IRS Tax Law

By Wendy Speelman11/14/06

Federal Agencies

State Agencies

Municipal Governments

County Governments

School Districts

Federal, State, & Local Government (FSLG)

Compliance Activities Outreach events

Compliance checks Review of adherence to recordkeeping

and information reporting requirements

Examinations What to expect IRS vs. State audit

IRS examination steps

Initial contact to set up appointment Information Document Request (IDR) Interview Review books and records Proposal of adjustments Closure

Agreed or Unagreed – Supervisor, Appeals

Common audit adjustments

Wages subject to FICA or Medicare Wages not reported for all employees

Part-time, seasonal workers, students Incorrect worker classification

Form 1099 vs. W-2

Common audit adjustments

Wages or withholding incorrectly reported Forms 941, W-2 and W-3

Bonuses, vacation pay or other pay not reported

FMV of non-cash compensation not reported Fringe benefits

Failure to file/furnish Forms 1099

Penalties IRC §6651 Failure to File

5% per month – 25% maximum Failure to Pay

½ of 1% per month - 25% maximum Failure to Deposit

2% - 10% based on number of days late

FRINGE BENEFITS Any benefit an employee receives

in addition to their normal wage Could be monetary, equipment

or services

Treasury Regulations 1.61-21(a)(3)

Taxable Fringe Benefits INCLUDE in Employee’s wages and on W-2

(Never on 1099-MISC) Subject to Federal Withholding, Social

Security and Medicare Even if benefit is received by/for spouse or

child of employee

Exclusions

Taxable unless excluded by law Medical Premiums IRC 106 Cafeteria Plans IRC 125 Education Assistance IRC 127 Dependent Care IRC 129 Certain Fringe Benefits IRC 132

Non-Taxable Fringe Benefits

No additional cost service Qualified employee discounts Working condition fringe De minimis fringe Qualified transportation expenses Qualified Moving Expense

Reimbursements

De Minimis Benefit

Property or service, the value of which (after taking to into account frequency) is so small that accounting for it would be unreasonable

Must be small and infrequent Frequency defined - an event which is not

haphazard but regularly reoccurring

Cash Allowances

Also knows as “Stipends” Do Not qualify as a working

condition fringe benefit Do Not qualify as de minimis fringe

benefit Taxable to the Employee

Unless paid under the accountable plan rules

Accountable Plan

Business Connection Adequate ‘accounting’ by

employee in reasonable time period

Excess reimbursement returned in a reasonable time period

IRC 62(c) & Treasury Regulations 1.62-2

Non-accountable Plan

Does not meet all 3 requirements for an accountable plan

Benefit is fully taxable when paid

Awards

Taxable: Cash prizes including gift certificates Performance awards Non-Cash prizes use Fair Market Value IRC 74

Nontaxable: if rules are followed Employee Achievement awards Length of service awards Treasury Regulations 1.274-8

Bonuses Taxable to the employee & included

in their wages/W-2 Never on Form 1099 Includes: All cash & check bonuses,

Christmas bonuses & gift certificates IRC 61 Treasury Regulation 1.61-2 & 1.132-

6(c)

Meal Money while Traveling on business:

Meals away from home that are paid for, reimbursed or given an allowance: Overnight

Accountable Plan - Not taxable Not Overnight

Taxable as wages Revenue Ruling 75-432 & 75-170 IRC 162(a)(2)

Meal Allowance when not traveling

Meals with business meetings - NOT taxable if:

clear business setting directly related

Employer buys you lunch - Taxable as wages

Cell phones

Listed property §280F(d)(4) Susceptible to personal use

Substantiation rules §274(d) Allocate cost between business and

personal use Personal use is taxable fringe

benefit

Cell phones

Need itemized bills Need written policy Employee reimburse or include in

wages Taxable even if usage is not over

monthly amount paid by employer

Cell Phone Examples

Plan is 500 min. & used 400 min. (100 personal) the personal use is still taxable

If using minutes during nights/weekends this is still personal use and is taxable

If allowance is given for using personal cell & no accountable plan then taxable

Automobile Expenses Employee car used for employer’s

business 2006 Federal Mileage Rate - .445

At this rate or less: Non-taxable to employee

Excess over rate: Taxable to employee - only the excess amount

Substantiation Required Employee reports to Employer:

Date, Purpose, Place of each trip

Mileage Examples: Diary, log, trip

sheet, expense statement or similar record

IRC 274(d) – IRC 280F(d)(4)

Employer-Provided Vehicles Personal Use is taxable

Includes commuting Business Use is not taxable Employee can reimburse

Employer for personal use or have included in wages

Exception: Qualified nonpersonal use vehicles

Examples of qualified Non-personal use Vehicles

Clearly marked police and fire vehicles

Unmarked vehicles used by law enforcement officers

The officer must be: 1. Authorized & regularly carries a

firearms 2. Execute search warrants 3. Make arrests (not citizen’s arrest)

Examples of Vehicles continued

Ambulance Dump truck Flatbed trucks Utility repair

truck (not a pickup truck)

Passenger buses (at least 20 passenger)

Delivery trucks with driver seat only or driver & folding jump seat

Vehicle designed to carry cargo - loaded gross vehicle weight over 14,000 lbs

Qualified Non-personal Use Vehicles

Must have policy on restricting personal use of the vehicle

Commuting is nontaxable to the employee

Substantiation and record keeping is not required

1.274-5T(k)

Personal Usage

If employer provided vehicle does not meet the qualifications for non-personal use vehicle, and

Employee is not restricted from using the vehicle for personal use, then

Personal use is usually a non-cash taxable fringe benefit

Example

Town owns pickup truck with town name marked on vehicle

Employee is allowed to take the vehicle home because he is “on call”

No personal use is allowed Commuting is included in wages

as a fringe benefit

Personal Use

If No record kept: Value of ALL use is

taxable If record kept:

Only Personal Use is taxable

Automobile Valuation Rules

Cents-Per-Mile Rule Treasury Regulations 1.61-21(d)

Commuting Rule Treasury Regulations 1.61-21(e)

Automobile Lease Valuation Rule Treasury Regulations 1.61-21(f)

Cents-Per-Mile Rule Vehicle “regularly used” in business OR Vehicle driven 10,000 miles a year and FMV in 2005 limited to $14,800

Regularly used means 50% or more of mileage is for business or Vehicle is used to transport at least 3

employees to work

Commuting Rule

$1.50 per one-way commute if: Vehicle owned or leased by employer Employer requires the employee to

commute for bona fide noncompensatory business reasons

Written policy on personal use No control employees (elected

officials)

Commuting example

Supervisor takes home truck every day and is using the commuting method of $1.50 each way. He is called out to check on a problem at 6AM. He leaves from home goes to where problem is and then goes into the office. In the afternoon goes from office to home. He would include $1.50 commuting for that day. The morning driving was business not commuting.

Lease Valuation Rule

1. Determine FMV of vehicle2. Use table in Reg. 1.61-21(d)(iii) or

Publication 15-B3. Determine % of personal use4. Multiple Annual Lease Value by %

of personal use5. Value the fuel if provided 5.5 cents

Uniforms

Cost and upkeep of clothes are excluded from employee’s income if:1. Condition of employment2. Not suitable for everyday wear and3. Not worn while away from work

IRC 162 & 262 Donnelly v. Commissioner 262 F.2d 411 Yeomans v. Commissioner 30 T.C. 757

Uniforms

If suitable to replace regular clothing then include in wages Mella v. Commissioner T.C. Memo 1968-

594 Pevsner v. Commissioner 628 F.2d 467

Must meet accountable plan rules Treasury regulations 1.62-2(c)(1)

Uniform law IRC 162 & 262 Regulation 1.62-2(c)(1) Donnelly v. Commissioner 262 F.2d 411 Yeomans v. Commissioner 30 T.C. 757 Revenue Ruling 70-474 Mella v. Commissioner T.C. Memo 1968-

