Update on Issues Related to "Recession-Proof“ Taxes – Employment Taxes and Withholding

Marianna DysonAGA/INGAA Taxation Committee MeetingJune 30, 2010

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Overview

• IRS National Research Program and ideas for preparing for examinations that will include – Payroll taxes Backup withholding Misclassification of workers

• Expansion of information reporting by healthcare reform legislation

• Update on cell phones

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IRS Employment Tax Examinations – March of the 6000

• Announcement in Fall of 2009 that 6,000 companies will be randomly selected and examined from Form 941 data base – focus on small businesses

• Three year program – directed by Chief of Employment Tax (SBSE), but LMSB is participating

• Designed to collect data and identify trends in payroll taxes, secure information regarding the tax gap, and find out where the most noncompliance is

• Last such initiative was 1984

• First group of notification letters started going out mid-March; will continue at six-month intervals

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Target of NRP Examinations

• Stated goal is “to gather data, not revenue”

• Random selection will include 20% large employers If large employer is under CAP, not subject to NRP

selection

• Coordination with corporate returns and executives’ individual returns is likely

• Starts with calendar year 2008 generally, but subject to expansion

• Will include backup withholding examinations

• Experience will affect future employment tax audits

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Focus of NRP examinations – Payroll and AP

• Will be “comprehensive record examinations”

• “Very linear” – agents will be given checklists of specific items to examine specific fringe benefits, divided into “executive” and

“nonexecutive”, worker classification, Information reporting, backup withholding, and officer compensation

• These examinations will not be coordinated with international examiners’ audits of AP for section 1441 violations

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NRP Examinations – Executive Fringe Benefits

• Specific fringe benefits must be addressed, including personal use of aircraft, equity-based compensation, bonuses, loans and discharges of indebtedness, million dollar cap on deductions under § 162(m), golden parachute payments, and specific benefits provided to all employees.

(See chart of specific fringe benefits that examiners must address.)

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NRP Examinations – Non-Executive Fringe Benefits

accountable plans, per diem and tool reimb plans

cars bonus pay cafeteria plans cell phones de minimis fringes educational assistance lawsuit settlements settlements moving expenses working condition fringes

no-additional-cost services meals and lodging prizes, awards, gifts,

vacations qualified employee discounts severance pay supplemental unemployment

comp tips and gratuities spousal travel “other taxable fringe benefits”

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Backup Withholding – Does Your AP Department Really Know the Rules?

• Limited pilot program for Form 1099 examinations specifically focusing on backup withholding IRS saw a surprising number of Forms 1099 with no

TINs and no backup withholding AP must backup withhold if it does not have the TIN at

the time of payment

• During an employment tax examination, the IRS generally runs a match of Forms W-2 and 1099 to compare SSNs looking for – disguised post-termination wages, and treatment of settlements

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NRP Student Guide – Form 1099 Filing Checks

• IDRs to be issued are designed to determine – disguised wages (including settlements) and

misclassified workers paid through AP system missing Forms 1099 that should have been issued to

vendors compliance with the B-notice solicitation requirements whether the payee’s TIN was on file at the time the

reportable payments were made whether the IRS notified payor that the payee’s TIN was

incorrect and how the payor responded to that notification

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Worker Classification – Everything Old is New Again

• Perception that misclassification is at the core of the tax gap TIGTA report criticizing failure of IRS to have a single

point of accountability for employment tax issues IRS educational outreach and “Questionable

Employment Tax Practices” initiative with the states

• Balancing the threat – IRS, the states, and the workers

• Administration’s FY 2011 Revenue Proposals include changes to Section 530 (released Feb. 1, 2010)

• H.R. 5107, Employee Misclassification Prevention Act, introduced April 22, 2010

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Worker Classification – NYT Articleof February 18, 2010

• Administration’s budget assumes that crackdown will yield at least $7 billion over 10 years

• Misclassified workers do not report 30% of income

• States are stepping up enforcement, including Illinois

• DOL estimates that 30% of companies misclassify workers

• Most misclassified workers – truckers, construction workers, home health aides, high-tech engineers

