Published reports indicate that the White House is considering additional payroll tax breaks to stimulate the economy.
Section 601 in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 temporarily reduced the employee Social Security withholding tax rate on wages from 6.2% to 4.2% for one year, effective with wages earned beginning Jan. 1, 2011. There is some talk in Washington about extending this break, and/or possibly providing this break to employers as well. In a June 7 joint press conference with German Chancellor Merkel, President Obama said that some “of the steps that we took during the lame duck session, the payroll tax, the extension of unemployment insurance, the investment in — or the tax breaks for business investment in plants and equipment — all those things have helped. And one of the things that I'm going to be interested in exploring with the members of both parties in Congress is how do we continue some of these policies to make sure that we get this recovery up and running in a robust way.”
In a May speech at Stanford University, Christina Romer, former Chairwoman of President Obama's Council of Economic Advisers, said that “my particular favorite additional short-run stimulus would be a cut in the employer side of the payroll tax. Congress cut the payroll tax for employees in the budget compromise last December. A similar cut in what firms have to contribute for payroll taxes would make hiring workers cheaper and would therefore likely be particularly helpful for employment growth.” Former Treasury Secretary Larry Summers also supports a payroll tax cut to employers. He stated in a June 12 opinion piece that “raising the share of the payroll tax cut from 2 percent to 3 percent would be desirable as well.”
Friday, June 24, 2011
Upcoming State Payroll Tax Changes
Many states will soon be revising key payroll tax figures and procedures. Here are some of the highlights:
Arizona
Effective July 20, 2011, employers may pay employees by either direct deposit or paycard, rather than by paper check, if certain requirements are met.
Arkansas
A 0.2% advance interest tax will be added to all employers' unemployment tax rates (except reimbursing employers), beginning with the second quarter return filed in July. The tax will help Arkansas pay the interest due on its federal unemployment insurance loans.
Colorado
The Colorado Department of Labor and Employment will be sending a bill to employers called “Unemployment Insurance Notice of Trust Fund Assessment” in early July to help the State pay the interest due on its outstanding federal unemployment insurance loans.
Florida
The Florida minimum wage rate recently increased from $7.25 to $7.31 per hour.
Hawaii
Effective July 1, 2011, professional employer organizations (PEOs) must register with the Hawaii Department of Labor and Industrial Relations before entering into a PEO agreement with a client company in Hawaii.
Idaho
Effective July 1, 2011, a PEO that fails to submit a separate quarterly wage report for each of its clients will be subject to a $100 penalty for each client that it fails to separately report. The maximum penalty in any quarter may not exceed $5,000.
Illinois
Effective for the tax year beginning on July 1, 2011, any employee making less than $4,300 per calendar quarter should not be included in the taxable employee counts for purposes of the $4 monthly Chicago employer's expense tax. Effective July 1, 2011, employers are required to make payments for the tax on or before the 15th day following the end of the quarterly tax period. Previously, the payments were due on or before the last day of the month following the end of the quarterly tax period [Chicago Department of Revenue Tax Alert, 11/17/10].
Michigan
The unclaimed property report must be filed by July 1, 2011, for the period beginning July 1, 2010, and ending on March 31, 2011.
Mississippi
Beginning July 1, 2011, all private employers must use the federal E-Verify system to verify the employment eligibility of new hires.
Missouri
Employers will pay an additional assessment with their second quarter unemployment tax return to help Missouri pay the interest due on its federal unemployment insurance loans.
Nebraska
Effective July 1, 2011, employers who made over $16,000 in withholding tax payments in a previous tax year must make all withholding tax payments by EFT.
Ohio
Effective July 1, 2011, the Ada Village (Hardin County) tax rate will increase from 1.15% to 1.65%; the Tipp City (Miami County) tax rate will increase from 1.25% to 1.5%; and the Franklin City (Warren County) tax rate will increase from 1.5% to 2.0%.
Utah
Utah's Taxpayer Access Point (TAP) is replacing WebExpress as a means to file, pay, and manage withholding taxes. Employers must register in the TAP system on or after June 27 to prevent filing and payment delays [STC Announcement, Taxpayer Access Point (TAP) is Replacing WebExpress, 5/5/11].
Virginia
Effective July 1, 2011, semi-weekly filers are required to file all withholding tax returns and make payments electronically [L. 2010, H1500 (c. 890)].
West Virginia
Beginning July 1, 2011, a 1% occupation tax must be withheld from all persons working in the City of Huntington. The occupation tax replaces the city service fee of $3.00 per week.
Arizona
Effective July 20, 2011, employers may pay employees by either direct deposit or paycard, rather than by paper check, if certain requirements are met.
Arkansas
A 0.2% advance interest tax will be added to all employers' unemployment tax rates (except reimbursing employers), beginning with the second quarter return filed in July. The tax will help Arkansas pay the interest due on its federal unemployment insurance loans.
Colorado
The Colorado Department of Labor and Employment will be sending a bill to employers called “Unemployment Insurance Notice of Trust Fund Assessment” in early July to help the State pay the interest due on its outstanding federal unemployment insurance loans.
Florida
The Florida minimum wage rate recently increased from $7.25 to $7.31 per hour.
