufficient to cover.

Patricia Benner, 66, a political independent from Louisville visiting Palm Springs in the California desert, reflects on the political dilemma that has tied the Capitol in knots.

She worries about President Obama's warning that inaction on the debt ceiling could leave the country unable to issue her monthly Social Security check.

However, she wants to see other types of federal spending cut rather than any taxes raised.

"They could settle this today if they really wanted to," she says, expressing disappointment with all sides.

Finger-pointing all around

As Americans enjoy vacations or simply try to carry on in the midsummer heat, the issue has become an unwanted intrusion into daily life.

The president and the Republican speaker of the House, John Boehner of Ohio, both have appealed to the public and accused the other side of refusing to come to a deal.

During his address to the nation Monday night, Obama warned, "We can't allow the American people to become collateral damage to Washington's political warfare."

Not everyone agrees on what that potential damage may be, or whether inaction would trigger an unprecedented federal default with broad and grim economic consequences for the nation.

Jennifer Dillon, 50, of Palm Springs, says she doesn't know what or whom to believe, but she calls talk about reduced Social Security and Medicare benefits "idle threats."

"I don't know if we're even really hearing the truth about what the ramifications would be," she says.

But the prospects are worrisome for many, even as they lament the nation's growing debt burden, which requires that the federal government devote increasing portions of tax collections to make interest payments.

"I think it will be pretty catastrophic," says David Maciewicz, 22, a recent University of Vermont graduate from Utica, N.Y. "It will destroy the economy if they don't raise the debt ceiling.

"We will not be able to reduce the debt in a week," he says. "Raising the debt ceiling needs to be a non-issue. It needs to be done."

Just before the lunchtime crush at the Napoleon House Bar & Café in New Orleans' French Quarter, the staff debates the debt ceiling issue, discussing different deals on the table and how it all may trickle down to them.

Waiter Jordan Angle, 35, says he doesn't blame congressional Republicans or Democrats — he blames the American people.

"We could blame our leaders all we want," he says. "But ultimately it's Americans living beyond their means that ran up so much debt."

Angle says the standoff could lead to a faltering economy and fewer people spending money at his bar.

More likely, he says, is that both sides will strike an agreement eventually. Inactivity from leaders doesn't spook or surprise him.

"Living in New Orleans, we're very used to nothing getting done," Angle says.

Braxton Moody, owner of Rita's Tequila House on Bourbon Street, is concerned about the impasse hurting his business. Just talk of the possibility of the country's credit rating being downgraded is harming the economy, he says.

His biggest fear: banks freezing credit.

"If banks can't loan, I can't grow," Moody, 37, says of his business, which boasts 135 different types of tequila on its menu.

'It's a power play'

In Chicago, McBride and Daryl Herman talk a lot about the debt ceiling crisis that's roiling Washington, and the couple is frustrated with pretty much everyone involved.

"It's a power play. It's about the Republicans showing their muscle and the Democrats showing their muscle," McBride says. Obama, she says, is being too diplomatic.

Herman, 31, a social worker, says regular people who already are having a tough time in this economy shouldn't pay a price.

"It's all about people at the end of the day," he says.

Jim Brown, 67, a semi-retired restaurant worker who with his wife, Linda Brown, 60, splits his time between Chicago and Maine, says he has a personal stake in the outcome of the wrangling.

He depends on his Social Security check and worries that increased taxes on business would affect the Maine restaurant where he works.

"We don't want the country to default by any means," he says. "We want what's coming to us."

"They need to get it done," says Linda Brown, a teacher. "And don't touch Medicare or Social Security!"

Tom Lauer, 51, who works in finance, says, "It's all just politics. I don't think that right now people are making decisions for the right reasons."

Lauer says government spending must be curbed, and he doesn't like the idea of precluding tax increases from the wealthy and corporations.

"You have to find a combination of both," he says.

A stake in the debt debate

Melanie Givens, 36, knows she has a personal stake in the fight. She lost her health care job in 2008 and found a new one recently that pays $40,000 less each year. That experience, she says, convinced her of the importance of paying your bills and staying out of debt.

She's disappointed with the congressional leadership of both parties, especially Republicans, whom she says have been "hijacked" by the no-tax, less-spending Tea Party.

She wishes Obama would "get the American people riled up and continue to call out the Republicans on their hypocrisy. Call their bluff."

In Minnesota, Robert Helland of Sauk Rapids, an optical company owner, says federal spending is out of control.

However, the self-described conservative Republican says the debt ceiling must be raised now, even if only for six months. He wants to cut foreign aid and welfare — although eliminating both programs still wouldn't amount to enough savings to stave off the need for borrowing.

Steve Whipple, who works in St. Cloud, Minn., says the debt ceiling definitely should be raised.

"It's been raised every time in our history that it needed to be raised," says Whipple, who considers himself an independent. He says the debate is the product of "political people trying to make political points instead of trying to govern."

Taylor Mason, 20, a student at University of South Carolina-Beaufort, is spending his summer working for Rep. Michele Bachmann's Republican presidential campaign.

Mason opposes lifting the debt ceiling, thinks that compromise isn't the solution, and wants to see reduced spending on health care for seniors and other benefits programs.

"I don't think the debt ceiling needs to be increased. I just think we need to spend less," Mason says. "Everyone's caught up in this word 'compromise.' There was no compromise in spending this money. … I think we need to cut Medicare and some of the other entitlement programs. People have gotten used to government programs providing for everything."

But in North Carolina, David Wijewickrama, 42, a lawyer and Democrat from Waynesville, says that if the debt ceiling is not raised, "There will be catastrophic, irreparable damage."

"I believe our economy will face irreparable harm," he says. "Unemployment will increase, and I believe investing houses will devalue the U.S. government's commitments."

He calls the debate in Washington "disgusting election politics."

"What we need is an honest discussion," Wijewickrama says. "Both parties are responsible for the debt. Both parties need to take ownership of the debt."

Contributing: Tracy Loew, Statesman Journal, Salem, Ore.; Keith Matheny, The (Palm Springs, Calif.) Desert Sun; Kirsti Marohn, St. Cloud (Minn.) Times; Jon Ostendorff, Asheville (N.C.) Citizen-Times; Natalie DiBlasio; Luke Kerr-Dineen.

Amazon Calls for Feds to Decide Online Sales Tax Issue

By Mark Hachman

Amazon executives said Tuesday that the company does and will pay sales taxes for goods purchased online, but that the retailer preferred a federal solution, and not leave it up to the states.

Thomas J. Szkutak, the company's chief financial officer, also declined to comment when asked if Amazon would terminate its agreements with any more of its affiliates, in order to avoid paying online sales taxes. He also declined to comment on whether or not Amazon would manufacture a tablet.

Amazon reported revenue growth of 51 percent for the quarter, in which the largest Web retailer also reported that sales volumes of its Kindle e-reader continued to accelerate. Overall, Amazon's cheapest version of the Kindle, its ad-subsidized version, is now its highest seller. Amazon introduced the Kindle 3G with Special Offers in May at $164; the recent AT&T sponsorship dropped the price to $139.

Szkutak noted that Amazon already pays taxes on more than half of its business around the world.

"I think in terms of the sales tax issue in total, the way you should think about it, we support a federal simplified approach, as we have for more than 10 years," Szkutak told analysts. He reiterated that Amazon thought that the tax issue was a "federal" one and that Amazon continued to work through those issues.

Amazon recently said it would seek a ballot initiative to strike down a new law in California that forces online retailers to collect sales tax, The New York Times reported. The earliest the initiative could be put to voters is February 2012.

Amazon recently cut off relations with its affiliates in California in order to avoid complying with the requirement, since the law affects only businesses with a physical presence in California. The State of California estimates that it loses about $1.2 billion a year in unpaid sales taxes, partly due to online e-tailers like Amazon. Although consumers are technically obligated to pay "use taxes" when they buy from out-of-state retailers, they rarely do, and it's usually up to the retailer to enforce them.

But Szkutak also said that he valued the company's affiliates. "We're incredibly pleased to have affiliates, and we'll continue to work with them," he said.

Szkutak also declined to provide any confirmation of an upcoming tablet, refusing to comment when an analyst asked. Recent rumors say that Amazon plans as many as three tablets, all expected to ship sometime this fall.

Additional reporting by Pete Pachal.

How IPO Founders Keep Their Taxes Low

Via a popular way of going public, founding partners can enjoy whopping capital gains without the usual tax bite. Investors may be less than happy about it, though.

By Robert Willens -

When a partnership goes to the public market for funding, and the offering is successful, the founding partners can enjoy a huge capital gain. But "enjoy" is not exactly the right word for how those founders are likely to feel about the taxes spawned by those gains.

By means of a popular going-public technique called a tax receivable agreement (TRA), however, the founding shareholders can enjoy hefty tax benefits. TRAs increase the tax liability of a new public company by removing a tax asset from the shareholders. For their part, though, investors may find it hard to factor the effects of TRAs into their calculations of the price of the offering.

TRAs are often used in combination with an "Up-C structure." The Up-C structure enables companies to acquire assets by issuing operating partnership units. Those units may make it possible for the founding owners from whom the company acquires assets to defer recognizing taxable gains until the company disposes of those assets. For example, among many other entities, DynaVox employed this structure in connection with its initial public offering last year.

