Tuesday, February 21, 2012

Payroll tax cut extended through 2012

Congress passed an extension of the 2% payroll tax cut that had been scheduled to expire at the end of February. The extension means 160 million working Americans will continue to pay social security tax on their wages at a 4.2% rate for the rest of 2012, rather than at a 6.2% rate.

Because Republicans and Democrats were unable to agree on how to pay for the extended tax cut, the law included no spending cuts to offset the estimated $93 billion cost of this provision.

The law also provides for long-term federal unemployment benefits, setting the maximum at 73 weeks in states with the worst unemployment and 63 weeks for other states.

Another provision in the law includes the so-called “doc fix” that prevents a scheduled 27% reduction in Medicare payments to doctors.

The unemployment benefits and doctor payments will be paid for by government sales of broadband spectrum, requiring federal workers hired after this year to contribute more to their pensions, and cuts in certain health programs.

Tuesday, February 14, 2012

Tax Tip Provides Advice to Taxpayers Missing Form W-2

The IRS has released a tax tip advising taxpayers missing a Form W-2, Wage and Tax Statement (IRS Tax Tip 2012-20). Employees should generally have received a Form W-2 from each of their employers by January 31, 2012, for wages paid in calendar year 2011.

The IRS recommends taxpayers follow four steps if they have not received a Form W-2:

Contact the employer. Taxpayers should inquire whether and when the employer sent the Form W-2. They should allow a reasonable amount of time for the Form W-2 to be reissued or re-sent.

Contact the IRS. If the employer does not provide a Form W-2 by February 14, the taxpayer should contact the IRS and provide the following information: employer's name, address, and phone number; dates of employment; and estimate of wages earned and federal income tax withheld. This information should preferably be based on the employee's final paystub.

File the return. A taxpayer is required to file a 2011 Form 1040, U.S. Individual Income Tax Return, (or request for an extension) by April 17, 2012, even if the taxpayer has not received a Form W-2. If the taxpayer has not received Form W-2, the taxpayer should attach Form 4852, Substitute for Form W-2, Wage and Tax Statement, to Form 1040. Form 4852 contains lines for the taxpayer to estimate income and withholding taxes.

File Form 1040X. If the taxpayer subsequently receives a Form W-2 with different wage and withholding information than the information the taxpayer provided on Form 4852, the Tax Tip states that the taxpayer must file Form 1040X, Amended U.S. Individual Income Tax Return, providing the correct information.

New Tax Information Reporting Regulations Proposed for Passport Applicants

The IRS has issued new proposed regulations under Code Sec. 6039E to replace regulations proposed in 1992 for tax information reporting by applicants for U.S. passports (NPRM REG-208274-86). The new proposed regulations, unlike regulations from 1992, do not provide rules concerning information reporting by individuals applying for permanent residency status.

The proposed regulations require information including: the applicant's full name; address of principal residence within the country of residence; taxpayer identification number (TIN), if the applicant has one, and date of birth. The information is required "regardless of where the applicant resides at the time it is submitted," the IRS explained.

Reference: PTE §39,135.30

Thursday, February 9, 2012

IRS Releases Guidance on How to Claim Expanded Veterans Tax Credit; Certification Requirements Streamlined

WASHINGTON — The IRS today released the guidance and forms that employers can use to claim the newly-expanded tax credit for hiring veterans. The IRS also announced that employers will have more time to file the required certification form for employees hired on or after November 22, 2011, and before May 22, 2012. The VOW to Hire Heroes Act of 2011, enacted Nov. 21, 2011, provides an expanded Work Opportunity Tax Credit (WOTC) to businesses that hire eligible unemployed veterans and for the first time also makes the credit available to certain tax-exempt organizations.

The credit can be as high as $9,600 per veteran for for-profit employers or up to $6,240 for tax-exempt organizations. The amount of the credit depends on a number of factors, including the length of the veteran’s unemployment before hire, hours a veteran works and the amount of first-year wages paid. Employers who hire veterans with service-related disabilities may be eligible for the maximum credit.

Normally, an eligible employer must file Form 8850 with the state workforce agency within 28 days after the eligible worker begins work. But according to today’s guidance, employers have until June 19, 2012, to complete and file this newly-revised form for veterans hired on or after Nov. 22, 2011, and before May 22, 2012. The 28-day rule will again apply to eligible veterans hired on or after May 22, 2012.