594 Pevsner v. Commissioner 628 F.2d 467 Drill v. Commissioner 8 T.C. 902

Timing of Fringe Benefits

Pay period, quarterly, semi-annually, annually or other basis

Don’t need same election for each employee

May change election during the year as long as treat as being paid by 12/31

Timing of Fringe Benefits

A single fringe benefit received may be paid on more than one date

Include in regular wages or treat as supplemental wages

IRC 451(a) & Announcement 85-113, 1985-31 IRB 31

Form W-9 To obtain a correct Taxpayer

Identification Number (TIN) Anyone required to file an information

return with IRS must use the form Substitute form is acceptable Applies to any US person including

resident aliensIRC 6041A(f) requires vendor to furnish

information

No W-9 Information No TIN provided — Payments subject to

Backup Withholding IRC §3406(a)

Backup Withhold rate is 28% for 2006

Publication 1281 and Form 1099 instructions

Reporting Backup Withholding

Report withholding to payee and to IRS in Box 4 of Form 1099-MISC

Form 945 to pay the IRS annual return, due 1/31/xx ordinary deposit rules apply make Form 945 deposits separate

from Form 941 deposits

Backup Withholding Begins when aggregate

payments for the year equal or exceed $600, or

immediately if: payee was paid >$600 in prior

year and an information return was issued, or

payee was subject to backup withholding in the prior year

Form 1099 Paid in the course of your trade or

business Including payments made by Federal,

State and Local Governments Payment of $600 or more to:

Individuals Partnerships Estates and Trusts

Form 1099-MISC

Payments of $600 or more for the year for: Rents Services or a combination of services

and products (including parts and materials)

Prizes/Awards Other Income Medical and Health Care Payments

IRC 6041

Examples of Service Auto repair Construction Custodial Maintenance Landscapers Locksmiths Referees

Printing Services Professional

Services Accountants Appraisers Architects Consultants Engineers Advertising

Medical & Healthcare Payments

$600 or more in Box 6 Report payments to all

individuals, partnerships, and corporations

Medical payments include doctor fees, drug testing, lab fees, physical therapy, etc.

Treasury Regulations §1.6041-3

* Do not report payments to pharmacies or tax exempt hospitals

Payments to Attorneys

Section 1031 of the House Bill and Proposed Regulation 1.6041-3 codify the requirement to report payments to attorneys (individuals and corporations) gross proceeds, and payments for

services regardless if they are a corporation

Effective for 1998 and later years

Payments to Attorneys

Attorney’s Fees Reported in Box 7 Payments of $600 or more

Gross Proceeds paid to Attorneys Report in Box 14 Any Amount Paid Don’t report in Box 14 if reported in

box 7 IRC 6045(f)

LLC’s & Reportable payments

LLC can be taxed as sole proprietorship, partnership, or corporation

Obtain a W-9 to determine status Report payments to sole

proprietors and partnerships (sometimes corp.)One or

more owners

Shouldn’t be on 1099-MISC

Payments to employees Fringe benefits Travel reimbursements

if not paid as part of an accountable plan, travel reimbursements and auto expenses should be included in wages and reported on W-2

Exemptions to filing form 1099

• Payments for only merchandise • Ex: Office or Cleaning Supplies

• Wages• Payments to a corporation except:

• Medical, health care providers and Attorneys

Filing Requirements

Payments on calendar year basis Provide copy to recipient by Jan. 31 File with IRS by Feb. 28 Form 1096 transmittal form with Forms

1099 to IRS

Common Errors

Failure to obtain identifying information before making payment (use Form W-9)

Failure to aggregate payments from all expense categories (use vendor files)

Assuming payee is a corporation: because name is “Company or

Associates” because an EIN is furnished

Behavioral Control - how, when and where to do the work; training

Financial Control - significant investment, expenses, opportunity for profit or loss

Relationship of the Parties - employee benefits, written contracts

Independent Contractor or Employee

Employees

Required to wear uniforms Required to work certain hours Owner provides training Owner provides supplies and

materials Can quit job without liability to

employer No financial risk of loss

Independent Contractor

Makes own schedule Has own phone number Advertises Buys own products Furnishes own equipment &

supplies Makes a profit or loss as a result

of his own business decisions

Resources

Publication 1779 - determination on status of worker as either an independent contractor or an employee

Publication 963 Chapter 3 Revenue Ruling 87-41 – 20 factors IRC 3401

Employee or Contractor??