When a partnership transforms itself into a corporation to make a public offering of ownership interests, the newly formed corporation often becomes a partner in the "operating" partnership. The remaining units in the partnership also continue to be held by the founders of the business. In such cases, the founders will be awarded "high-vote" stock in the corporation — equity that enables them to maintain voting control over the corporation's affairs. For their part, public investors will acquire low-vote stock.

Sometimes the IPO's proceeds will be used by the corporation to buy partnership interests from the founders. In addition, the founders will typically acquire an "exchange right" entitling them to trade partnership interests for low-vote shares issued by the corporation. When these exchanges are separate from the incorporation, they're taxable to the founders because immediately after the exchange the founders aren't in control of the corporation.

But the founders can gain a tax benefit through the use of a TRA. Each time the corporation buys a partnership interest in the partnership, or acquires an interest in a taxable exchange for its stock, the corporation's taxable income derived from the partnership will be diminished (because the purchase increases the amount of amortization and depreciation deductions the purchasing partner will enjoy) and, correspondingly, its tax liabilities will be minimized.

To be sure, the fruits of such purchases clearly "belong" to the corporation. After all, the corporation paid a price for the partnership interests that reflected their value. But the TRA, which is almost standard operating procedure in these types of incorporations, shifts the tax benefits to the persons who transferred the partnership interests to the corporation.

The TRA DynaVox is operating under is quite representative. Thus, the TRA in that case provides that ". . .we will enter into a TRA with our existing owners (the founders) that will provide for the payment by [the company] to our existing owners of 85 percent of the (tax) benefits that [the company] is deemed to realize as a result of the current tax basis in the intangible assets of. . . (the partnership) and the increases in basis resulting from our purchases or exchanges. . . ." The corporation goes on to say that these payments will be "substantial."

TRAs may be fully legal; however, the entire import of these agreements in the price of an IPO might not be fully appreciated by all investors. To the extent the TRAs are not taken into account by such shareholders, they may lead to market inefficiencies.

Robert Willens, founder and principal of Robert Willens LLC, writes a biweekly tax column for

Low taxes, high health costs make US choices tough

By PAUL WISEMAN - AP Economics Writer

WASHINGTON (AP) — Wealthy countries all over the world are dealing with debts and strained budgets as they mop up after the Great Recession and brace for the budget-busting retirement of the baby boomer generation.

But the United States is in a bigger fix than almost anyone else.

The U.S. federal debt was equal to 95 percent of the overall economy in the first three months of 2011, the fifth-highest on the Associated Press Global Economy Tracker, an analysis of economic and financial data from 30 of the biggest economies.

Every year that the U.S. government spends more than it collects in taxes, it records an annual budget deficit. The $14.3 trillion debt is the sum of all annual deficits and surpluses.

As U.S. policymakers argue over raising the federal borrowing limit and slashing debts, America is hobbled in ways the others are not. Tax collections are low by historical and international standards. Health care costs are astronomical — and still rising. The political system is gridlocked.

Those problems suggest the current impasse over raising the U.S. government's borrowing limit and cutting the deficit is a prelude to even more intense political combat.

"We as a society will either have to pay more for our government, accept less in government services and benefits, or both," says Douglas Elmendorf, director of the nonpartisan Congressional Budget Office. "For many people, none of those choices is appealing — but they cannot be avoided for very long."

This year's federal tax revenues are forecast to equal 14.4 percent of gross domestic product, a broad measure of economic output, according to the Office of Management and Budget.

That's the lowest share since 1950, long before Congress approved expensive programs such as Medicare. Tax collections have been reduced by the recession and by tax cuts enacted in 2001 and 2003. Among 29 countries ranked by the Organization for Economic Development and Cooperation, only Japan and Spain take in less tax revenue than the U.S. as a percentage of GDP.

When it comes to health care, the U.S. spends the equivalent of 17.4 percent of its GDP — by far the highest percentage among wealthy nations. The next highest is the Netherlands, where health care spending equals 12 percent of GDP. Among the 34 wealthy countries that belong to the OECD, health care spending averages less than 9.5 percent of GDP.

Political gridlock magnifies America's debt woes. Among the five biggest countries with a top AAA rating from the credit rating agency Moody's, the U.S. is the only one that hasn't come up with a serious plan to control government debt, says Moody's sovereign debt analyst, Steven Hess.

The U.S. is also the only one of the five that doesn't have a parliamentary system, which allows the ruling party or coalition to pass its agenda undeterred by the opposition. After taking control last year in Britain, for instance, a coalition led by the Conservative Party enacted an austerity program of tax hikes and spending cuts.

The U.S. has a divided government — Democrats control the White House and Republicans control half of Congress. The effort to narrow annual budget deficits and reduce the debt has bogged down in partisan wrangling.

The AP Global Economy Tracker found most of the wealthy nations of the world struggling with high debt:

— Japan, which is aging rapidly and has endured more than a decade of economic stagnation, had the heaviest debt burden at the end of the first quarter: 244 percent of GDP. Economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the Peterson Institute for International Economics say anything above 90 percent starts to weigh down economic growth partly by pushing up interest rates. Greece's debt was at 161 percent, Italy's 113 percent, Thailand's 111 percent and the United States' 95 percent.

— Energy-producing Canada and Norway had some of the lowest debt burdens among wealthy nations at 32 and 31 percent, respectively. The Norwegian government's finances are so strong that it issues debt mainly to ensure it has a functioning debt market and turns a profit by investing the money it borrows, says Nikola Swann, an analyst at credit rating agency Standard & Poor's.

— Fast-growing developing countries have a big advantage over rich countries when it comes to containing debts. They have younger populations and aren't facing a baby boomer retirement crunch. Brazil (28 percent) and Mexico (27 percent) had light debt burdens relative to GDP.

The U.S. does have a couple of advantages over other rich countries that help it hang onto its top credit rating even as its debts rise and political squabbling over the federal borrowing limit raises the risk of default.

Thanks to a relatively high birth rate and an even higher rate of immigration, the U.S. is aging more slowly than other rich countries. It will have a higher percentage of people working over the next few decades than Europe and Japan. Those workers will pay taxes to finance health care and pension benefits for baby boomers.

Last year, the U.S. had four active workers for every retiree; by 2050, with baby boomers out of the labor force, it will have only two, according to an S&P report on the fiscal impact of aging populations on rich countries. But the countries that are aging fastest — Japan and Italy — will have it much worse. An even split between workers and retirees will put enormous strains on their pensions and health care budgets.

Another U.S. advantage: The federal government's debts are all in U.S. dollars, giving America control of its destiny compared with countries that have to pay back debts in another country's currency. The U.S., for instance, can print dollars, driving down the value of the currency. That would make it cheaper to pay back its debts. It would also boost the economy and tax revenue by making American products cheaper around the world and luring foreign investors who build plants and buy real estate.

Cash-strapped Greece, by contrast, is tethered to a common European currency, the euro, and can't take advantage of a weaker currency. It's even worse for countries that owe money in another currency. Their debt payments go up if a currency they have borrowed in rises in value against their own.

Foreigners also like to own dollars, especially in times of crisis. That allows the U.S. Treasury to issue debt at low interest rates.

The U.S. debt burden isn't quite as heavy as it looks at first, either. The federal debt — $14.3 trillion — includes money the government has borrowed from itself, mostly revenue from Social Security. Take out the borrowing between government agencies and Uncle Sam's net debt drops to $9.8 trillion, or about 64 percent of GDP.

Some debt analysts consider Australia a model for the way it has controlled its budget and prepared to pay for an aging society. Over the last two decades, Australia cut government spending, imposed a 10 percent tax on most goods and services and sold off state assets including airports and railways. It also prepared to cope with an aging society by requiring employers to contribute toward a pension fund.

As a result, the Australian government's debts were equal to 14 percent at the end of the first quarter, lowest on AP's Global Economy Tracker.

5 401(k) Mistakes to Avoid

By Scott Holsopple

Setting up retirement plan contributions and choosing investments is the first step toward saving for your future. There are, however, mistakes that can derail the best retirement aspirations if investors are not careful. Here are five retirement investing traps to avoid:

Not knowing your personality. When it comes to investing, knowing your personality is the key to maintaining any strategy. Picking investments based solely on what friends, coworkers, or family members are using is not typically a wise idea. Those individuals may have a higher or lower tolerance for investment risk or have different investment goals.

To pick the best funds for you, first decide what type of investor you are—conservative, moderate, aggressive or some combination—and chart a course based on solid information. There are plenty of investor tests available online that will lead you toward a more appropriate spread of your investment dollars.

Ignoring your account. You've picked your contribution percentage or dollar amount for your retirement account, and you've decided on funds you feel best suit your needs.

Your job is done, right? Wrong.

Investors should review their account at least once a year to make sure they are appropriately invested based on their needs. With market fluctuations, certain portfolio sectors could increase or decrease, throwing off a carefully crafted investment mix. Set a date to review individual fund balances to ensure that the percentages have not over- or under-weighted a particular area of the portfolio. Using the quarter end as a reminder will help keep this from falling off of the to-do list.

