Form 56- Notice Concerning Fiduciary Relationship
Form 1040-Final Individual Income Tax Return and the State Tax Return
Form 706-United States Estate (and Generatino-Skipping Transfer) Tax Return
TAX FILINGS FOR ESTATES AND TRUSTS
FORM 56 – NOTICE CONCERNING FIDUCIARY RELATIONSHIP
This form is filed with the IRS to notify the Service that you are acting as the representative for the estate or trust. It is important to file this form as soon as possible so that the Service sends any tax notices or other correspondence to the correct address. By filing this form, you notify the IRS that you are the responsible party for filing and paying taxes for the estate or trust.
FORM 1040 – FINAL INDIVIDUAL INCOME TAX RETURN AND THE STATE TAX RETURN
The decedent’s final individual tax returns, Form 1040 and state return. The executor, administrator, or trustee is responsible for filing this form. It includes all income, deductions, credits, and withholdings from January 1 to through the date of death. As of the date of death, the decedent’s tax filing ends.
FORM 706 – UNITED STATES ESTATE (and GENERATION-SKIPPING TRANSFER) TAX RETURN
This return reports all the assets and liabilities of the decedent as of the date of death or an alternate valuation date. It is a snapshot of a moment in time. It does not report income and it is not an income tax return.
The assets are reported at the fair market value as of the date of death. The executor of the estate must obtain documents to prove the date of death values of the decedent’s assets. These documents would include bank statements, CD certificates, broker statements, IRA and/or 401k statements, annuity statements, etc. dated as of the date of death or very close to it. The estate must also include life insurance proceeds on policies owned by the decedent and payable on his/her death. It will include income earned but not yet received by the decedent such as a paycheck, a bonus, and award, etc.
There will be a need for appraisals of the value of certain assets if the decedent owned any of the following:
- real estate
- a closely held business
- partnership interests
- jewelry
- art, antiques, and collectibles
The return is required if the net value is in excess of $5.43 million in 2015. This amount is referred to as the exemption amount. This amount is estate-tax free. It is adjusted annually for inflation.
The return may be required if the surviving spouse elects to carry over her/his deceased spouse’s unused exemption amount (the DSUE). In general, we advise a spouse to file the Form 706 to make this election if the couple’s entire estate is valued at $4 million or more at the date of the first spouse’s death.
The Form 706 is due exactly 9 months after the date of death. For example, if the date of death is February 7, the Form 706 is due by November 7. An extension may be available for the filing for 6 months. The extension is for filing, not paying. The estate tax is due by the original filing date.
FORM 1041 – US INCOME TAX RETURN FOR ESTATES AND TRUSTS and THE STATE RETURN
Income earned or received and deductions incurred after the date of death are reported on this return. For example, if the date of the decedent’s date of death is May 6, there could be a final decedent’s return for the period January 1 through May 6 reporting income and deductions during that period. The estate or trust would file a Form 1041 reporting income and deductions for the period May 7 through December 31. It is important to keep track of income and deductions during these two periods of time.
FORM 709 – UNITED STATES GIFT (and GENERATION-SKIPPING TRANSFER) TAX RETURN
- Every individual may gift (give a gift) up to $14,000 per gift recipient in 2015 without incurring a gift tax.
- Gifts are never taxable to the recipient.
- Gifts may be taxable to the giver.
- You may give or bequest up to the Exclusion Amount, $5.43 million in 2015, during your lifetime or at your death.
- All gifts and the net estate value are totaled on the Form 706.
- Annually, any gifts in excess of $14,000 are reported on the Form 709.
- The Form 709 is due by 4/15 each year. The due date can be extended to 10/15.
What is Propositon 60 & 90, 58 & 193 re transfer of base year property tax values
FAQ’s REGARDING THE TRANSFER OF THE PROPERTY TAX BASE
What is Proposition 60?
Prop. 60 was a constitutional amendment approved by the voters of California in 1986. It allows the transfer of an existing Proposition 13 base year value from a former residence to a replacement residence, if certain conditions are met. This benefit is open to homeowners who are at least 55-years old and are able to meet all qualifying conditions, (see below).
What is Proposition 90?
Proposition 90 has the same provisions and qualifications as Proposition 60. The difference is that it allows base year transfers from one county to another county in California. The only counties that have adopted an ordinance to allow values from other counties are:
o Alameda
o El Dorado
o Los Angeles
o Orange
o Riverside
o San Bernardino
o San Diego
o San Mateo
o Santa Clara
o Ventura
This list can change at any time. Please contact the local assessor to see if the value of your original property can be transferred to a replacement in that county.
How do I qualify for these property tax benefits?
- Proposition 60 - Both the original property (former residence) and its replacement must be located in the same county.
- Proposition 90 - The original property is located in a different county from replacement, (see Proposition 90 information above).
- As of the date of transfer of the original property, the seller or a spouse living with the seller must be at least 55 years old.
- The original property must have been eligible for the Homeowners' Exemption or entitled to the Disabled Veterans' Exemption.
- The replacement dwelling must be of equal or lesser value than the original property.
- The replacement dwelling must have been purchased or newly constructed on or after 11/06/86.