In an effort to streamline the certification requirements, IRS today clarified and expanded upon 2002 guidance to facilitate employers’ use of electronic signatures when gathering the Form 8850 for transmission to state workforce agencies. The guidance confirms that employers can transmit the Form 8850 electronically, and also allows employers to transmit the Form 8850 via fax, subject to the ability of the state workforce agencies to accept submissions in those formats. The IRS expects the Department of Labor to issue further guidance to the state workforce agencies providing further clarification.

Notice 2012-13, posted today on IRS.gov, and the instructions for Form 8850 provide further details.

Businesses claim the credit on their income tax return. The credit is first figured on Form 5884 and then becomes a part of the general business credit claimed on Form 3800.

This credit is also available to certain tax-exempt organizations by filing Form 5884-C. The guidance released today also provides instructions and a new set of forms for tax-exempt organizations to claim the credit. For more information, including how to claim the credit, go to IRS.gov.

Wednesday, February 8, 2012

Failure to File Correct Form W-2 by Due Date

Employers who fail to file a correct Form W-2 by the due date are subject to the following penalty, which is based on when a correct Form W-2 is filed:

(1) $30 per Form W-2 if correctly filed within 30 days after the due date (by March 30 if the due date is February 28), up to a maximum of $250,000 a year ($75,000 for certain small businesses);

(2) $60 per Form W-2 if correctly filed more than 30 days after the due date but by August 1, up to a maximum of $500,000 a year ($200,000 for small businesses); and

(3) $100 per Form W-2 if filed after August 1 or not filed, up to a maximum of $1,500,000 a year ($500,000 for small businesses).

Failure to file correctly means failure to include all information required to be shown on Form W-2, including:

* incorrect information,

* filing on paper when filing electronically is required,
* reporting an incorrect taxpayer identification number (TIN),

* failing to report a TIN, or

* failing to file paper Forms W-2 that are machine readable.

An inconsequential error or omission is not considered a failure to include correct information. However, errors and omissions relating to a TIN, a payee's surname, and money amounts are never considered inconsequential (Code Sec. 6721; Reg. §§301.6721-1(a)(2), 301.6721-1(c)).

IRS Indicates 2012 Filing Season Brings Many New Changes

The 2012 filing season brings in many changes for tax return preparers and taxpayers, reported IRS officials Preston Benoit, deputy director of Return Preparer Office, and Jason Langley, lead tax law specialist of Tax Forms and Publications.

At a January 10 webcast hosted by Tax Talk Today, Benoit outlined the format of the registered return preparer competency exam, which is required for return preparers who want to be designated as Registered Tax Return Preparers. Langley also discussed changes to existing forms and the introduction of new tax forms for the 2012 filing season.


Some of the new forms are Form 8949 for reporting capital gains and losses, and an updated Form 1040-EZ and Form 1040-NR-EZ, which will reflect the payroll tax cut legislation when they are released in the next few months.

Competency Test

As part of its initiative to improve the return preparer industry, the IRS, in 2011, began requiring that return preparers who are not attorneys, CPAs or enrolled agents, must obtain a Preparer Tax Identification Number (PTIN). The second prong of the initiative requires that return preparers pass the registered tax return preparer competency test by December 31, 2013.

"The exam is a basic minimal competency exam," Benoit explained. "The examination is 120 questions; they're all mostly multiple choice or true and false." Exam takers are not allowed to bring prepared materials or notes with them into the exam, but the IRS will provide several resources such as Publication 17, the Tax Guide, and the long version of Form 1040 and its instructions. Benoit cautioned that the exam "is structured in such a way that, if a taker has to look up each and every answer, there may be trouble." The IRS will provide review materials on its website (http://www.irs.gov), and the likelihood of commercial study courses arising in the next two years should enable exam takers to more than adequately prepare for the test. For those who do not pass the exam on the first try, Benoit explained, "They can take the exam as many times as necessary."


In the meantime, return preparers who have not yet applied for their PTIN must do so. Benoit reported that the IRS has released applicants from the controversial fingerprinting requirement, although they are still subject to checks on their tax compliance status.

Registered Tax Return Preparer Status

Registered Tax Return Preparers who have passed the competency exam must maintain their status by annually renewing their PTIN and obtaining a minimum of 15 continuing education credits. These include two hours of ethics or professional conduct, three hours of federal tax law updates and 10 hours of federal tax law topics. Attorneys, CPAs and enrolled agents are subject to requirements of their own states, bar associations or other professional organizations and are generally not required to fulfill the IRS continuing education requirements. They must, however, still annually renew their PTINs.