Guessing at a contribution amount. Many 401(k) investors choose an arbitrary contribution amount, and less than 50 percent of employees calculate how much they should save by the time they retire. Make sure to contribute enough to at least receive the full company match.

An even better idea: calculate your own retirement needs and choose a contribution amount based on reaching that number. If it is too much of a stretch to increase to the necessary percentage or dollar amount, establish dates in the future to make the increase. Use your anniversary date with the company or your birth date as a reminder.

Being uninformed about your plan. Plan sponsors make updates to retirement plans regularly—some changes are in the investment options available, some in the plan rules or types of contributions that can be made (such as adding an after-tax option). If you are not paying attention, you could miss out on important opportunities for a long-term strategy.

If you don't know what's available in your plan, don't sit back and wait for someone to spell it out. Check out your benefits website for detailed information and the latest updates. If the information isn't readily available on a statement or website, ask a benefits officer for more detail.

Letting news define your investment strategy. Gold is up; bonds are out of favor; the U.S. will default on its debt. Some headlines can be inflammatory and shouldn't be used to set a retirement approach. With such an influx of news, it can be difficult to keep emotions in check when it comes to saving. The best approach is to create a long-term strategy based on personal goals, tolerance for risk, and availability of investments. Then stick to your plan. Make changes to the strategy only if goals change or the risk level isn't working with your comfort level.

There are plenty of ways to reach confidence with a retirement strategy. Learning from other's mistakes will set you ahead and on the right path.

Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost effective 401(k) advice and solutions for the every-day investor. His advice has been featured on various news outlets including FOX Business, USA Today and The Wall Street Journal.

Travelers may be owed a tax refund

By DAVID KOENIG - AP Airlines Writer

DALLAS (AP) — Travelers who paid all their federal airline taxes when they bought tickets might get a refund if they're flying now, after some of the taxes expired.

The situation has airlines confused. Some are telling customers to file refund claims with the IRS, while others invite them to contact that airline.

Airlines stopped collecting taxes that expired at midnight Friday.

Affected are people who paid all the taxes when they bought tickets two weeks ago — or any time before Friday night — but are flying now. The Treasury Department acknowledged over the weekend that they people might be owed a refund.

JetBlue Airways said Tuesday that customers flying in the next week should email their refund request to the airline and put "Expired Tax Refund Request" in the subject line.

Alaska Airlines said amounts paid for taxes that are no longer in effect will be considered an overpayment. It told customers to file a refund claim with the IRS.

American Airlines and Virgin America also told customers to direct their refund questions to the IRS.

The airlines said they're expecting guidance from the Internal Revenue Service soon.

The terminated taxes expired when Congress failed to pass a bill to keep the Federal Aviation Administration running at full speed. The dispute could drag on for days or weeks.

For a brief time, it looked like the Washington standoff would result in a break for air travelers. But most airlines raised fares by the same amount as the expired taxes cost, leaving customers to pay the same they did before.

The expired taxes can add 10 percent or more to an airline ticket.

"Those people traveling in July probably paid a lot for their tickets," said Tom Parsons, CEO of travel website "For a family of four, it could be worth $100 in refunds."

The airlines said there hasn't been a rush for refunds.

"We're not getting a lot of incoming inquiries about this," said Tim Smith, a spokesman for American.

8 Things That Scream "Audit Me" To The IRS

By Steve Garmhausen

By now, you've filed your corporate taxes.

No business owner looks forward to being audited by the IRS, not the examination part, and not the potential penalties.

The good news is that if you’re smart—and yes, honest—you probably won’t be audited. Here’s a look at some of the most common audit “triggers”: the red flags that are likely to pique the taxman’s interest.

Overstating your deductions. Take legitimate writeoffs, by all means. But overdoing it could well raise the IRS’ antennae.

A common trigger is claiming luxuries as business expenses. If you claim deductions for things like limousines, boats or extravagant travel, be prepared to back it up. And remember, very often your travel and entertainment expenses are only 50% deductible.

Crying poverty. If you claim your business hasn’t turned a profit for multiple years, or if you claim a large net loss for a certain year, it’s a red flag. Losing money for more than three out of five years suggests your business may be more of a hobby, and thus not deduction-worthy.

Witholding payroll taxes. Suck it up and pay the taxes. The penalty for not doing so is the amount of payroll taxes you owe—and that can break your business.

Misclassifying your employees. Asserting that your employees are independent contractors—and thus that you don’t need to pay payroll taxes for them—is something that may happen quite by accident. But the IRS regards this as tax evasion, so guard against it.

Making a lot of money. If you file a Schedule C (the self-employment return form used by sole proprietors), and your income is over $100,000, you’re a big fish—or at least a somewhat big one—and your odds of being audited increase. Obviously, you should try to make as much money as possible. Just keep good records.

Claiming a home-office deduction. This is a common red flag. If you intend to write off your home office, be prepared to prove that the office is a well-defined room or area dedicated exclusively to business.

Overpaying relatives. If your office manager spouse pulls down more than office manager salary, it’s going to look fishy. Family members should be paid the same salary as if they were non-family members with the same experience level, doing the same job.

Filing a sloppy return. Filling out a return by hand, making all your numbers extremely round, leaving boxes blank. All of it smells fishy to IRS examiners.

Tax Breaks For Your Business

These tax-savers are scheduled for extinction at year-end, so take advantage while you can.


Legislation enacted last year included some very favorable, but very temporary, business tax changes. The best of the bunch are scheduled to expire at the end of this year unless Congress acts. These are the breaks.

100% First-Year Bonus Depreciation

For qualifying new (not used) assets that are put to use in your business by Dec. 31, 2011, you can claim 100% first-year bonus depreciation. This translates to deducting the entire cost in year one. There's no dollar limit on this deal, and even the largest businesses are eligible. If your business adds enough new stuff to generate an overall tax loss for the year, you can carry the loss back to 2009 and 2010 and recover some or all of the federal income taxes paid for those years.

To be eligible for 100% bonus depreciation, an asset must pass three tests.

* It must be qualified property, which includes most equipment and software and some leasehold improvements.

* It must be purchased and put to use by Dec. 31, 2011.

* It must be new rather than pre-owned.

New passenger cars and light trucks are subject to relatively stingy first-year depreciation allowances. The bonus depreciation break increases the maximum first-year deduction by $8,000 for new vehicles that are put to business use by yearend. Specifically, for new light trucks and vans used 100% for business, the maximum first-year depreciation deduction is increased to $11,260. For new passenger autos used 100% for business, the maximum write-off is $11,060.

If you buy a new "heavy" SUV, pickup or van (one with a gross vehicle weight rating, or GVWR, in excess of 6,000 pounds), you can deduct the entire business-use percentage of the vehicle's cost on this year's return -- assuming the business-use percentage (based on mileage) exceeds 50%. You can usually find a vehicle's GVWR on a label on the inside edge of the driver's side door where the door hinge meets the frame.

For 2012, the 100% bonus depreciation break is scheduled to be replaced by 50% bonus depreciation. That's still good, but it's not nearly as good as 100%.

$500,000 Section 179 Deduction

For tax years beginning in 2011, the maximum first-year Section 179 depreciation deduction is $500,000. This translates to being able to deduct the entire cost of up to $500,000 of assets in the first year. Even better, the Section 179 break is available for both new and used equipment and software. However, unlike first-year bonus depreciation, you cannot claim Section 179 deductions that will create or increase an overall business tax loss for the year. So for new assets, the Section 179 deduction privilege is less valuable than the 100% bonus depreciation break. For tax years beginning in 2012, the maximum Section 179 deduction is scheduled to drop back to only $125,000.

For tax years beginning in 2011, the maximum Section 179 deduction allowance is phased out dollar-for-dollar once your business's eligible asset additions exceed $2 million. This rule makes the Section 179 deduction off limits for larger businesses. For tax years beginning in 2012, the threshold for reduced deductions is scheduled to drop to only $500,000.

$250,000 Section 179 Deduction for Real Estate

For tax years beginning in 2011 only, your business can claim up to $250,000 of Section 179 deductions for qualified real property additions, which include the following:

* Qualified leasehold improvement property costs. The definition covers only nonresidential building interior costs. Some interior costs are excluded (such as elevators and any interior structural framework of a building). The improvements must be put to use more than three years after the date the building opened for business.

* Qualified restaurant property costs. The definition covers both building and improvement costs. To qualify, more than 50% of the building's square footage must be devoted to the preparation of meals and customer seating.

* Qualified retail improvement costs. The definition covers only nonresidential building interior costs for a building that is open to the general public and used in a retail business of selling tangible personal property to the general public. Certain interior costs are excluded (such as elevators and any interior structural framework of a building). The improvements must be put to use more than three years after the date the building opened for business.

Section 179 Details

For "heavy" SUVs with GVWRs in excess of 6,000 pounds, the maximum Section 179 deduction is limited to $25,000. That's still a good deal.

If your business uses a non-calendar year for tax purposes, you have extra time to take advantage of today's ultra-favorable Section 179 rules. For example, if your business has an Oct. 31 tax yearend, its 2011 tax year won't begin until Nov. 1, 2011.