Hawaii
Effective July 1, 2011, professional employer organizations (PEOs) must register with the Hawaii Department of Labor and Industrial Relations before entering into a PEO agreement with a client company in Hawaii.
Idaho
Effective July 1, 2011, a PEO that fails to submit a separate quarterly wage report for each of its clients will be subject to a $100 penalty for each client that it fails to separately report. The maximum penalty in any quarter may not exceed $5,000.
Illinois
Effective for the tax year beginning on July 1, 2011, any employee making less than $4,300 per calendar quarter should not be included in the taxable employee counts for purposes of the $4 monthly Chicago employer's expense tax. Effective July 1, 2011, employers are required to make payments for the tax on or before the 15th day following the end of the quarterly tax period. Previously, the payments were due on or before the last day of the month following the end of the quarterly tax period [Chicago Department of Revenue Tax Alert, 11/17/10].
Michigan
The unclaimed property report must be filed by July 1, 2011, for the period beginning July 1, 2010, and ending on March 31, 2011.
Mississippi
Beginning July 1, 2011, all private employers must use the federal E-Verify system to verify the employment eligibility of new hires.
Missouri
Employers will pay an additional assessment with their second quarter unemployment tax return to help Missouri pay the interest due on its federal unemployment insurance loans.
Nebraska
Effective July 1, 2011, employers who made over $16,000 in withholding tax payments in a previous tax year must make all withholding tax payments by EFT.
Ohio
Effective July 1, 2011, the Ada Village (Hardin County) tax rate will increase from 1.15% to 1.65%; the Tipp City (Miami County) tax rate will increase from 1.25% to 1.5%; and the Franklin City (Warren County) tax rate will increase from 1.5% to 2.0%.
Utah
Utah's Taxpayer Access Point (TAP) is replacing WebExpress as a means to file, pay, and manage withholding taxes. Employers must register in the TAP system on or after June 27 to prevent filing and payment delays [STC Announcement, Taxpayer Access Point (TAP) is Replacing WebExpress, 5/5/11].
Virginia
Effective July 1, 2011, semi-weekly filers are required to file all withholding tax returns and make payments electronically [L. 2010, H1500 (c. 890)].
West Virginia
Beginning July 1, 2011, a 1% occupation tax must be withheld from all persons working in the City of Huntington. The occupation tax replaces the city service fee of $3.00 per week.
IRS Increases Standard Mileage Rates
The IRS has increased the optional standard mileage rates for the final six months of 2011 due to the sharp rise in gasoline prices. The rate will increase to 55.5¢ per mile (previously 51¢ cents per mile) for all business miles driven between July 1 and Dec. 31, 2011. The new six-month rate for computing deductible medical or moving expenses will be 23.5¢ per mile, up from 19¢ for the first half of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14¢ per mile [IR 2011-69; Ann. 2011-40, 2011-29 IRB].
An employer that requires employees to supply their own autos may reimburse them at a rate that doesn't exceed 55.5¢ per mile for employment-connected business mileage in the second half of 2011, and the reimbursement will be treated as a tax-free accountable plan reimbursement. The employee must substantiate the time, place, business purpose, and mileage of each trip. Additionally, an employee's personal use of lower-priced company autos during the second half of 2011 may be valued at 55.5¢ per mile if the conditions specified in Reg. §1.61-21(e)(1) are met.
Employers paying a mileage allowance in excess of the standard rate must report the excess on Form W-2.
Taxpayers always have the option of calculating the actual costs of using their vehicle, rather than using the standard mileage rates.
The IRS generally only revises the standard mileage rates once a year (in the fall).
An employer that requires employees to supply their own autos may reimburse them at a rate that doesn't exceed 55.5¢ per mile for employment-connected business mileage in the second half of 2011, and the reimbursement will be treated as a tax-free accountable plan reimbursement. The employee must substantiate the time, place, business purpose, and mileage of each trip. Additionally, an employee's personal use of lower-priced company autos during the second half of 2011 may be valued at 55.5¢ per mile if the conditions specified in Reg. §1.61-21(e)(1) are met.
Employers paying a mileage allowance in excess of the standard rate must report the excess on Form W-2.
Taxpayers always have the option of calculating the actual costs of using their vehicle, rather than using the standard mileage rates.
The IRS generally only revises the standard mileage rates once a year (in the fall).
IRS Can't Apply Certain Overpayments to Other Tax Periods if Taxpayer Remits Taxes But Fails to File a Return
The Court of Appeals for the Fifth Circuit has denied an employer's refund claim, even though the employer had overpayments in certain quarters that were not applied to its withholding tax liability [Nicholas Acoustics & Specialty Company, Inc. v. U.S., CA5, 107 AFTR 2d ¶2011-950, 6/15/11].
The facts. Between 1999 and 2003, Nicholas Acoustics & Specialty Company, Inc. (Nicholas) remitted payroll taxes to the IRS, but failed to file any tax returns. The funds remitted were not for the exact amount owed, but were instead an estimate of the amount due. The company occasionally paid taxes in excess of its liability. Nicholas erroneously assumed that the IRS could apply all of its overpayments to other quarters in which it had underpaid its tax liability.