- Without exception, the replacement dwelling must be purchased or newly constructed within two years (before or after) of the sale of the original property.
- The original property must be subject to reappraisal at its current fair market value as the result of its transfer, in accordance with Sections 110.1 or 5803 of the Revenue and Taxation Code.
- Without exception, a Claim for Relief must be filed within three years of the date a replacement dwelling is purchased or new construction of a replacement dwelling is completed to receive the full relief. A claim filed after the three year time period will receive a prospective relief only.
Is it true that only one claimant, out of several co-owners of a replacement dwelling, need be at least 55 as of the date of sale of an original property?
Yes, but the claimant must be an owner of record. Either the claimant or his/her spouse must also have been an occupant of the original property and at least 55 years old on the date of sale.
Can a taxpayer apply for and receive the benefit of Prop. 60/90 more than once?
No, this is a one-time benefit. You are not eligible if you have been previously granted this benefit.
What is meant by "equal or lesser value" than the original dwelling?
In general, "equal or lesser value" means:
100 % of the market value of an original property if a replacement dwelling is purchased before the original property is sold.
105 % of the market value of an original property if a replacement dwelling is purchased within one year after the sale of the original property.
110 % of the market value of an original property if a replacement dwelling is purchased within the second year after the sale of the original property.
Is the "equal or lesser value" test a simple comparison of the sales price of the original property and the purchase price or cost of new construction of the replacement dwelling?
No. The comparison must be made using the full market value of the original property and the full market value of the replacement dwelling as of its date of purchase or completion of new construction. This is important because sales prices are not always the same as market value. The Assessor must determine the market value for each property, which may differ from sales price.
If the current full cash value of my replacement dwelling slightly exceeds the full market value of my original property, can I still receive a partial benefit?
No. Unless the replacement dwelling satisfies the "equal or lesser value" test, no benefit is available.
May I give my original property to my child and still receive the Prop. 60/90 benefit when I purchase a replacement property?
No. The law provides that an original property must be sold for consideration and subject to reappraisal at full market value at the time of sale. Original property transferred to a child or disposed of by gift or devise does not qualify. See the FAQ’s below re Propositions 58 and 193.
Can I qualify for the benefits of Prop. 60/90 when I sell my original property (owned by me alone) and purchase a replacement dwelling with several co-owners? What if I own only a 10 percent interest in the replacement dwelling?
Yes. The base year value of your original property can be transferred to your replacement dwelling, as long as you are otherwise qualified. You may receive the benefits of Prop. 60 regardless of how many co-owners of record there are on the replacement dwelling. In this situation, the total market value of the original property is compared to the total market value of the replacement property regardless of the fact that the qualified principal claimant may only own 10 percent of both original and replacement dwelling properties.
You and your spouse, as the claimants, will use your "one time only" benefit. An owner of record of the replacement property who is not the claimant's spouse is not considered a claimant, and a claim filed for the property will not constitute use of the one-time-only exclusion by the co-owner even though that person may benefit from the property tax relief.
Can two otherwise qualified taxpayers who have recently sold their separately owned original properties combine their claim for Prop. 60/90 benefit when they buy a single replacement dwelling together?
No. they can only receive the benefit if one or the other, not both together, qualifies by comparing his or her original property to the jointly purchased replacement dwelling. The implementing legislation specifically disallows combining a claim, whether or not the co-owners of the replacement dwelling are married.
May I, as a former co-owner of an original property, receive partial benefit on my replacement dwelling, along with other co-owners who purchase separate replacement dwellings?
No. The law provides that only one co-owner of an original property that is, or was, qualified for the Homeowners' Exemption may receive the benefit in a situation like this where all co-owners purchase separate replacement dwellings. The co-owners must determine, between themselves, which one should receive the benefit. Only in the case of a multiple-residential original property, where several co-owners qualify for separate Homeowners' Exemptions, may portions of the factored base year value of that property be transferred to several qualified replacement dwellings.
What if I am the co-owner of a property with more than one residential unit?
A portion of the original property may qualify for the Homeowners' Exemption for you. The base year value of that portion can be transferred to your replacement dwelling. The other portion(s) of the original property may qualify for a separate Homeowners' Exemption(s). The base year value(s) of that other portion(s) can be transferred to another replacement dwelling(s).
Does a person qualify for the Prop. 60/90 benefit when he/she sells an original property, then buys a replacement dwelling within two years, but no longer qualifies for a Homeowners' Exemption on the original property that sold nearly two years before?
Yes. The statute requires that the original property be eligible for the Homeowners' Exemption at the time of sale. It is eligible if the claimant owns and occupies the property as his or her principal residence at the time of sale.
Can I receive Prop 60. benefits if my original property is outside Orange County but my replacement dwelling is inside Orange County?
No. Both properties must be within Orange County.
Can I receive Prop. 60 benefits if my original property is inside Orange County but my replacement dwelling is in another county in California?
You may qualify under Prop. 90. Call the county Assessor's Office where the replacement dwelling is located and ask if that county allows transfers of base year values between counties.