0% Tax Rate on Qualified Small Business Corporation Stock Gains

If you invest in qualified small business corporation stock that is issued between now and Dec. 31, 2011, you'll be eligible for a 0% federal capital gains tax rate when you sell the shares after owning them for more than five years. But if you invest after this year, the maximum tax rate on gains from shares held more than five years is scheduled to be 14%. I like 0% much better. If you are interested in this idea, talk to your tax pro because there are some tricky rules regarding the definition of qualified small business corporation stock. For instance, the corporation's gross assets cannot exceed $50 million. Professional service businesses are off limits. So are banking, leasing, financing, investing, farming, oil and gas extraction, and hotel, motel and restaurant operations.

Wednesday, July 27, 2011

IRS Takes Next Steps in International Realignment; Bolsters Transfer Pricing Compliance Programs and International Coordination


WASHINGTON — IRS officials today announced they are taking additional steps in their continuing efforts to improve the agency’s international operations.

First, the IRS Advance Pricing Agreement (APA) Program, concerned exclusively with reaching pre-filing agreements with taxpayers on transfer pricing, will shift from the office of IRS Chief Counsel to an office under the Transfer Pricing Director in the Large Business &International division’s international operation. In addition, the IRS Mutual Agreement Program (MAP), concerned primarily with the bilateral resolution of transfer pricing disputes with U.S. treaty partners, will shift to the same office.

The resulting “Advance Pricing and Mutual Agreement program” will be under the direction of a single executive and the IRS will increase staffing available to the two program areas. The combined office will allow the IRS to reduce the time needed to complete advance pricing agreements and to resolve transfer pricing disputes with its treaty partners. The Office of Chief Counsel will remain a vital partner in the analysis and resolution of legal issues.

Second, to facilitate IRS coordination with treaty partners in an increasingly global environment, the IRS will adjust its competent authority and international coordination functions under an Assistant Deputy Commissioner (International) who will:

• coordinate international activities across all IRS operating divisions,

• oversee the IRS Exchange of Information program and IRS participation in the Joint International Tax Shelter Information Centre (JITSIC),

• manage the activities of the IRS Tax Attaches in the agency’s foreign posts of duty,

• coordinate IRS participation at the Organisation for Economic Cooperation and Development (OECD) and other non-governmental organizations,

• support the Department of the Treasury in its negotiations of tax treaties and tax information exchange agreements, and

• pursue competent authority agreements with treaty partners on issues other than transfer pricing.

“Improving how we manage transfer pricing compliance and continuing to develop our capacity to coordinate effectively with our treaty partners is ever more critical to our job,” said IRS Commissioner Doug Shulman. “These latest changes move forward to fulfilling one of my top priorities -- meeting the challenge of tax administration in a global economy.”

Six Things to Know About the Expanded Adoption Tax Credit

If you are adopting a child in 2011, the Internal Revenue Service encourages you to familiarize yourself with the adoption tax credit. The Affordable Care Act increased the amount of the credit and made it refundable, which means it can increase the amount of your refund.

Here are six things to know about this valuable tax credit:

1. The adoption tax credit, which is as much as $13,170, offsets qualified adoption expenses making adoption possible for some families who could not otherwise afford it. Taxpayers who adopt a child in 2010 or 2011 may qualify if you adopted or attempted to adopt a child and paid qualified expenses relating to the adoption.

2. Taxpayers with modified adjusted gross income of more than $182,520 in 2010 may not qualify for the full amount and it phases out completely at $222,520. The IRS may make inflation adjustments for 2011 to this phase-out amount as well as to the maximum credit amount.

3. You may be able to claim the credit even if the adoption does not become final. If you adopt a special needs child, you may qualify for the full amount of the adoption credit even if you paid few or no adoption-related expenses.

4. Qualified adoption expenses are reasonable and necessary expenses directly related to the legal adoption of the child who is under 18 years old, or physically or mentally incapable of caring for himself or herself. These expenses may include adoption fees, court costs, attorney fees and travel expenses.

5. To claim the credit, you must file a paper tax return and Form 8839, Qualified Adoption Expenses, and you must attach documents supporting the adoption. Documents may include a final adoption decree, placement agreement from an authorized agency, court documents and the state’s determination for special needs children. You can still use IRS Free File to prepare your return, but it must be printed and mailed to the IRS, along with all required documentation. Failure to include required documents will delay your refund.

6. The IRS is committed to processing adoption credit claims quickly, but it also must safeguard against improper claims by ensuring the standards for this important credit are met. If your return is selected for review, please keep in mind that it is necessary for the IRS to ensure the legal criteria are met before the credit can be paid. If you are owed a refund beyond the adoption credit, you will still receive that part of your refund while the review is being conducted.

For more information see the Adoption Benefits FAQ page available at or the instructions to IRS Form 8839, Qualified Adoption Expenses, which can be downloaded from the website or ordered by calling 800-TAX-FORM (800-829-3676).

Tuesday, July 26, 2011

Two-Year Limit No Longer Applies to Many Innocent Spouse Requests

IR-2011-80, July 25, 2011

WASHINGTON — The Internal Revenue Service today announced that it will extend help to more innocent spouses by eliminating the two-year time limit that now applies to certain relief requests.

"In recent months, it became clear to me that we need to make significant changes involving innocent spouse relief," said IRS Commissioner Doug Shulman. "This change is a dramatic step to improve our process to make it fairer for an important group of taxpayers. We know these are difficult situations for people to face, and today’s change will help innocent spouses victimized in the past, present and the future."

The IRS launched a thorough review of the equitable relief provisions of the innocent spouse program earlier this year. Policy and program changes with respect to that review will become fully operational in the fall and additional guidance will be forthcoming. However, with respect to expanding the availability of equitable relief:

* The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.

* A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.

* The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.

The change to the two-year limit is effective immediately, and details are in Notice 2011-70, posted today on

Existing regulations, adopted in 2002, require that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit, adopted after a public hearing and public comment, was designed to encourage prompt resolution while evidence remained available. The IRS plans to issue regulations formally removing this time limit.

By law, the two-year election period for seeking innocent spouse relief under the other provisions of section 6015 of the Internal Revenue Code, continues to apply. The normal refund statute of limitations also continues to apply to tax years covered by any innocent spouse request.

Available only to someone who files a joint return, innocent spouse relief is designed to help a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability. Publication 971, Innocent Spouse Relief, has more information about the program.

Managing an IRS Correspondence Audit

By Joe B. Marchbein, CPA

The IRS has expanded its use of correspondence examinations in lieu of field examinations of individual income tax returns. While this trend has allowed the Service to collect additional revenue more efficiently, it has also caused difficulties for some taxpayers and CPAs representing them. The IRS has had problems in timely and properly responding to letters providing requested information or disagreeing with proposed adjustments.

The problems were identified in a 2006 report by the Treasury Inspector General for Tax Administration (TIGTA) that documented a 170% increase in correspondence examinations for individual taxpayers with gross incomes or business receipts of at least $100,000 in fiscal years 2002 through 2005, while face-to-face examinations increased by 25% (Report 2006-30-105, July 25, 2006). TIGTA recently found improvements but said more were needed (Report 2011-30-016, Feb. 18, 2011). This article suggests ways CPA tax practitioners can help manage clients’ correspondence audits.


The IRS typically compares returns against norms and selects some for correspondence examinations, which are handled at an IRS service center or campus. The IRS mails either (1) Letter 566 (CG), often termed an initial contact letter, advising the taxpayer that a return has been selected for examination and listing the items to be verified; or (2) a CP 2000 notice, which contains proposed adjustments based on information documents issued by third parties, such as Forms W-2, Wage and Tax Statement; 1099- MISC, Miscellaneous Income; and 1098, Mortgage Interest Statement. Some typical items for which the IRS requests verification include alimony, moving expenses, various itemized deductions, casualty losses, employee expenses, Schedule C receipts and expenses, foreign tax credits, earned income credits and education credits.

When the IRS receives correspondence, the file is assigned to an auditor. If there is no response from the taxpayer, the IRS issues a second notice, and if there is no reply, it issues a statutory notice of deficiency, known as a “90-day letter.”


A practitioner should advise a client in advance, usually by an explanatory paragraph in the tax engagement letter, to notify the practitioner if the client receives a notice from the IRS. If the CP 2000 notice is correct, the CPA should advise the taxpayer to sign the agreement sent with the letter and pay the deficiency. If the CPA responds to the IRS service center, he or she should submit the necessary documentation and explain whether an adjustment is appropriate.

If an assessment is incorrect or if a response is to be made to the initial contact letter, the practitioner should consider asking that the matter be transferred from an IRS service center to a local office, where it can be resolved by one auditor. Often in a correspondence audit, taxpayer correspondence is not assigned to the auditor who reviewed earlier documents. Correspondence from the IRS bears only the name of a supervisor. If the practitioner calls the supervisor, the IRS typically refers the call to whatever employee is available. Also, correspondence tends to not be reviewed for several months, resulting in the IRS’ sending letters advising the taxpayer that it needs additional time to review it. When the IRS finally issues reports, in some cases the proposed adjustments are incorrect because it has not properly considered and evaluated documents and substantiation furnished by the taxpayer or his or her representatives.