In 2003, the IRS audited Nicholas due to its failure to file its tax returns. After the audit, Nicholas filed returns for the missing quarters, which allowed the IRS to refund overpayments or credit the overpayments to certain quarters in which a deficit had occurred. The IRS said that it could only refund or credit Nicholas's overpayments for returns due within the past three years because of the statute of limitations. Nicholas still owed taxes for the period in question, even after the IRS made the adjustments. The IRS filed a lien against Nicholas, which Nicholas paid before seeking a refund. Nicholas contended that the shortfall wouldn't have occurred if the IRS had applied all of the company's overpayments to future or past quarters.
IRS methodology. The IRS classifies a remittance of taxes as either a payment or a deposit. If a tax remittance is determined to be a deposit, it is treated like a cash bond, which the IRS simply holds, and a taxpayer may seek a refund of the deposit at any time (see Rosenman v. U.S., U.S. Sup. Ct., 33 AFTR 314, 1/29/45). But if a remittance is deemed a payment, the taxpayer may only recover the money by filing a timely claim for refund (see Miller v. U.S., Ct Fed Cl, 86 AFTR 2d 2000-7058, 11/09/00).
Previous court rulings. In Deaton v. Comm., CA5, 97 AFTR 2d 2006-984, 2/9/06, and Baral v. U.S., U.S. Sup. Ct., 85 AFTR 2d 2000-941, 2/22/00, federal courts determined that a remittance that discharges or pays a deemed or assessed tax liability constitutes a payment. In addition, a remittance also constitutes a payment if it's made under an Internal Revenue Code section for which the statute's plain language states that the remittance is to be “deemed paid.”
In Baral, the Supreme Court looked at an individual's refund claim for income tax partially paid through his employer's wage withholding and partially paid through his own remittance of the estimated tax. The Supreme Court held that the tax was paid when the money was remitted, not when the tax was assessed. The Supreme Court focused on Code Sec. 6513(b)(1) and Code Sec. 6513(b)(2) , which govern employee withholding taxes. It noted that remittances which are governed by a “deemed paid” provision akin to Code Sec. 6513 are “payments” subject to Code Sec. 6511. Under Code Sec. 6511(a), a claim for credit or refund of an overpayment must be filed by the taxpayer within two years from the time the tax was paid if no return was filed by the taxpayer.
The ruling. The Court of Appeals for the Fifth Circuit agreed with the IRS that the employment tax remittances constituted payments and that refunds of the payments were subject to the statute of limitations period in Code Sec. 6511. The Fifth Circuit looked at the plain language in Code Sec. 6513(c)(2) and said that it was a “deemed paid” provision subject to Code Sec. 6511 's limitations period for refunds. Similarly, Reg. §31.6302-1(h)(9) deems a remittance of employment taxes to be a payment.
The facts. Between 1999 and 2003, Nicholas Acoustics & Specialty Company, Inc. (Nicholas) remitted payroll taxes to the IRS, but failed to file any tax returns. The funds remitted were not for the exact amount owed, but were instead an estimate of the amount due. The company occasionally paid taxes in excess of its liability. Nicholas erroneously assumed that the IRS could apply all of its overpayments to other quarters in which it had underpaid its tax liability.
In 2003, the IRS audited Nicholas due to its failure to file its tax returns. After the audit, Nicholas filed returns for the missing quarters, which allowed the IRS to refund overpayments or credit the overpayments to certain quarters in which a deficit had occurred. The IRS said that it could only refund or credit Nicholas's overpayments for returns due within the past three years because of the statute of limitations. Nicholas still owed taxes for the period in question, even after the IRS made the adjustments. The IRS filed a lien against Nicholas, which Nicholas paid before seeking a refund. Nicholas contended that the shortfall wouldn't have occurred if the IRS had applied all of the company's overpayments to future or past quarters.
IRS methodology. The IRS classifies a remittance of taxes as either a payment or a deposit. If a tax remittance is determined to be a deposit, it is treated like a cash bond, which the IRS simply holds, and a taxpayer may seek a refund of the deposit at any time (see Rosenman v. U.S., U.S. Sup. Ct., 33 AFTR 314, 1/29/45). But if a remittance is deemed a payment, the taxpayer may only recover the money by filing a timely claim for refund (see Miller v. U.S., Ct Fed Cl, 86 AFTR 2d 2000-7058, 11/09/00).
Previous court rulings. In Deaton v. Comm., CA5, 97 AFTR 2d 2006-984, 2/9/06, and Baral v. U.S., U.S. Sup. Ct., 85 AFTR 2d 2000-941, 2/22/00, federal courts determined that a remittance that discharges or pays a deemed or assessed tax liability constitutes a payment. In addition, a remittance also constitutes a payment if it's made under an Internal Revenue Code section for which the statute's plain language states that the remittance is to be “deemed paid.”
In Baral, the Supreme Court looked at an individual's refund claim for income tax partially paid through his employer's wage withholding and partially paid through his own remittance of the estimated tax. The Supreme Court held that the tax was paid when the money was remitted, not when the tax was assessed. The Supreme Court focused on Code Sec. 6513(b)(1) and Code Sec. 6513(b)(2) , which govern employee withholding taxes. It noted that remittances which are governed by a “deemed paid” provision akin to Code Sec. 6513 are “payments” subject to Code Sec. 6511. Under Code Sec. 6511(a), a claim for credit or refund of an overpayment must be filed by the taxpayer within two years from the time the tax was paid if no return was filed by the taxpayer.