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Follow-Up to Form SS-8 Determination of Employee Status

• Letter will be sent to employer asking about follow-up actions when Form SS-8 recharacterizes a worker as an employee

• Letter asks “employer” – whether it has filed Forms 941c to reflect SS-8

determination; whether it is eligible for Section 530 relief; or its reasons for disagreeing with the SS-8 determination

• Revised Form 941 specifically requests wage and tax information on reclassified employees

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IRS Form 8919

• Designed for “misclassified” worker to report his share of FICA taxes in following situations – SS-8 determination of employee status Worker is designated as pre-1997 Section 530 employee Previously treated as employee by firm and performing

services in a similar capacity under similar control Co-workers are performing similar services and treated

as employees Co-worker performing similar services and received SS-

8 determination Has not received a reply to an SS-8 request

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Preparing for the Employment Tax Examination

• What courses of action can the employer take before the examination? Review of plans and benefits being provided Discussions with payroll re treatment of benefits Discussions with AP department re vendor procedures Establish an interdisciplinary team to coordinate issues Review agreements for independent contractors Establish procedures for hiring independent contractors

• Consider protecting attorney-client privilege throughout the period of preparation

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Review of Benefits

• Compile list of benefits provided and determine proper tax treatment, i.e., applicable statutory and regulatory exclusions (full or partial) Review 2005 Audit Technique Guides and Pub. 15-B

• Consider preparing or updating policies explaining treatment of targeted fringe benefits

• Consider voluntary corrections to take advantage of the interest-free adjustment rules of § 6205 and Treas. Reg. § 31.6205-1 File Forms 941-X or voluntarily approach the IRS

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Review of AP Procedures

• IRS will ask for AP’s written procedures for -- Setting up a vendor and initial TIN solicitations Payments before TIN is obtained from payee – was

backup withholding applied? B-notice procedures – were solicitations made and

backup withholding applied as required by regs? T&E plan – did AP coordinate with Payroll when

reimbursements were nonaccountable and should have been treated as wages?

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Review of Worker Classification Issues

• Determine who has responsibility for determining worker status – coordinate the team

• Are there written procurement procedures, e.g., questionnaires at hire, procedures for “tough calls”

• Categorize workers that cause concern and apply 20-factors using approach of 1996 Training Materials – Behavioral control, Financial control, and Relationship of the parties

• Be prepared to argue status using common law factors before resorting to Section 530 for relief

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Health Care Legislation’s Expansion of Vendor Reporting Requirements

• Two key changes to section 6041, effective for payments made after Dec. 31, 2011: Reporting of payments made to any payee, including a

corporation, unless payee is a tax-exempt recipient, and Reporting of all nearly all payments of $600 or more,

including payments for merchandise, equipment, inventory and raw materials

• Implications included increased risk of liability for backup withholding related to failure to collect TINs

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Update on Cell Phones and Related Services

• Re-introduction of bipartisan bill – Modernize Our Bookkeeping in the Law for Employee’s (“MOBILE”) Cell Phone Act “De-lists” cell phones and similar telecommunications

equipment, eliminating application of detailed § 274(d) substantiation requirements

Does not address § 162 business substantiation requirements for purposes of deducting the costs or excluding the value of the business use of cell phones under §§ 62(c) or 132(d)

It is likely that employer will be required to implement a policy to sustain business connection, depending on IRS guidance that results from legislative history

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Cell Phones – Notice 2009-46 and Administration’s Proposal

• June 8 Notice requested comments on proposed approaches to streamlining substantiation for business use of cell phones

• Negative reaction was immediate

• Commissioner issued statement asking Congress to amend the law, and later made comments on CSPAN

• Administration’s FY 2011 Revenue Proposals include request that cell phones be “de-listed” – “The FMV of personal use of a cell phone . . . provided

primarily for business purposes would excluded from gross income.”

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Contact Information

For additional information, please contact

Marianna Dyson (202) 626-5867 mdyson@milchev.com

These slides were prepared by Miller & Chevalier Chartered for this conference. This presentation does not provide legal advice and is not intended to establish an attorney-client relationship.

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