The IRS tends to not want to transfer cases because of the possibility of delay, and it is usually more economical for the agency to handle the matter by correspondence. However, Treas. Reg. § 301.7605-1(e)(1) provides that the IRS will consider written requests to change the examination venue. Many IRS service centers take the view that correspondence examinations will be transferred only in instances of hardship. If there are problems, the practitioner may want to contact the local office of the Taxpayer Advocate Service and request assistance in having the matter transferred to the local IRS office.

For most taxpayers, an examination is fraught with anxiety, which can only be compounded if correspondence explaining the taxpayer’s position or providing requested information or verification seems not to have been duly taken into account by the IRS. But these tips can at least help minimize frustration.

By Joe B. Marchbein, CPA, ( with Jack P. Fitter, CPA, APC, in Chesterfield, Mo., and a member of the AICPA’s IRS Practice and Procedures Committee.

A version of this article appeared in The Tax Adviser, April 2011, page 276.

Practitioners Say Uncertainty Growing With Increase of Informal Guidance

By Liz White

The rising use of informal guidance by the Internal Revenue Service and the complications of the regulation process have triggered a range of questions—often unanswerable—for taxpayers and their advisers, practitioners said at a roundtable discussion in Washington, D.C., July 22.

At a discussion hosted by Tax Analysts about problems with IRS guidance, former government officials and tax practitioners debated the issues facing taxpayers and advisers because of unclear regulations from the government. Rules surrounding IRS guidance that does not meet formal definitions under the Internal Revenue Code are increasingly unclear.

Informal Guidance Has Ups and Downs

These types of guidance, like FAQs, are released without going through the rigorous guidance process that can take months or years. Problems surrounding informal guidance continue to rise as IRS increasingly relies on it, panelists said.

Informal guidance is also not subject to external comments or an internal process, and can be released without other government officials knowing about it, said Michael Desmond, partner at Bingham McCuthen LLP in Washington, D.C., and former tax legislative counsel for the Treasury Department.

“Certainly having an FAQ out there is better than having nothing, but there are some drawbacks as well,” Desmond said. In the past, IRS has had to backtrack on released FAQs, said Christopher Rizek, partner at Caplin & Drysdale in Washington, D.C., and former associate tax legislative counsel at Treasury.

However, this type of IRS guidance can be released at a faster pace, making it easier to meet the demands of stakeholders, who are increasingly relying on “real-time” information, said Linda Stiff, managing director at PricewaterhouseCoopers LLP in Washington, D.C., and former IRS commissioner. The formal process for guidance is not equipped to meet the real-time demands of the industry, she said.

Practitioners question the reliability of this kind of guidance, which is not mentioned as having authority under federal regulations. Informal guidance may be helpful, but questions remain about what kind of protections it offers for taxpayers who want to abide by it and what options exist for those who wish to challenge it, said Phillip Pillar, partner at Greenberg Traurig LLP in Washington, D.C.

“As helpful as they are, there is a disconnect there,” Desmond said. “Not only can you not rely on them substantially, arguably you can't rely on them for penalty protection because they aren't listed in” regulations.

In the future, IRS will most likely continue to use these types of guidance, and if trends continue, usage will increase. Therefore, IRS will need to consider the role of this guidance, Rizek said.

Formal Process Slow but Reliable

While some practitioners criticize the formal process followed by IRS and Treasury for releasing official guidance as being too slow, others say the process works well at times. The process is challenging because it involves numerous people from across the department, some who are not involved in the original drafting, slowing the process further, said Desmond. Formal guidance can take months and sometimes years to become final, particularly when it has an impact across a variety of areas, he said.

In 2010, IRS issued about 86 notices and 54 revenue procedures. The official guidance that is released goes through multiple levels of review and is usually accurate, he said. Also, community stakeholders get a say in the process, so it is mostly fair, he said.

In the last year, IRS has issued comprehensive guidance and a phased implementation for the Foreign Account Tax Compliance Act, said Pillar. Also, guidance on the return preparer penalties is commendable, he said.

Changes Necessary to Process

Now may be the time to make changes in the guidance process because of how much tax policy and tax stakeholders have changed, Stiff said.

The use of the revenue procedures could be significantly expanded to a much greater extent because the revenue procedures define what IRS will not accept and what safe harbors exist, she said. With revenue procedures, there is not as much pressure to put out the “right interpretive rule.” Instead, they allow IRS to acknowledge the rules are not perfect, Stiff said.

Similarly, IRS could use informal guidance to craft rules in case taxpayers rely on the informal information, she said.

Congress is unlikely to take action to improve or change the guidance process, Stiff said. However, practitioners should continue to push for such changes, panelists said. Likewise, Treasury will not see an increase in resources to handle guidance, Stiff said.

Although it is unlikely that Treasury will have more resources to invest in the guidance process, putting more money toward the process could save money in the future as it could lead to fewer lawsuits or a decrease in continued resources used to clarify confusing guidance, said Desmond.

The complete text of this article can be found in the BNA Daily Tax Report, July 25, 2011.

Monday, July 25, 2011

3 stealth tax traps

By Janice Revell, contributor @FortuneMagazine

FORTUNE -- Congressional gridlock over whether to cut or raise income taxes is obscuring a different threat to six-figure earners: a host of stealth taxes implemented in the name of deficit reduction. Many of the provisions, as with the dreaded alternative minimum tax, have never been adjusted for inflation. As a result, they have morphed into tax traps for upper-middle-income earners. Here are three of the most glaring examples.

Two of the new stealth taxes were created by last year's landmark health care reform bill. First, the Medicare payroll tax is going up. The tax is now 2.9% on all wages; employers and employees each pay 1.45%. Starting in 2013, individuals making more than $200,000 (and couples making more than $250,000) will have to kick in an additional 0.9% on wages above that amount.

A second, much heftier increase also takes effect in 2013, in the form of an unprecedented new 3.8% Medicare tax on investment income. It will strike filers whose "modified adjusted gross income" -- roughly speaking, wages plus investment income -- tops $200,000 for individuals or $250,000 for couples. (The tax will apply to whichever is less: investment income or the amount by which modified adjusted gross income exceeds the income threshold.) Investment income will include taxable capital gains, dividends, interest income, annuities, royalties, and rents. The thresholds for both of the new Medicare taxes will not be indexed for inflation. So they'll snag an increasing number of taxpayers over time.

Finally there's the taxation of Social Security benefits. In 1984, when the Social Security system faced a funding crisis, Congress enacted a law to make the wealthiest recipients pay income taxes on their benefits. Specifically, up to 50% of Social Security benefits became taxable when half of these benefits, plus a retiree's other income -- including retirement plan payouts and investment income -- exceeded $25,000 a year ($32,000 for couples). Back then, only about 10% of retirees had incomes that topped that level. In 1994 a second layer of tax was put in place: 85% of your Social Security benefits became taxable if half of your Social Security benefit plus your "other" income topped $34,000, or $44,000 as a couple.

Once again, none of those crucial thresholds were indexed to inflation; today the Social Security tax still kicks in at $25,000. As a result, about a third of retirees are now paying federal income tax on their Social Security benefits. A decade from now, an estimated 45% will owe the tax.

Don't expect relief from the government on any of those stealth taxes. Your best bet is to generate as much income as possible from sources that don't trigger them. One way to accomplish that is to put your retirement savings into a Roth IRA or Roth 401(k), where contributions are made with after-tax dollars, and all future investment gains and withdrawals are tax-free. At the end of the day, you may never be able to shield yourself completely from stealth taxes. But you can at least minimize the bite.

--A former compensation consultant, Janice Revell has been writing about personal finance since 2000.

Obstacle Course Awaits Congress in Quest for Simpler Tax Code

By Richard Rubin and Steven Sloan

The allure of a simpler, more efficient tax code that could fuel economic growth presents a tantalizing possibility for U.S. lawmakers. The path to that goal is littered with political and legislative obstacles.

Even if President Barack Obama and House Speaker John Boehner had agreed to pursue a tax code overhaul as part of a deal to raise the debt ceiling, completing such an effort would require sustained bipartisan cooperation on an issue that deeply divides Republicans and Democrats.

Congress hasn’t rewritten the U.S. tax code since 1986, and that isn’t for lack of trying. The problem extends beyond disagreements about the proper size of government and the role of government in fighting income inequality. The difficulty is that the clearest track to a simpler code with lower rates would require eliminating or curtailing cherished tax breaks such as those for home mortgage interest, charitable contributions, domestic manufacturing and capital gains.

“A lot of these groups are pretty well-organized, so I think this battle within the business community of who’s going to win and who’s going to lose is the big issue,” said David Kautter, managing director of the Kogod Tax Center at American University in Washington. “That’s what makes it hard.”

Negotiators had been discussing an agreement that would set a short timeline for rewriting the tax code with parameters for revenue and an enforcement mechanism that would trigger consequences if Congress doesn’t act. Boehner said yesterday that he was ending discussions with the White House.

‘Incredibly Difficult’

The outlines of an agreement could have made it difficult for lawmakers to agree on the details of a tax rewrite, said Melissa Mueller, a former Democratic tax counsel for the Ways and Means and Senate Finance committees.

“They’ve sort of gotten whipped up in the frenzy of tax reform and how easy it might be in the abstract,” said Mueller, now a partner at the Washington lobbying firm Capitol Tax Partners. “But when you actually get in and see the specific ways of doing it, it’s incredibly difficult.”