2011 Tax Form Changes

There will be fewer processing delays for the 2011 tax year than there were for 2010. The delays in 2011 were due mainly to the last-minute tax legislation passed by Congress in 2010. "Because there is a lot of last-minute give-and-take to reach a deal, sometimes behind closed doors, we never know what the final legislation is going to be," said Langley. But he offered his assurances: "We don't expect to have any delays for 2011."

Some important changes to the 2011 tax forms include:

Form 1040. Form 1040 now has several blanks where taxpayers may directly input their foreign addresses, eliminating the need to file that information on a separate form.

Schedule L. Schedule L will no longer be required to figure the standard deduction.

Form 1040 and Individual Tax Return Identity Theft. The IRS has included a box for the identity theft protection PIN for victims of identity theft. It appears on the bottom of the second page, to the right of the blank for the spouse's occupation. Taxpayers who suffered identity theft (that is, someone whose information was used to file a fraudulent tax return and not simply someone whose credit cards were stolen) should have received a letter from the IRS at the end of 2011 that contained their PIN. Langley warned e-filers that they must include their PIN. "If they don't enter the PIN, and they received the letter, the return will probably be rejected." Additionally, ‘if they have lost the PIN, there is nothing they can do."

Foreign Financial Assets. Form 8938, Statement of Specified Foreign Financial Assets, has been released. Because of the penalties associated with the failure to file this form when required, preparers and taxpayers should familiarize themselves with the form and its instructions. "They define exactly what a foreign financial asset is, which I think is going to confuse a lot of people," said Langley.

Capital Gains and Losses. Schedule D, which traditionally was used to report capital gains and losses, has been replaced by Form 8949. Schedule D is now a recapitulation of items appearing elsewhere. The new system may change in the future as the IRS receives feedback. "We did focus test the 8949 as we developed it…and Schedule D as well," said Langley. "And depending on the feedback…there will be further changes, I'm sure, to tweak this."

Refundable Credits. Finally, Langley stated that taxpayers who qualify for some refundable credits, such as the adoption credit or the first-time homebuyer credit, must file their returns on paper.

IRS Issues 2011-2012 Priority Guidance Plan

The IRS has issued the priority guidance plan for 2011-2012. The payroll related items relating to executive compensation, health care, and benefits are below.

(1) Guidance under Code Sec. 51(d) on whether a state workforce agency may accept a Form 8850 Pre-Screening Notice and Certification Request for the Work Opportunity Credit with faxed signatures of the job applicant and the employer.

(2) Revenue ruling under Code Sec. 62(c) on wage recharacterization.

(3) Regulations under Code Sec. 83 to incorporate the holding in Revenue Ruling 2005-48.

(4) Revenue procedure providing model language on Code Sec. 83(b) elections.

(5) Final regulations on cafeteria plans under Code Sec. 125.

(6) Guidance on the $2,500 annual limit on salary reduction contributions to cafeteria plan health Flexible Spending Arrangements (health FSAs) under Code Sec. 125(i), as added by §9005 of the Patient Protection and Affordable Care Act (ACA).

(7) Notice on the applicability of Code Sec. 132(d) and (e) to employer-provided cell phones following enactment of §2043 of the Small Business Jobs Act of 2010. Published: 9/19/11 in IRB 2011-38 as Notice. 2011-72 (Released 9/14/11).

(8) Guidance under Code Sec. 132(f) on the use of smart cards, debit cards and credit cards in providing qualified transportation fringe benefits.

(9) Guidance under Reg. §162(m) on the application of the deduction limitation to certain payments of dividends or dividend equivalents.

(10) Guidance under Code Sec. 162(m)(6), as added by §9014 of the ACA.

(11) Notice under Code Sec. 223 on the effect of Indian Health Service coverage on eligibility to contribute to a Health Savings Account (HSA).

(12) Revenue ruling under Code Sec. 280G and Code Sec. 4999(a) on change in ownership.

(13) Guidance on application of Code Sec. 402(b) to participants in foreign nonqualified deferred compensation plans.

(14) Guidance under Code Sec. 404 on the application of the "in which or with which ends" rule and the exceptions to that rule in Code Sec. 1.404(a)-12(b).

(15) Final regulations on income inclusion under Code Sec. 409A. Proposed regulations were published on December 8, 2008.