The ruling. The Court of Appeals for the Fifth Circuit agreed with the IRS that the employment tax remittances constituted payments and that refunds of the payments were subject to the statute of limitations period in Code Sec. 6511. The Fifth Circuit looked at the plain language in Code Sec. 6513(c)(2) and said that it was a “deemed paid” provision subject to Code Sec. 6511 's limitations period for refunds. Similarly, Reg. §31.6302-1(h)(9) deems a remittance of employment taxes to be a payment.
Hiring Children to Work in the Family Business May Generate Some Employment Tax Savings
Summer is here and your kids need something to do. Why not hire them to work in your family business? If you do, it may help build their self-esteem. Plus your employment tax liability may also be a little less than it would have been if you had hired an unrelated individual to perform the task.
Income tax withholding. Regardless of how the family business is organized, it probably will have to withhold federal income taxes on the child's wages. Usually, an employee who had no federal income tax liability for the prior year, and expects to have none for the current year, can claim exempt status. However, exemption from withholding can't be claimed if: (1) the employee's income exceeds $950 and includes more than $300 of unearned income (such as dividends), and (2) the employee may be claimed as a dependent on someone else's return (whether or not the child is actually claimed as a dependent). Keep in mind that the child probably will get a refund for part or all of the withheld tax when he or she files a personal income tax return for the year.
Payments for domestic work in a parent's home are not subject to withholding tax. Withholding from remuneration for “services not in the course of the employer's trade or business” is only required if $50 or more cash remuneration is paid for such services performed by the child in the calendar quarter, and the child is regularly employed by the parent to perform the services (see Code Sec. 3401(a)(4)).
FICA and FUTA taxes. Employment for FICA tax purposes doesn't include services performed by a child under the age of 18 while employed by a parent in a trade or business that is a sole proprietorship, or a partnership in which each partner is a parent of the child (see Code Sec. 3121(b)(3)(A) ). This can generate some employment tax savings for the parent. For example, let's say a sole proprietor who averages $120,000 of earnings from the business pays $4,750 to his or her 17-year-old child in 2011. The sole proprietor's self-employment income would be reduced by $4,750, a saving of $137.75 (the 2.9% health insurance portion of the self-employment tax he or she would have paid on the $4,750 shifted to the child). This doesn't take into account a sole proprietor's income tax deduction for one-half of his or her own Social Security taxes. That's on top of the $268.38 (.0565 × $4,750) in employee FICA tax that the child saves by working for a parent instead of someone else. A similar but more liberal exemption applies for FUTA, which exempts earnings paid to a child under age 21 while employed by his or her parent (see Reg. §31.3306(c)(5)-1).
There is no FICA or FUTA tax exemption for employing a child in a corporation, even if it is controlled by the child's parent, or in a partnership that includes non-parent partners. The children are subject to the same rules that apply to all other employees.
Income tax withholding. Regardless of how the family business is organized, it probably will have to withhold federal income taxes on the child's wages. Usually, an employee who had no federal income tax liability for the prior year, and expects to have none for the current year, can claim exempt status. However, exemption from withholding can't be claimed if: (1) the employee's income exceeds $950 and includes more than $300 of unearned income (such as dividends), and (2) the employee may be claimed as a dependent on someone else's return (whether or not the child is actually claimed as a dependent). Keep in mind that the child probably will get a refund for part or all of the withheld tax when he or she files a personal income tax return for the year.
Payments for domestic work in a parent's home are not subject to withholding tax. Withholding from remuneration for “services not in the course of the employer's trade or business” is only required if $50 or more cash remuneration is paid for such services performed by the child in the calendar quarter, and the child is regularly employed by the parent to perform the services (see Code Sec. 3401(a)(4)).
FICA and FUTA taxes. Employment for FICA tax purposes doesn't include services performed by a child under the age of 18 while employed by a parent in a trade or business that is a sole proprietorship, or a partnership in which each partner is a parent of the child (see Code Sec. 3121(b)(3)(A) ). This can generate some employment tax savings for the parent. For example, let's say a sole proprietor who averages $120,000 of earnings from the business pays $4,750 to his or her 17-year-old child in 2011. The sole proprietor's self-employment income would be reduced by $4,750, a saving of $137.75 (the 2.9% health insurance portion of the self-employment tax he or she would have paid on the $4,750 shifted to the child). This doesn't take into account a sole proprietor's income tax deduction for one-half of his or her own Social Security taxes. That's on top of the $268.38 (.0565 × $4,750) in employee FICA tax that the child saves by working for a parent instead of someone else. A similar but more liberal exemption applies for FUTA, which exempts earnings paid to a child under age 21 while employed by his or her parent (see Reg. §31.3306(c)(5)-1).
There is no FICA or FUTA tax exemption for employing a child in a corporation, even if it is controlled by the child's parent, or in a partnership that includes non-parent partners. The children are subject to the same rules that apply to all other employees.