The arithmetic required to trade tax breaks for lower rates, it’s much simpler than the politics, said Representative Kevin Brady, a Texas Republican on the Ways and Means Committee.

“On paper, yeah, it’s very easy to make the adjustments and changes,” he said in an interview yesterday. “In real life, to seriously dial down the tax rates, you have to seriously eliminate some very popular, very politically sensitive exemptions, credits and incentives.”

Higher Revenue

Additionally, if an agreement included higher revenue through a tax code overhaul as a condition of obtaining spending cuts, Republicans would have to write a bill that violates some of their core principles.

“The higher revenues make it harder to get the kind of tax reform that we need to grow our economy,” Ways and Means Chairman Dave Camp said yesterday in an interview on “Political Capital with Al Hunt” airing on Bloomberg Television this weekend. “And also, I really believe it will make it harder for us to create jobs.”

Camp said in an interview after the televised taping that such a revenue target wouldn’t necessarily make it impossible to overhaul the tax code, and he didn’t rule out advancing tax changes with a higher revenue target as part of a broader bipartisan deficit-reduction package.

In 1986, during the last major tax code overhaul, Congress stuck to a revenue-neutral framework, which created a zero-sum environment. In that law, Congress shifted tax benefits from businesses to individuals. A framework this year that raised revenue would tip the balance so that politically vocal losers would outweigh the winners, Kautter said.

“When you don’t have a reduction for most people,” he said, “then I think the dynamic changes dramatically.”

Advancing a Rewrite

The Ways and Means chairman said he is trying to write a corporate tax overhaul bill this year. Because many businesses are taxed through the individual tax code, Camp has long said he wants to address both parts of the tax system together.

Camp, a Michigan Republican, and Senate Finance Committee Chairman Max Baucus, a Montana Democrat, have been holding hearings this year on the tax code. Next week, Camp’s panel will consider consumption taxes and Baucus’s committee will hear about the tax code’s effect on job creation from chief executive officers of Wal-Mart Stores Inc., Kimberly-Clark Corp., PMC- Sierra Inc., and CVS Caremark Corp.

The hearings haven’t focused on a particular proposal. The Treasury Department may release a corporate tax overhaul framework after the debt ceiling debate is concluded, Treasury Secretary Timothy Geithner has said.

“There is nothing really specific, no proposal to point at to say, this works and this doesn’t,” Mueller said. “Once you really have a proposal, then you can really have a serious conversation. How long that takes? I don’t know.”

Ultimate Goals

While Camp and Baucus talk regularly and on July 13 held their committees’ first joint hearing on tax policy in more than 70 years, they don’t necessarily agree on the ultimate goals of tax policy. The gaps between them mirror the philosophical gaps between their parties.

Camp wants to lower the top individual and corporate tax rates to 25 percent and collect the same amount of revenue as if all of the expiring tax cuts were extended and the tax increases in last year’s health-care law were repealed.

Baucus, in contrast, wrote major portions of the health- care law and has supported Democratic efforts to extend tax cuts for individuals earning less than $200,000 a year and married couples earning less than $250,000 without also extending the cuts for high-income taxpayers.

Political Calendar

One additional complication is the political calendar. Any tax-code rewrite would have to occur in the months leading up to the 2012 election, while Obama is running for re-election and while the House and Senate minorities seek control of their respective chambers.

“It absolutely makes it more challenging,” said Arshi Siddiqui, a partner at Akin, Gump, Strauss, Hauer & Feld in Washington who was a tax adviser to Representative Nancy Pelosi when she was House speaker. “It will take a while to do kind of a reasoned approach to this.”

Even without a total rewrite of the tax code, Congress likely will pass significant tax legislation before it adjourns at the end of 2012. Extensions of the income and estate tax cuts expire at the end of 2012. Popular business tax breaks such as the research and development tax credit expire at the end of this year.

Preparing For D-Day: When Congress Takes Your Deductions

By Laura Saunders, Wall Street Journal

Some people call them "tax loopholes," while others prefer "tax breaks." In Congress, they are often called "tax expenditures."

Whichever term of art you prefer, hundreds of tax deductions, credits and exclusions that taxpayers rely on every year are at risk of being cut.

The debt-ceiling debate cast these benefits into the spotlight when Senate Finance Committee member Tom Coburn, a Republican from Oklahoma, on Monday released a budget plan he calls "Back in Black." Sen. Coburn's $9 trillion, 10-year package of debt-reducing measures includes $1 trillion in reclaimed tax breaks.

Introducing the plan, he sought to reframe the debate as one of cutting wasteful government spending rather than raising taxes. "Tax subsidies are socialism," he declared.

Of course, one taxpayer's senseless subsidy is another's worthy incentive. The low top rate on long-term gains is supposed to encourage investment. The Earned Income Tax Credit helps the working poor, and the charitable donation deduction fosters worthy causes.

Sen. Coburn's move was followed by another. The Senate's "Gang of Six"—three Democrats and three Republicans, including Sen. Coburn—called for cuts in tax breaks, along with spending cuts and lower marginal tax rates. President Obama's reaction was positive.

What matters now: These breaks aren't cheap. All told, the top 10 individual tax breaks will cost more than $3 trillion in forgone tax revenues between 2010 and 2014, according to estimates by Congress's Joint Tax Committee.

By contrast, the top 10 corporate tax breaks will cost only $350 billion over the same period. (This disparity isn't surprising: the individual income tax long has raised far more revenue than the corporate income tax; it currently brings in more than four times as much.)

What happens next is unclear. There has been talk of postponing decisions about tax breaks until next year. Experts say the Aug. 2 debt-ceiling deadline doesn't allow time to enact major new laws, and then comes the summer recess—giving advocates time to organize to fight changes tooth and nail.

On the other hand, the idea of cutting tax breaks is officially "in play." While the Gang of Six's plan doesn't give details, Sen. Coburn's does.

His plan takes aim at many small breaks for individuals and three big ones. He would limit the popular mortgage interest deduction to first homes worth $500,000 or less, while disallowing deductions for second homes and home-equity loans. He would also limit the working poor to five years of the earned-income tax credit.

Instead of allowing open-ended tax-free employer-paid health insurance, Sen. Coburn would institute a tax-free limit of $7,500 for individual premiums and $15,000 for families. He says these are higher than the current averages, and would be frozen for years and then grow slowly after that.

How to prepare? For now, "Taxpayers who rely heavily on these breaks don't need to panic—but they should pay close attention," says Clint Stretch, a tax analyst with Deloitte Tax in Washington. Changes that are enacted usually don't go as far as changes that are proposed, he adds.

Meantime, here is a rundown of the Joint Tax Committee's top 10 tax expenditures, along with their 2010-14 revenue cost. Medicare doesn't appear on the list because Parts A, B, and D are counted separately. Added together, they would be in fourth place.

Health insurance: Employer payments for health care, health insurance premiums, and long-term-care insurance premiums aren't taxed, costing $659 billion.

Mortgage interest: Homeowners may deduct mortgage interest on up to $1.1 million of debt for up to two homes, costing $484 billion for deductions on 34 million tax returns a year.

Capital gains and dividends: Long-term gains and qualified dividends are taxed at a maximum rate of 15%. Total tab: $403 billion.

Pensions: Defined-benefit pension contributions and earnings aren't taxed (although payouts are), for a total of $303 billion.

Earned-Income Tax Credit: Some 26 million low-income taxpayers a year are expected to claim $269 billion.

Donations: Charitable contributions are largely deductible, costing $241 billion for 36 million claims a year.

State taxes: Deductions for state and local income, sales and property taxes will cost $237 billion for 41 million claims a year.

401(k): Contributions and earnings aren't taxed (although payouts may be), for a total of $212 billion.

Capital gains at death: Assets held at death aren't subject to capital gains tax. Total tab: $194 billion.

Social Security benefits: The portion of Social Security and railroad retirement payments that isn't taxed comes to $173 billion from 28 million tax returns a year.

Congress Offers Tax Free Flights… For Now

By Kelly Phillips Erb

As Congress and the President collectively stomp their feet and stick their tongues out at each other over the debt ceiling, frequent travelers are catching something of a break…

It turns out that one of the tax measures that has not been resolved involves federal taxes on airline tickets. Since Congress has not confirmed the Federal Aviation Administration (FAA) budget – putting 4,000 FAA employees on furlough – the laws which authorize the collection of federal taxes on airline tickets have expired. That means that tickets sold after July 22, 2011 won’t include these federal excise taxes.

So how much can you save? It could be quite a bit. Depending on your destination, airline tickets are generally subject to a 7.5% passenger ticket tax, a $3.70 segment tax, a $16.30 international departure tax and a $16.30 international arrival tax, among other fees and add-ons. Those taxes aren’t being collected right now which means that, depending on the original cost of your ticket and where you’re headed, you could save some significant cash.

Unless you fly American and US Airways, that is. Those airlines have boosted their prices in advance of the tax expiration to offset – you know, just because they can. And no, it’s not coincidental. American spokesman Tim Smith was clear that the airline “adjusted prices so the bottom-line price of a ticket remains the same as it was before … expiration of federal excise taxes.” That price adjustment means that cash out of your pocket will go directly into theirs.