Many state and local government officials are employees by statute

Elected Officials are always employeesWithhold taxesReport on Form W-2

Medicare Wages

Mandatory Medicare Coverage: employees hired or rehired after 3/31/86 Coverage is mandatory, not voluntarily Even if paying into a retirement system

Medicare Exception: Hired prior to 4/1/86 and no break in

service

Medicare Example

Employee was hired in 1980 & therefore does not pay into Medicare. They retire on 6/30/06. They are rehired on 7/1/06. They never stop working. They MUST pay into Medicare starting on 7/1/06 because they are a new employee hired after 3/31/86.

Reconciling Forms

Reconcile Form 941, Form W-2 & Form W-3 Wages Social Security wages Medicare wages Federal income tax

When to Deposit Make payment with return if:

Less than $2,500 tax liability for quarter Line 10, Form 941

Pay in full with timely filed return Monthly depositor if:

Liability for look back period $2,500 to $50,000

Deposit by 15th of following month

When to Deposit Semiweekly depositor if (line 8):

Liability for look back period > $50,000 If payday Wed. Thurs. or Fri. deposit taxes by

following Wed. If payday is Sat. – Tues. deposit taxes by

following Friday Next day depositor if (line 10):

Accumulate $100,000 or more of taxes in a deposit period (even if monthly or semiweekly depositor)

Pub 15 Circular E

Look back period

How to Deposit

Payment with return Coupons

Form 8109 – get from IRS Deposit with authorized depositary

Electronic deposits EFTPS – Electronic Federal tax Payment

System WWW.EFTPS.GOV

Form 941 – Liability Summaries

Monthly depositor -Line 15 (2nd page)

Semiweekly depositor - schedule B

Schedule B total should match total liability on 941 (Line 10)

Trust Fund Recovery Penalty If taxes are withheld but not

remitted to IRS Penalty is 100% of tax assessed Applies to person responsible for

collecting, accounting, & paying the taxes and who acted willfully

Willfully = voluntarily, consciously, & intentionally

Form 941C – Common uses

Use to correct Medicare withholding errors Failed to withhold the tax Withheld in error

Use to correct FICA tax withholding Failed to withhold on elected official

opting out of OPERS

Form 941C

Form 941C cannot be filed by itself File with Form 941 in quarter error

discovered Make deposit based on date error

discovered May need to correct W-2s Adjustments on line 7D or 7E on 941

Form 941C

Do not use to correct errors previously reported on: Monthly Deposits on Form 941, 2nd

page line 15 Schedule B Number of employees on Form 941

line 1 Wages on Form 941 line 2

Forms W-4 Treasury Decision 9196 effective

4/15/2005 No longer required to send W-4s to

IRS IRS will use W-2 information to

determine problems Lock-In letters issued to both

employer and employee

Forms W-4 Maintain for every employee Determine amount of tax to withhold Specify filing status and allowances Update for life changing events Don’t need new W-4 each year IRC 3402(f) – requirement to get information Pub 505, Form W-4 worksheet

Forms W-4 If employee claimed exempt status

they must submit new Form W-4 by Feb. 15th

If not, change to Single Zero

If employee gets Advanced EIC, Form W-5 by December 31st

Health Insurance Premiums paid by employee

Excluded from Income If: Employer reimburses employee for

paying health insurance premiums Must require proof of prior payment Can’t receive cash in lieu of

premium reimbursements Revenue Ruling 61-146 and 75-241 Private Letter Ruling 9022060

Revenue Ruling 58-360

Court Reporters fees from the preparation & sale of transcripts

Income from trade or business Not treated as wages In addition to statutory wages Dual capacity – employee (W-2) &

independent contractor (Form 1099)

Recent Rulings

TAM 200437031 Gift Certificates

Revenue Ruling 2006-36 HSA accounts with beneficiaries

Revenue Ruling 2006-43 What is a valid pick up plan

Gift certificates

TAM 200437031 Employer provided holiday gift

coupon redeemable at local stores Intended to be used for ham or turkey Had restrictions on it (i.e. tobacco) Limited dates to redeem it

Determined to be taxable

Revenue Ruling 2006-36

Reimbursement from HSA taxable if: Plan permits amounts to be paid as

§213(d) medical benefits to designated beneficiary other than spouse/dependents after employee and surviving spouse/dependents die

All payments, including those to employee, would be taxable

Rev. Rul. 2006-36 plan details Employer sponsored Reimburses for medical expenses not

covered by another plan Covers employees, retirees, spouses,

dependents Provides for annual maximum limit Used amount carried forward Upon death of employee, surviving

spouse & dependents any unused amount is paid as reimbursement of substantiated medical care expenses to a designated beneficiary Because of this provision, all reimbursements

made are taxable to employee!