IRS Panel Discusses Employment Tax Return Examination Process
On June 22, the IRS conducted a webinar called “The Examination Process for Employment Tax Returns.” The webinar was conducted by a panel of four experts, including Anita Bartels, IRS Program Manager in Employment Tax Compliance Policy, and Laird Macmillan, IRS Senior Policy Analyst in Employment Tax Compliance Policy.
What triggers an audit? Bartels discussed some of the circumstances that might trigger an audit. For example, if an employer files many 1099 forms but only one Form W-2, that might trigger an audit. The IRS may also look closely at an S corporation income tax return that reports very little compensation but has a lot of distributions. A Form W-2 and Form 1099 issued to the same person might also pique the IRS's interest, but it possible for a person to receive both of these forms if he or she performs more than one service for the company. Bartels mentioned that some small businesses make the mistake of reporting a bonus to an employee on Form 1099 that should have been reported on Form W-2. Industry trends might also trigger an audit.
Accountable plan. Worker classification (employee vs. independent contractor) is generally a hot employment tax return examination topic, along with whether an employer has a legitimate accountable plan. Reimbursements (e.g., a mileage or tool allowance) are tax-free to the employee and aren't subject to withholding or payroll taxes if made under an accountable plan. To be treated as made under an accountable plan, a reimbursement must meet all of the following requirements: (1) the reimbursed expense must be allowable as an income tax deduction and must be paid or incurred in connection with performing services as an employee of the employer (business connection), (2) each reimbursed expense must be adequately accounted for to the employer within a reasonable period of time (substantiation), and (3) any amounts in excess of expenses must be returned within a reasonable period of time (return of excess requirement) [Reg. §1.62-2].
Michael M. Lloyd, who works for the law firm of Miller & Chevalier, said that the accountable plan issue comes up in almost every employment tax audit that his firm participates in. If the IRS determines that an employer did not have a valid accountable plan, all of the reimbursements will be reclassified as taxable compensation that is subject to withholding taxes.
State ramifications. The results of an IRS examination are shared with many state workforce agencies as part of the Questionable Employment Tax Practice (QETP) initiative. More than 35 states have entered into individual information-sharing agreements with the IRS.
Further information. There are many resources available to help employers obtain a better understanding of the IRS examination process. IRS Publication 3498 , The Examination Process, includes the following topics: (1) “Your Return Is Going To Be Examined,” (2) “What to Do When You Receive a Bill from the IRS,” (3) “What To Do if You Agree or Disagree with the Examination Results,” (4) “How Do You Appeal a Decision?,” and (5) “After the Examination.” Page 11 of IRS Publication 594, The IRS Collection Process, has information on the collection of employment taxes. There is a video on the IRS Video Portal called “Your Guide to an IRS Audit.”
The June 22 webinar will be archived on the IRS website.
What triggers an audit? Bartels discussed some of the circumstances that might trigger an audit. For example, if an employer files many 1099 forms but only one Form W-2, that might trigger an audit. The IRS may also look closely at an S corporation income tax return that reports very little compensation but has a lot of distributions. A Form W-2 and Form 1099 issued to the same person might also pique the IRS's interest, but it possible for a person to receive both of these forms if he or she performs more than one service for the company. Bartels mentioned that some small businesses make the mistake of reporting a bonus to an employee on Form 1099 that should have been reported on Form W-2. Industry trends might also trigger an audit.
Accountable plan. Worker classification (employee vs. independent contractor) is generally a hot employment tax return examination topic, along with whether an employer has a legitimate accountable plan. Reimbursements (e.g., a mileage or tool allowance) are tax-free to the employee and aren't subject to withholding or payroll taxes if made under an accountable plan. To be treated as made under an accountable plan, a reimbursement must meet all of the following requirements: (1) the reimbursed expense must be allowable as an income tax deduction and must be paid or incurred in connection with performing services as an employee of the employer (business connection), (2) each reimbursed expense must be adequately accounted for to the employer within a reasonable period of time (substantiation), and (3) any amounts in excess of expenses must be returned within a reasonable period of time (return of excess requirement) [Reg. §1.62-2].
Michael M. Lloyd, who works for the law firm of Miller & Chevalier, said that the accountable plan issue comes up in almost every employment tax audit that his firm participates in. If the IRS determines that an employer did not have a valid accountable plan, all of the reimbursements will be reclassified as taxable compensation that is subject to withholding taxes.
State ramifications. The results of an IRS examination are shared with many state workforce agencies as part of the Questionable Employment Tax Practice (QETP) initiative. More than 35 states have entered into individual information-sharing agreements with the IRS.
Further information. There are many resources available to help employers obtain a better understanding of the IRS examination process. IRS Publication 3498 , The Examination Process, includes the following topics: (1) “Your Return Is Going To Be Examined,” (2) “What to Do When You Receive a Bill from the IRS,” (3) “What To Do if You Agree or Disagree with the Examination Results,” (4) “How Do You Appeal a Decision?,” and (5) “After the Examination.” Page 11 of IRS Publication 594, The IRS Collection Process, has information on the collection of employment taxes. There is a video on the IRS Video Portal called “Your Guide to an IRS Audit.”