Virgin America, however, has turned the whole mess into a savvy promo opportunity. The airline is touting the tax free flights as a holiday with the tagline: Evade Taxes. Take Flight. Book a Tax Holiday. Grab a Seat With Fewer Federal Taxes.

But you have to act fast: there’s no guarantee that the “tax free” flights will continue on any given day.

Congress is supposed to be fixing things (insert hysterical laughter here) but in the meantime, there’s no clear direction for taxpayers. As a result, the IRS issued the following statement:

The laws authorizing the airline ticket tax and other aviation-related taxes expired at midnight on Friday, July 22. The IRS continues to monitor pending legislation related to this issue. The IRS will continue to work with the airline industry to address issues relating to the collection and payment of the taxes involved. Taxpayers do not need to take any action at this time. The IRS will provide further guidance on this issue in the near future.

So how much is this glitch costing us? The Transportation Department has put the price tag on the failure to renew the excise taxes at about $200 million per week. It’s a good thing we don’t need the money.

Saturday, July 23, 2011

Federal E-Verify Program Now Accepts Mississippi Driver's Licenses

The U.S. Citizenship and Immigration Services (USCIS) recently announced that a Mississippi driver's license may be used as one of the documents that new hires give to their employer to verify their eligibility to work in the United States [USCIS News Release, USCIS and Mississippi Implement New E-Verify Tool to Combat Fraud, 6/13/11].

The federal E-Verify program is a free, Internet-based system that determines the employment eligibility of new hires by comparing information from the new hire's Form I-9, Employment Eligibility Verification, to Department of Homeland Security (DHS) and Social Security Administration (SSA) records. Earlier this year, USCIS announced that employers will soon be able to use motor vehicle documents to help determine whether individuals are authorized to work in the U.S. under the voluntary “Records and Images from DMVs for E-Verify (RIDE)” initiative. Mississippi is the first state to partner with USCIS to implement RIDE. The E-Verify program will execute the data verification and respond to the E-Verify user on whether the submitted information matches with the motor vehicle agency data or not. Employers that check Mississippi driver's licenses through E-Verify will not have access to the data contained within the Mississippi Department of Public Safety database. The employer will only be notified by USCIS of the result, such as “Employment Authorized” or “Tentative Nonconfirmation.”

More than 80% of new hires present driver's licenses to establish their identities when completing Form I-9.

Revenue Officers Given 15 Days to Contact Employers Included in Federal Tax Deposit Alert Cases

The IRS Small Business/Self-Employed (SB/SE) Division has issued an internal memorandum that instructs its revenue officers to contact employers in Federal Tax Deposit (FTD) Alert cases within 15 calendar days [IRS Memorandum SBSE-05-0711-064, 7/1/11].

Background. The FTD Alert program (the Alert program) is a proactive process that provides for early intervention by the IRS when semiweekly depositor employers do not deposit and pay taxes withheld from employees. The Alert program identifies taxpayers that appear to be behind in making deposits of withholding taxes before their quarterly employment tax returns are due to be filed. FTD Alerts are computer-generated, and taxpayers' accounts will have a specific code indicating there is an Alert. If the Alert meets a certain probability level that there will be an underpayment of FTDs, the Alert is assigned to the IRS collection field inventory. Revenue officers in the collection field work Alert cases and contact the identified taxpayers in person to discuss the deposit requirements and obtain payments.

The Alert program can protect the federal government's interest by its early identification of a potential delinquent tax payment. It also serves the employer's interest by allowing IRS involvement before enforced collection action, such as a levy of a bank account, seizure of assets, or bankruptcy, becomes the sole remaining alternative for collecting the taxes owed.

In 2007, the Treasury Inspector General for Tax Administration (TIGTA) issued a report which said that revenue officers do not always promptly contact employers about federal tax deposit issues, and, therefore, more employers incur FTD penalties (see TIGTA Report, The Federal Tax Deposit Alert Program Helps Taxpayers Comply With Paying Taxes, but Alerts Can Be Worked More Effectively, Reference Number: 2007-30-180, 9/17/07). The new internal memorandum requires revenue officers to contact employers within 15 calendar days after a revenue officer receives a FTD Alert. A telephone call by the revenue officer that does not result in employer contact will not meet IRS requirements for timely contact. Leaving a message within this period is also not considered a timely contact. In these instances, revenue officers should make a field visit to the employer.

Employer Can't Challenge IRS Closing Agreement that Had Incorrect EIN

The U.S. Tax Court has ruled that an employer was not coerced into signing an IRS closing agreement, and that the closing agreement could still be enforced even though it did not contain the correct employer identification number (EIN) [Tree-Tech Inc. v. Commissioner, TC Memo 2011-162, 7/11/11].

The facts. On Feb. 1, 2007, the IRS notified William Moon, attorney-in-fact for Tree-Tech Incorporated, that it was conducting an audit of the company. The sole officer and director of the company was Julie Moon (i.e., William Moon's wife). The exam was originally going to focus on the company's failure to report officer's compensation as wages, but after his first meeting with Mr. and Mrs. Moon, IRS examiner William Cookenour expanded the examination to include worker classification issues.

Cookenour met with Mr. and Mrs. Moon after the audit was concluded to explain the terms of an IRS settlement offer under the Classification Settlement Program. The Moons said that at the meeting, Cookenour presented them with two different calculations of the company's liabilities and told them that if they did not accept the offer to settle for the lower amount, the IRS would assess the higher amount. The Moons also said that Cookenour told them that they could appeal the assessment, but that they would not win on appeal. Mrs. Moon accepted the settlement offer at that meeting by signing a closing agreement titled “Closing Agreement on Final Determination Covering Specific Matters Regarding Worker Classification.” Mrs. Moon agreed to pay the amount shown on the closing agreement in full satisfaction of the company's liability stemming from its incorrect worker classification, and she agreed to begin treating company workers as employees.

The closing agreement signed by Mrs. Moon contained an incorrect EIN in the document heading. However, the closing agreement did contain the correct EIN in the first paragraph and it identified the employer by name as “Tree Tech Incorporated.”

On Sept. 18, 2008, the IRS mailed the Moons a “Final Notice of Intent to Levy and Notice of Your Right to a Hearing” (notice of intent to levy). The Moons timely filed Form 12153, Request for a Collection Due Process or Equivalent Hearing. The Moons contested the company's underlying tax liability, arguing that the company was entitled to employment tax relief under Section 530 of the Revenue Act of 1978. Section 530 provides retroactive and prospective relief from employment tax liability for employers who misclassified workers as independent contractors. The Moons also argued that Cookenour had coerced Mrs. Moon into signing the closing agreement, and that the agreement was invalid anyway since it included an incorrect EIN for the company. The IRS Appeals Office said that the Moons could not contest the company's underlying tax liability during the collection due process hearing because the assessments were made in accordance with the closing agreement signed by Mrs. Moon.

The law. Code Sec. 7121(b) states that an IRS closing agreement is final and conclusive “except upon a showing of fraud or malfeasance, or misrepresentation of a material fact.”

The ruling. The Tax Court granted summary judgment to the IRS on the coercion and incorrect EIN issues. The court said that Cookenour's settlement offer was precisely the kind of arrangement contemplated under the IRS Classification Settlement Program. The court noted that the very nature of a settlement offer is that one party offers the other party a concession to induce that party to agree to the deal. The IRS agreed to assess only a portion of the taxes due under the reclassification in exchange for the Moons' agreement to settle the matter. The court also said that the closing agreement was final and conclusive because the Moons did not raise any issues with respect to fraud, malfeasance, or misrepresentation of a material fact.

The Tax Court acknowledged that there was a minor error in the company's EIN on the closing agreement, but it said that the Moons were in no way prejudiced or confused by the minor error.

The Tax Court said that it lacked jurisdiction to address the Section 530 issue, but pointed out that the company may still be eligible for Section 530 relief under Rev Proc 85-18, 1985-1 CB 518 , if it has not yet completely paid the employment tax liability in the closing agreement.

Employment Tax Penalties Abated Even Though Not First-Time Offense

The U.S. Tax Court has overturned an IRS assessment imposing penalties and interest on an employer for failure to deposit and pay employment taxes, finding that there was “reasonable cause” for the failure [Custom Stairs & Trim Ltd. Inc. v. Commissioner, TC Memo 2011-155, 7/5/11].

The facts. Custom Stairs & Trim Ltd. (Custom Stairs) is a Florida business that fabricates staircases for residential properties. It was strongly affected by Hurricane Ivan in 2004, the collapse of the housing market, and the recession. The company laid off employees, eliminated vacations and paid holidays, and cut employee benefits. Custom Stairs went so far as to list its office property with a real estate broker in hopes of paying off its debts.

The company had a history of timely filing its Forms 941 and making deposits of the tax assessed. However, following the hurricane, it also had a history of failing to pay the full amount and having to pay penalties and interest. The company fell behind with its employment taxes in early 2005 and was thereafter consistently in arrears. For most of the calendar quarters at issue, Custom Stairs actually paid over to the IRS amounts that would have fully satisfied its liability for the current quarter, but the IRS applied its payments to prior arrearages, leaving all or portions of each successive quarter's required deposits underpaid. This situation caused the IRS to assess cascading penalties.