“Pick up” of employee contributions by Employer

Revenue Ruling 2006-43 Requirements to conform with

§414(h)(2) Provides transition relief for pre-

existing “pick-ups” Only addresses federal income tax

Requirements of pick up plan

Must specify contributions, although designated as employee contributions are being paid by employer

Formal action required Employee not permitted to have cash or

deferred election with respect to designated contributions

Cannot opt out of “pick-up” Participation required

Questions??

Wendy Speelman (419) 526-2607

Wendy.E.Speelman@irs.govAmy Myers (419) 522-2259

Amy.L.Myers@irs.govTrudee Billo (419) 522-2359

Trudee.L.Billo@irs.gov

Wendy Speelman (419) 526-2607

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Hancock Hardin Henry Huron Lake Lorain Lucas Medina Mercer Ottawa

Paulding Putnam Sandusky Seneca Trumbull Van Wert Williams Wood Wyandot

Amy Myers (419) 522-2259

Ashland Athens Belmont Carroll Columbiana Coshocton Fairfield Franklin Gallia Guernsey

Harrison Hocking Holmes Jefferson Knox Lawrence Licking Mahoning Meigs Monroe

Morgan Muskingum Noble Perry Portage Stark Summit Tuscarawas Washington Wayne

Trudee Billo (419) 522-2359 Adams Brown Butler Champaign Clark Clermont Clinton Delaware Fayette

Pickaway Pike Preble Richland Ross Scioto Shelby Union Vinton Warren

Greene Hamilton Highland Jackson Logan Madison Marion Miami Montgomery Morrow

Resources Business and Specialty Tax line 1-800-829-4933 EFTPS hotline 1-800-555-4477 Employee Plans Taxpayer Assistance 1-877-829-5500 Form 941 Online filing program (E-help) 1-866-255-

0654 To get IRS Forms 1-800-829-3676 Copy A, Form W-2 reporting questions, SSA employer

reporting service 1-800-772-6270 or employerinfo@socialsecurity.gov

Information reporting program customer service 1-866-455-7438 or mccirp@irs.gov

Information reporting web page www.irs.gov/smallbiz

List of Resources The quarterly “Federal, State and Local

Governments Newsletter” is available on the IRS Web site at www.irs.gov/govts.

The Taxable Fringe Benefit Guide provides basic information for determining the taxability, withholding, and reporting requirements regarding employee fringe benefits. This resource guide can be found at www.irs.gov/govts , link to Educational Products, then on the Taxable Fringe Benefit Guide 117 pages

List of Resources e-Help Desk Toll Free Number 866-255-0654

Supports e-file, Electronic Federal Tax Payments System, and future e-Services customers. Operational hours of the e-Help Desk can be found at www.irs.gov/efile

Social Security Administration electronic filing of wage reports (Forms W-2/W-3) through SSA’s Online Wage Reporting Service (OWRS). Register for Internet filing at www.ssa.gov/employer/ then click on Employer Services Online. You will receive a PIN assigned by SSA. Within two weeks of your registration, you will receive in the mail from SSA, a Password.

List of Resources

IRS e-News for tax Professionals - OhioIf you want to subscribe to this mailing list, please send a blank e-mail to mailto: ohio-subscribe@lists.qai.irs.gov to subscribe.

e-Services, including TIN Matching www.irs.gov link to Tax Professionals; scroll to bottom of page and link to e-services-New Products. Must register to access products.

List of Resources Questions relating to information returns

(forms 1099) contact Martinsburg Computing Center mccirp@irp.gov or call 866-455-7238

Fire System www.irs.gov/efile or Reporting Program Customer Service at 866-455-7438 or email at mccirp@irs.gov. Electronic submission of information returns (forms 1099) use FIRE system (Filing Information Returns Electronically)

IRS Government Call Site 1-877-829-5500

EFTPS www.eftps.gov