The June 22 webinar will be archived on the IRS website.
Thursday, June 23, 2011
IRS Announcement 2011-40
Announcement 2011-40 advises the public that the Internal Revenue Service is revising the optional standard mileage rates for computing the deductible costs of operating an automobile for business, medical, or moving expense purposes and for determining the reimbursed amount of these expenses that is deemed substantiated. This modification results from recent increases in the price of fuel. The revised standard mileage rates are 55.5 cents per mile for business use of an automobile and 23.5 cents for use of an automobile as a medical or moving expense. The mileage rate for use of an automobile as a charitable contribution is fixed by statute and remains 14 cents. The revised standard mileage rates apply to deductible transportation expenses paid or incurred for business, medical, or moving expense purposes on or after July 1, 2011, and to mileage allowances that are paid both (1) to an employee on or after July 1, 2011, and (2) for transportation expenses an employee pays or incurs on or after July 1, 2011.
Announcement 2011-40 will be published in Internal Revenue Bulletin 2011-29 on July 18, 2011.
Announcement 2011-40 will be published in Internal Revenue Bulletin 2011-29 on July 18, 2011.
IRS Increases Mileage Rate to 55.5 Cents per Mile
WASHINGTON — The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes.
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
The new rates are contained in Announcement 2011-40 on the optional standard mileage rates.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Mileage Rate Changes
Purpose Rates 1/1 through 6/30/11
Business — 51
Medical/Moving — 19
Charitable — 14
Rates 7/1 through 12/31/11
Business — 55.5
Medical/Moving — 23.5
Charitable — 14
The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.
In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."
While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.
The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.
The new six-month rate for computing deductible medical or moving expenses will also increase by 4.5 cents to 23.5 cents a mile, up from 19 cents for the first six months of 2011. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.
The new rates are contained in Announcement 2011-40 on the optional standard mileage rates.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Mileage Rate Changes
Purpose Rates 1/1 through 6/30/11
Business — 51
Medical/Moving — 19
Charitable — 14
Rates 7/1 through 12/31/11
Business — 55.5
Medical/Moving — 23.5
Charitable — 14
Doing Business With the IRS?
How to prepare for an office audit.
by Wendy Kravit, CPA
In the case of an office audit, a taxpayer is typically sent a letter that his return has been selected for audit. The letter details the items on the return that are being examined and requests that the taxpayer produce specific records pertaining to those items in person at an Internal Revenue Service (IRS) office at a specified time on a particular date.
The date and time of the audit is easily changed. The IRS does not expect most people to be available at the random date and time that it chose to put on the letter. Therefore, there is no negative connotation placed upon a taxpayer or representative who calls to change the appointment.
An Overview of the Typical IRS Office Audit
Prior to meeting with the taxpayer or his representative, the IRS Tax Auditor should have inspected the return and the classification check sheet created during the classification process when the return was selected for audit. While the audits are often confined to the items on the classification checklist (which are the same items that are detailed in the letter to the taxpayer), IRM 4.10.2.6.1 instructs the auditor that the scope of the examination should not be limited to the classified items if other significant issues are revealed during the examination. Therefore, an audit may be expanded depending on what the auditor discovers. The IRM urges the auditor to get managerial permission before expanding the scope of the audit. If the scope of the audit is expanded to another tax period, the taxpayer is to be notified in writing.
Office audits are not as complex as field examinations. Most office audits are allotted initial time slots of a few hours. The examiner has a worksheet that he will fill out upon examining the evidence that the taxpayer or representative presents for the items listed on the audit letter.
Preparing for an Office Audit
Generally, the meeting at the IRS office is fairly informal and relaxed. Most office audits do not involve complex issues and the auditor is verifying gross income and documentation to verify deductions. The auditor has to complete a form to create his report. He uses Form 4700 to record what he has seen and verified. The key to a successful office audit outcome is organization. A representative should have thoroughly reviewed all documentation that will be presented to the auditor. If there are multiple receipts to verify a particular expense, they should be organized together preferably with an adding machine tape to show the totals. The auditor may test some of the tapes to verify the accuracy.
Common areas for an office audit include itemized deductions, employee business deductions, and less complex Schedule C and Schedule E issues.
The representative should have a copy of the Power of Attorney (POA) with him even if it has already been submitted. The POA should include all open tax years for the taxpayer. If the auditor finds a significant issue in one year, he is very likely to look at the same issue in any other years that are currently open by statute.
The auditor will generally go through his check sheet. If there is disagreement between the representative and the auditor regarding the final audit findings, the representative may request a meeting with the auditor’s manager. If no adjustments are made, the case will be closed and a “no change” letter will be issued to the taxpayer. If there are adjustments to be made to the return, obtain a copy of the report and review it with the taxpayer. Do not sign reports on behalf of your client, always discuss the report with the client and, if agreed, have the client sign the report.
If the taxpayer agrees with the adjustment, he may sign and pay the tax immediately or sign the form, consenting to the assessment and wait for a bill. If the total amount due is less than $100,000, the taxpayer will have 21 calendar days to pay the bill without incurring additional interest. If the amount is at least $100,000 or more, he may pay the bill within 10 business days without incurring additional interest charges.