(16) Notice on the application of Code Sec. 409A(b), as amended by the Pension Protection Act of 2006.

(17) Guidance under Code Sec. 419A on the definition of post-retirement medical benefits.

(18) Guidance under Code Sec. 424(c)(1)(B) on whether there is a disposition of Incentive Stock Option or Employee Stock Purchase Plan shares on receipt of boot by a target shareholder in a Code Sec. 368(a)(1) reorganization.

(19) Regulations under Code Sec. 457(f) on ineligible plans.

(20) Regulations under Code Sec. 512 explaining how to compute unrelated business taxable income of voluntary employees' beneficiary associations described in Code Sec. 501(c)(9).

(21) Guidance on the employee retention credit under Code Sec. 1400R.

(22) Regulations under Code Sec. 3101(b), Code Sec. 3102(f), and Code Sec. 1401(b) on additional Medicare tax on employees and self-employed individuals as added by §9015 of the ACA.

(23) Revenue ruling under Code Sec. 3121(q) updating Revenue Ruling 95-7 on tips.

(24) Regulations under Code Sec. 3127, Code Sec. 3121(b)(3)(A) and Code Sec. 3306(c)(5) making certain FICA exemptions available for disregarded entities.

(25) Regulations under Code Sec. 3504 designating certain parties who file employment tax returns under their employer identification numbers (EINs) for their clients' workers as persons required to perform acts of employers.

(26) Regulations under Code Sec. 4980G on interaction of Code Sec. 4980G and Code Sec. 125 with respect to comparable employer contributions to employees' HSAs.

(27) Guidance on shared responsibility for employers regarding health coverage under Code Sec. 4980H, as added by §1513 of the ACA. Published: 10/3/11 in IRB 2011-40 as Notice 2011-73 (Released 9/13/11).

(28) Guidance on the reporting requirements under Code Sec. 6056, as added by §1514 of the ACA.

(29) Guidance on the tax treatment of health insurance premium rebates under Public Health Service Act Code Sec. 2718(b), as added by §1001 of the ACA. (Treasury Office of Tax Policy and Internal Revenue Service,Second Quarter 2011-2012 Priority Guidance Plan, January 25, 2012.)

Friday, February 3, 2012

IRS Reopens Offshore Voluntary Disclosure Program and Increases Top Penalty

The IRS has reopened the offshore voluntary disclosure program, which closed in 2011, to encourage taxpayers to disclose unreported foreign accounts. The revived program is open-ended, but the IRS reserved the right to change the terms of the program at any time going forward (IRS News Release 2012-5). Additional details will be posted on the IRS website, the IRS advised.


IRS Commissioner Douglas Shulman announced the reopening of the offshore voluntary disclosure program by lauding the success of past programs. Shulman reported that the IRS has collected $4.4 billion from the 2009 and 2011 programs. Shulman predicted the IRS will collect additional revenue from the 2011 program as it processes cases.

The reopened program is similar to the 2011 program, but there are some differences. The overall penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to disclosure.

The 2011 program imposed a penalty of 25 percent. Unchanged from the 2011 program are reduced penalties of 12.5 percent and five percent for qualified taxpayers, the IRS explained. Individuals who have made voluntary disclosures after the 2011 program ended will be able to be treated under the provisions of the revived program.

The 2009 and 2011 programs were temporary and required taxpayers to request to participate by certain deadlines. The reopened program has no set deadline. However, the terms of the revived program could change at any point, the IRS cautioned. The IRS indicated it could increase penalties in the program for all, or some, taxpayers or defined classes of taxpayers; or, it could decide to end the revived program entirely.


Shulman reported that the 2009 and 2011 programs have generated 33,000 voluntary disclosures to date.

In related news, the National Taxpayer Advocate recently has ordered the IRS Large Business & International and Small Business/Self-Employed Divisions in a Taxpayer Assistance Directive (TAD) to revoke a memorandum issued on March 1, 2011, to examiners of open cases in the 2009 offshore voluntary disclosure program. The memorandum directs examiners in certain listed categories of cases to stop using their discretion to determine whether to propose an offshore penalty less than 20 percent.


According to the National Taxpayer Advocate, the IRS materially changed the terms of the 2009 offshore voluntary disclosure program after taxpayers, who relied on the original terms, applied for it. This resulted in the IRS treating similarly situated taxpayers differently.