On Nov. 20, 2008, Custom Stairs received from the IRS a “Final Notice, Notice of Intent to Levy and Notice of Your Right to a Hearing” (CDP levy notice), that showed a $9,919.27 liability for the quarter ended June 30, 2008. On Dec. 2, 2008, Custom Stairs was mailed a “Notice of Federal Tax Lien Filing and Your Right to a Hearing.” On Dec. 11, 2008, Custom Stairs timely filed a Form 12153, Request for a Collection Due Process or Equivalent Hearing. Under the heading “Offer in Compromise,” Custom Stairs requested a “reduced penalty, under the present economic conditions.” Under the heading “Lien Withdrawal,” Custom Stairs stated that the IRS lien was filed prematurely because Custom Stairs had been keeping current while slowly paying its past due liabilities. Custom Stairs also claimed that, as of Dec. 4, 2008, all of the past due amounts (except penalties) had been paid.

In early 2009, Settlement Officer Salinger from the IRS Appeals Office contacted Rebecca Cordes, Vice President of Custom Stairs, about the federal tax lien. Cordes claimed that the lien was unnecessary because the underlying taxes had been paid and the only balance for that period was a penalty. Cordes did not believe that she had to submit the documentation that Salinger had requested because she had been making payments on the delinquent tax liability. Still Salinger argued that Custom Stairs did not have “reasonable cause” for abatement of the penalty, as Custom Stairs had not submitted any of the documentation requested, and the company had not suggested any collection alternatives. When Salinger asked Cordes how she wished to resolve the liability, she informed him that she did not know because she did not have the money to pay it.

Reasonable cause. Code Sec. 6651(a) allows an employer to avoid penalties for noncompliance if it can show that its failure to file, pay, or deposit taxes was due to “reasonable cause” and not willful neglect. Reg. § 301.6651-1(c) states that in determining whether the taxpayer exercised ordinary business care and prudence, “consideration will be given to all the facts and circumstances of the taxpayer's financial situation, including the amount and nature of the taxpayer's expenditures in light of the income.” The primary factors cited by the federal courts of appeals in determining whether there was “reasonable cause” are: (1) the taxpayer's favoring other creditors over the government; (2) a history of failing to make deposits; (3) the taxpayer's financial decisions; and (4) the taxpayer's willingness to decrease expenses and personnel.

The ruling. The Tax Court ruled that Custom Stairs' failure to timely deposit and pay was due to reasonable cause. The court analyzed the four factors above. It concluded that Custom Stairs' failure to make the deposits, in the context of cascading penalties being assessed from one quarter to another, was due in significant part to Hurricane Ivan, the 2008 economic collapse, and the practical fact of the cascading penalties themselves. The court also noted that Custom Stairs had exercised ordinary business care and prudence in cutting benefits and payroll, selectively paying business expenses, and attempting to sell its real property to pay its tax liability. While the IRS argued that if the company cannot afford to make timely tax payments it should not be in business, the court found that the economy is negatively impacted by such an approach.

Failure to Pay Workers for Pre-Shift Work Activities Will Cost Employer More than $1.5 Million

Farmers Insurance Inc. has agreed to pay over $1.5 million in back wages to 3,459 employees following an investigation by the U.S. Department of Labor's Wage and Hour Division (WHD) that disclosed significant and systemic violations of the federal Fair Labor Standards Act's (FLSA) overtime and record-keeping provisions. The violations occurred at 11 customer service call centers across the country [WHD News Release, Los Angeles-based Farmers Insurance to pay more than $1.5 million in back wages to nearly 3,500 employees following US Labor Department investigation, 7/6/11].

The FLSA requires that covered employees be paid for pre-shift and post-shift job duties, and for attending required meetings.

Investigators found through interviews with employees and a review of the company's timekeeping and payroll systems that the company did not account for time employees spent performing pre-shift work activities. Employees routinely performed an average of 30 minutes per week of unrecorded and uncompensated work, such as turning on work stations, logging into the company phone system, and initiating certain software applications necessary to begin their call center duties. Employees are owed compensation at time and one-half their regular rates for hours that exceeded 40 per week. Farmers Insurance has agreed to pay the back wages, as well as to maintain future compliance with the FLSA by properly recording and compensating all hours worked by its employees.

Employers in Several States to Soon Pay Interest Surcharges

As of June 30, 2011, 29 states and the Virgin Islands have borrowed money from the federal government to help keep their unemployment insurance (UI) trust funds solvent. The loans total over $41 billion. The federal government will charge interest on these loans unless legislation is enacted that waives the interest charges. Many states are passing the interest charges on to employers. Some employers will be paying additional interest assessments in the next few months. Here is a summary of the assessments:

Alabama. All employers, except reimbursing employers, should soon be receiving a bill from the Alabama Department of Industrial Relations to help the State pay the interest due on its federal UI loans.

Arizona. Employers will pay a special assessment in 2011 and 2012 to help Arizona pay the interest on its federal unemployment insurance loans. The rate may not exceed 0.4% of taxable wages in 2011. The assessment for the first three quarters of 2011 will be paid with the third quarter unemployment tax return due on Oct. 31, 2011. The assessment for the fourth quarter of 2011 and all four quarters in 2012 will be paid with the unemployment tax return for that quarter [L. 2011, H2619].

Arkansas. Employers must pay a 0.2% advance interest tax, beginning in the second quarter of 2011. The tax is computed on taxable wages. It is paid with the quarterly unemployment tax report. (The second quarter return must be filed by August 1.) All employers, except reimbursing employers, must pay this assessment.

Colorado. Employers received (or should soon be receiving) a bill from the Colorado Department of Labor and Employment (DL&E) called “Unemployment Insurance Notice of Trust Fund Assessment” to help the State pay the interest due on its outstanding federal unemployment insurance loans. Employers must pay the assessment within 30 days of the billing date. The first payment will cover interest due to the federal government from January 2011 through April 2011 [DL&E website, Federal Interest Repayment].

Connecticut. The first annual special assessment will be mailed to employers on Aug. 1, 2011. The assessment must be paid by Aug. 31, 2011. The estimated average cost per employee is $35 [DOL Employer Information Notice, June 2011].

Hawaii. In the 2011 tax year, all employers, other than those selecting an alternative method of financing for unemployment benefits, must pay the employment and training fund assessment. The employment and training fund assessment rate is 0.02% of taxable wages in 2011. This rate includes a 0.01% surtax on employers to reimburse Hawaii for interest it must pay on federal loans to the State's unemployment trust fund [L. 2011, H1077].

Indiana. Experienced employers are paying a 13% surcharge in 2011 to help Indiana pay the interest on its federal unemployment insurance loans [Ind. Code §22-4-10-4.5].

Michigan. Negative-balanced employers are required to pay a solvency tax (maximum rate of 0.75% for 2011) in 2011 to help Michigan pay the interest on its federal unemployment insurance loans [Michigan UIA Solvency Tax Fact Sheet #121, October 2010].

Minnesota. Employers, except reimbursing employers, are paying a 2% federal loan interest assessment in the 2011 tax year to help Minnesota pay the interest on its federal unemployment insurance loans.

Missouri. Employers will pay an additional assessment with their second quarter 2011 unemployment tax return to help Missouri pay the interest due on its federal unemployment insurance loans. The Missouri Department of Labor has stated that the amount due will be 0.0931895% of an employer's taxable wages for calendar year 2010. Employers will pay $12.11 (i.e., 0.0931895% × $13,000 = $12.11) on each employee who earned wages equal to or greater than the 2010 taxable wage base of $13,000.

New Jersey. The New Jersey Department of Labor (DOL) has mailed (or should soon be mailing) the “Federal Loan Interest Assessment” (FLINT) to employers. New Jersey employers (except governmental entities and nonprofit organizations) will be paying this assessment to help the State pay the interest on its outstanding federal unemployment insurance loans. Employers must pay the assessment by Aug. 14, 2011. The assessment will be equal to 2.786% of an employer's 2010 unemployment insurance contributions, or $5, whichever is higher [New Jersey DOL website, Employer Information, Federal Loan Interest (FLINT) Assessment].

New York. All employers (except reimbursing employers) must pay an additional assessment to help New York State pay the interest due on its federal loans. The assessment is computed on 0.25% of taxable wages from the fourth quarter of 2009 through the third quarter of 2010. The payment is due on Aug. 15, 2011.

Pennsylvania. All employers (except reimbursing and new employers) must pay an additional assessment for interest due on federal loans. The interest factor tax is a variable rate, not to exceed 1%. The interest factor tax is 0.44% in the 2011 tax year.

Rhode Island. The job development assessment fee has been increased by 0.3% to help Rhode Island pay the interest on its federal unemployment insurance loans.

South Carolina. All employers, except reimbursing employers, must pay an interest surcharge in 2011 to help South Carolina pay the interest on its federal unemployment insurance loans.

Wisconsin. Employers recently received a letter from the Wisconsin Department of Workforce Development (DWD) that notified them of a “Special Assessment for Interest” that will be billed in early August 2011 and will be due in September 2011. The assessment will be approximately 0.2% of taxable payroll (0.15% for reimbursing employers). Employers will pay the assessment if their taxable payroll for calendar year 2010 was greater than $25,000 [DWD website, Special Message to Employers: Information on Special Assessment for Interest].