Handling Audit Disagreements
IRS Publication 556 outlines taxpayer appeal options.
As mentioned earlier, the first step to be taken to resolve a disagreement with the auditor is to meet with the auditor’s manager. However, if that resolution is not satisfactory, there are different options available depending upon the amount of money in dispute. The examiner will write up the case explaining your objection and close it out. A case is closed subject to managerial approval.
The taxpayer will receive a “30-day letter.” The letter proposes the adjustments that the auditor found and requests that the taxpayer either sign his agreement to the assessment of the additional tax or request an appeal.
If the taxpayer does not respond to the 30-day letter, he will receive a “90-day letter.” The 90- day letter is a “statutory notice of deficiency.” It contains information and instructions for filing a Tax Court petition. If the taxpayer does not respond to the 90-day letter and does not file a tax court petition, the tax will be assessed.
Field Examinations
Field examinations are handled by revenue agents and are generally more complex audits involving a business. Usually these are done at either the taxpayer’s place of business or the representative’s office. The taxpayer may be initially contacted by the agent by telephone or letter, depending on the practices of that area. Once a Power of Attorney has been submitted to the IRS all communications should be done through the representative.
The agent will submit a rather exhaustive request of books and records that he wants to examine to the taxpayer on an IDR, Information Document Request Form. Obviously, he will not be able to examine all of those records on the first day, so it is not unreasonable to ask him which records he really expects to be examining for that first day. Assuming the audit will take more than one day, he will typically issue a new IDR at the end of that first day detailing more specific records requests.
Often an issue arises because the revenue agent wants to speak to the taxpayer even though the representative has a valid Power of Attorney on file.
IRM 4.10.1.6.1 states that “Honoring a valid power-of-attorney submitted by a taxpayer is always required unless the criteria for bypassing the power-of-attorney has been met.”
Furthermore, IRM 4.10.4.3.3.2 provides the following information to IRS auditors:
Internal Revenue Code section 7521(c) states that an examiner cannot require a taxpayer to accompany an authorized representative to an examination interview in the absence of an administrative summons. However, the taxpayer’s voluntary presence can be requested through the representative as a means to expedite the examination process.
Should an examiner find that a representative has unreasonably delayed or hindered an examination, an examiner can bypass the representative and deal directly with the taxpayer.
Revenue agents are trained to request an interview with the taxpayer. However, if the representative is well prepared and knowledgeable about the taxpayer’s business and sources of income such a meeting should not be necessary.
The initial interview will include questions concerning possible nontaxable sources of funds as well as unreported sources of income. Therefore, the representative should be familiar enough with his client’s financial picture to be able to answer questions regarding loans, family gifts, inheritances and so on.
IRM 4.10.1.3.3.3 instructs the auditor to conduct a tour of the business site. The agent is instructed to visit the principal location and any other locations acquired during the period under examination. This is not required for office audits, although a visit may be conducted if appropriate. The purpose of the tour is for the revenue agent to gain familiarity with the taxpayer’s business operations and internal controls, identify potential sources of unreported income and to confirm the existence of assets.
Field audits of small businesses usually last several days or longer, depending upon the complexity of the business. The agent will have conducted a survey of the return before the visit; however, he will determine the scope of the audit based upon the initial interview and subsequent findings.
This article has been excerpted from The Adviser’s Guide to Doing Business With the IRS. You can purchase the publication at cpa2biz.com.
by Wendy Kravit, CPA
In the case of an office audit, a taxpayer is typically sent a letter that his return has been selected for audit. The letter details the items on the return that are being examined and requests that the taxpayer produce specific records pertaining to those items in person at an Internal Revenue Service (IRS) office at a specified time on a particular date.
The date and time of the audit is easily changed. The IRS does not expect most people to be available at the random date and time that it chose to put on the letter. Therefore, there is no negative connotation placed upon a taxpayer or representative who calls to change the appointment.
An Overview of the Typical IRS Office Audit
Prior to meeting with the taxpayer or his representative, the IRS Tax Auditor should have inspected the return and the classification check sheet created during the classification process when the return was selected for audit. While the audits are often confined to the items on the classification checklist (which are the same items that are detailed in the letter to the taxpayer), IRM 4.10.2.6.1 instructs the auditor that the scope of the examination should not be limited to the classified items if other significant issues are revealed during the examination. Therefore, an audit may be expanded depending on what the auditor discovers. The IRM urges the auditor to get managerial permission before expanding the scope of the audit. If the scope of the audit is expanded to another tax period, the taxpayer is to be notified in writing.
Office audits are not as complex as field examinations. Most office audits are allotted initial time slots of a few hours. The examiner has a worksheet that he will fill out upon examining the evidence that the taxpayer or representative presents for the items listed on the audit letter.
Preparing for an Office Audit
Generally, the meeting at the IRS office is fairly informal and relaxed. Most office audits do not involve complex issues and the auditor is verifying gross income and documentation to verify deductions. The auditor has to complete a form to create his report. He uses Form 4700 to record what he has seen and verified. The key to a successful office audit outcome is organization. A representative should have thoroughly reviewed all documentation that will be presented to the auditor. If there are multiple receipts to verify a particular expense, they should be organized together preferably with an adding machine tape to show the totals. The auditor may test some of the tapes to verify the accuracy.