Reference: PTE §39,015.15

Wednesday, February 1, 2012

FUTA Reminders for 2012

All of the states have now announced their taxable wage bases for 2012. As usual, there are a number of increases over the wage bases set last year. In addition, Nevada has a decrease in its taxable wage base for 2012. In the table below, states having higher 2012 wage bases than the 2011 wage bases are printed in bold. Nevada, with its lower amount, appears in italics.

FUTA tax figures for 2012

The taxable wage base under the Federal Unemployment Tax Act remains $7,000 for 2012. In addition, all 50 states, as well as the District of Columbia, Puerto Rico and the Virgin Islands, have received certifications for the maximum additional credit allowable based on the 12-month period ending on October 31, 2011.

0.2% surtax expires

The FUTA tax rate is 6.2% for wages paid on or after January 1, 2011, through June 30, 2011. It decreases to 6.0% for wages paid after July 1, 2011, through December 31, 2011, because of the mid-year expiration of the FUTA surtax. As we go to press, there has been no legislation reenacting the surtax for either the latter part of 2011 or for 2012.

Credit reduction states

Employers that pay their state unemployment tax timely and in full receive a 5.4% credit. However, that credit is reduced when a state has outstanding federal loans for two consecutive Januarys. The reduction is 0.3% for the first year and an additional 0.3% for each succeeding year until the loan is repaid. A state that has not repaid the money it has borrowed is called a credit reduction state.

The 0.3% credit reduction states for 2011 (for taxes paid in 2012) are Arkansas, California, Connecticut, Florida, Georgia, Illinois, Kentucky, Minnesota, Missouri, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, Virginia and Wisconsin, plus the U.S. Virgin Islands. Indiana is a 0.6% credit reduction state and Michigan is a 0.9% credit reduction state. South Carolina has received conditional approval for the full FUTA credit.

Taxable Wage Bases for 2012
State — 2012 Wage Base
Alabama — 8,000
Alaska — 35,800
Arizona — 7,000
Arkansas — 12,000
California — 7,000
Colorado — 11,000
Connecticut — 15,000
Delaware — 10,500
District of Columbia — 9,000
Florida — 8,500
Georgia — 8,500
Hawaii — 38,800
Idaho — 34,100
Illinois — 13,560
Indiana — 9,500
Iowa — 25,300
Kansas — 8,000
Kentucky — 9,000
Louisiana — 7,700
Maine — 12,000
Maryland — 8,500
Massachusetts — 14,000
Michigan — 9,500
Minnesota — 28,000
Mississippi — 14,000
Missouri — 13,000
Montana — 27,000
Nebraska — 9,000
Nevada — 26,400
New Hampshire — 14,000
New Jersey — 30,300
New Mexico — 22,400
New York — 8,500
North Carolina — 20,400
North Dakota — 27,900
Ohio — 9,000
Oklahoma — 19,100
Oregon — 33,000
Pennsylvania — 8,000
Puerto Rico — 7,000
Rhode Island — 19,600*
South Carolina — 12,000
South Dakota — 12,000
Tennessee — 9,000
Texas — 9,000
Utah — 29,500
Vermont — 16,000
Virgin Islands — 23,700
Virginia — 8,000
Washington — 38,200
West Virginia — 12,000
Wisconsin — 13,000
Wyoming — 23,000

* Rhode Island has a two-tier taxable wage base for 2012. For most employers it will be $19,600. For those in the highest tax group (9.79%), the taxable wage base will be $21,100.

IRS Issues Regs On Exclusion For Injury/Sickness Damages

The IRS has released final regulations relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness. The final regulations reflect amendments made by the Small Business Job Protection Act of 1996 (P.L. 104-188) and affect taxpayers receiving damages on account of personal physical injuries or physical sickness and taxpayers paying these damages.

The final regulations adopt without substantive change proposed regulations (NPRM REG-127270-06) issued on September 15, 2009. The proposed regulations deleted the requirement that, to qualify for exclusion from gross income, damages received from a legal suit, action, or settlement agreement must be based upon "tort or tort type rights." The proposed regulations provided, instead, that the Code Sec. 104(a)(2) exclusion may apply to damages recovered for a personal physical injury or physical sickness under a statute that does not provide for a broad range of remedies, and that the injury need not be defined as a tort. These regulations are effective January 23, 2012, and apply to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after January 23, 2012. (T.D. 9573, January 20, 2012.)