Common areas for an office audit include itemized deductions, employee business deductions, and less complex Schedule C and Schedule E issues.
The representative should have a copy of the Power of Attorney (POA) with him even if it has already been submitted. The POA should include all open tax years for the taxpayer. If the auditor finds a significant issue in one year, he is very likely to look at the same issue in any other years that are currently open by statute.
The auditor will generally go through his check sheet. If there is disagreement between the representative and the auditor regarding the final audit findings, the representative may request a meeting with the auditor’s manager. If no adjustments are made, the case will be closed and a “no change” letter will be issued to the taxpayer. If there are adjustments to be made to the return, obtain a copy of the report and review it with the taxpayer. Do not sign reports on behalf of your client, always discuss the report with the client and, if agreed, have the client sign the report.
If the taxpayer agrees with the adjustment, he may sign and pay the tax immediately or sign the form, consenting to the assessment and wait for a bill. If the total amount due is less than $100,000, the taxpayer will have 21 calendar days to pay the bill without incurring additional interest. If the amount is at least $100,000 or more, he may pay the bill within 10 business days without incurring additional interest charges.
Handling Audit Disagreements
IRS Publication 556 outlines taxpayer appeal options.
As mentioned earlier, the first step to be taken to resolve a disagreement with the auditor is to meet with the auditor’s manager. However, if that resolution is not satisfactory, there are different options available depending upon the amount of money in dispute. The examiner will write up the case explaining your objection and close it out. A case is closed subject to managerial approval.
The taxpayer will receive a “30-day letter.” The letter proposes the adjustments that the auditor found and requests that the taxpayer either sign his agreement to the assessment of the additional tax or request an appeal.
If the taxpayer does not respond to the 30-day letter, he will receive a “90-day letter.” The 90- day letter is a “statutory notice of deficiency.” It contains information and instructions for filing a Tax Court petition. If the taxpayer does not respond to the 90-day letter and does not file a tax court petition, the tax will be assessed.
Field Examinations
Field examinations are handled by revenue agents and are generally more complex audits involving a business. Usually these are done at either the taxpayer’s place of business or the representative’s office. The taxpayer may be initially contacted by the agent by telephone or letter, depending on the practices of that area. Once a Power of Attorney has been submitted to the IRS all communications should be done through the representative.
The agent will submit a rather exhaustive request of books and records that he wants to examine to the taxpayer on an IDR, Information Document Request Form. Obviously, he will not be able to examine all of those records on the first day, so it is not unreasonable to ask him which records he really expects to be examining for that first day. Assuming the audit will take more than one day, he will typically issue a new IDR at the end of that first day detailing more specific records requests.
Often an issue arises because the revenue agent wants to speak to the taxpayer even though the representative has a valid Power of Attorney on file.
IRM 4.10.1.6.1 states that “Honoring a valid power-of-attorney submitted by a taxpayer is always required unless the criteria for bypassing the power-of-attorney has been met.”
Furthermore, IRM 4.10.4.3.3.2 provides the following information to IRS auditors:
Internal Revenue Code section 7521(c) states that an examiner cannot require a taxpayer to accompany an authorized representative to an examination interview in the absence of an administrative summons. However, the taxpayer’s voluntary presence can be requested through the representative as a means to expedite the examination process.
Should an examiner find that a representative has unreasonably delayed or hindered an examination, an examiner can bypass the representative and deal directly with the taxpayer.
Revenue agents are trained to request an interview with the taxpayer. However, if the representative is well prepared and knowledgeable about the taxpayer’s business and sources of income such a meeting should not be necessary.
The initial interview will include questions concerning possible nontaxable sources of funds as well as unreported sources of income. Therefore, the representative should be familiar enough with his client’s financial picture to be able to answer questions regarding loans, family gifts, inheritances and so on.
IRM 4.10.1.3.3.3 instructs the auditor to conduct a tour of the business site. The agent is instructed to visit the principal location and any other locations acquired during the period under examination. This is not required for office audits, although a visit may be conducted if appropriate. The purpose of the tour is for the revenue agent to gain familiarity with the taxpayer’s business operations and internal controls, identify potential sources of unreported income and to confirm the existence of assets.
Field audits of small businesses usually last several days or longer, depending upon the complexity of the business. The agent will have conducted a survey of the return before the visit; however, he will determine the scope of the audit based upon the initial interview and subsequent findings.
This article has been excerpted from The Adviser’s Guide to Doing Business With the IRS. You can purchase the publication at cpa2biz.com.
Wednesday, June 22, 2011
IRS Advisory Panel Offers Recommendations Related To Tax-Exempt And Government Entities
The IRS Advisory Committee on Tax Exempt and Government Entities (ACT) presented final recommendations and its annual report at a June 15 public meeting. The year-long projects that culminated in the recommendations covered topics related to the following: tax-exempt bonds; federal, state, and local governments; Indian tribal governments; exempt organizations; and employee plans. The ACT report and recommendations are available at http://www.irs.gov/pub/irs-tege/tege_act_rpt10.pdf.
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