If the transfer of my base year value to the replacement dwelling results in a supplemental assessment that is a refund, do I still have to pay the existing annual roll tax bill on the replacement property or will that bill be adjusted to reflect the new, lower value?
Unfortunately, you must pay the existing annual roll tax bill on your replacement property. That bill cannot be adjusted or canceled to reflect the Prop. 60 benefit. Additionally, you must pay that bill before any refund resulting from the Prop. 60 benefit will be sent to you.
However, after the existing bill has been paid, you will later receive a refund that will reflect the Prop. 60 benefit. In other words, when the entire process is complete, you will not have overpaid any taxes,.
May parents transfer the family home to their children without a property tax reassessment?
YES. Proposition 58 allows parents to transfer by gift, bequest, or sale their principal residence to their child(ren) and there will be no property tax reassessment. There is no limit on the value of the principal residence. The parents must have a Homeowner’s or Disabled Veterans Exemption on the home.
May parents transfer other property to their children without a property tax assessment?
Yes. Each parent may transfer up to a total of $1 million of other property to their children without a property tax assessment.
May grandparents transfer property to their grandchildren without a property tax assessment?
Proposition 193 expanded the benefits of family transfers of real property to grandparents. They may transfer the property to a grandchild(ren) without a tax reassessment if the middle generation had already died.
How do the transferor and transferee obtain the relief of Propositions 58 and 193?
In order to obtain such relief, a Claim for Reassessment Exclusion for Transfer form must be signed by both the property owner or deceased owner’s estate and by the person to whom title is being transferred. The Claim must be filed within three years of the date of the transfer of the real property. It is filed with the county Assessor.
International estates, an increasing concern.
Situation: One of our clients referred a challenging fiduciary issue to our firm. A U.S. citizen had died and left his assets to relatives in India. The benficiaries of the estate were not U.S. citizens. The trustee had to travel to the U.S. to settle the estate, creating a compressed timeline. The trustee was facing a large tax bill as the rule for income paid to a non-U.S. citizen is that tax must be withheld at a rate of 30%, and the trustee is liable for the withholding.
Action: The fiduciary accounting team at Green Zahn & Associates determined that the tax convention with The Republic of India provided for relief from double taxation and that the fiduciary was not required to withhold tax.
Results: GZA saved the taxpayer tens of thousands of dollars in tax withholdings, and the cost of a second year's tax return preparation, by being proactive in researching and understanding international tax laws.
We need to prepare a burden calculation, what?!
Situation: Our client needed to submit burden calculations, in a proposal, to a major customer.
Action: We helped our client determine what costs should be included in the burden pool to enable the client to accurately calculate the burden.
Results: Our client received acceptance of their proposal to produce parts for the customer.
We need to expand to another state...
Situation: A construction company client wanted to be qualified to do business in another state. The state required audited financial statements to be submitted in the qualification process.
Action: Our client included reviewed financial statements prepared by Green Zahn & Associates in the qualifications package submitted to the state.
Results: The state accepted the reviewed financial statements and the company received its license to operate in the state.
As a firm, we believe in giving back to our community. This year we have achieved this through cash and time donations. We regularly support the Long Beach Symphony, the Long Beach Rescue Mission, the Orange County School of the Arts, and (of course!) UCLA. Allison dedicates quite a bit of time to the National Association of Women Business Owners' Mentoring Committee where she helps new business owners receive invaluable coaching from seasoned professionals. Several staff members participated in the Run Seal Beach 5k & 10k this year and Rachel went on to participate in the Long Beach Half Marathon, the rest of the staff was happy to cheer for her!
In July the entire staff headed over to the Ronald McDonald House in Long Beach to prepare lunch for the families staying there. We toured the facility, learned about the charity and its services, and prepared a fresh Chinese chicken salad luncheon. It was very gratifying to help an organization with such a noble cause. We highly reccomend adding this charity to the list you support, there are many ways to get involved, from preparing meals, to helping out with odd jobs, or donating household supplies. Cash donations are always useful as well. Did you know that you can rent their beautiful, high tech boardroom for your company's off-sites? Find out more at their website:
http://www.longbeachrmh.org/about_us.php
In November we headed over to Working Wardrobes in Costa Mesa to help prepare for a workshop they hold at Camp Pendleton in suport of our returning troops. Working Wardrobes is a smart organization that not only helps individuals put together a professional wardrobe, but offers workshops, mentoring and training on subjects such as networking the art of management, marketing, and change management. Check out their offerings at:
http://www.workingwardrobes.org/
We are always looking for opportunities to get involved, so let us know if you have a favorite not-for-profit that could use the likes of us for a day's worth of labor. You can email your ideas to: greenzahn@greenzahn.com
Help! Are we growing too fast?
Situation: A manufacturing client was experiencing extremely rapid growth and their accounting needs were not being met by their in-house team, creating hazards on their path to success.
Action: GZA stepped in to provide additional support to their existing accounting department as well as assisting with creating a policies and procedures manual to provide a basis for future growth.
Results: The client was able to maintain stability and meet the demands of their clients while sustaining the rapid growth.
The IRS and the Treasury Department have automatically extended the federal income tax filing due date for individuals for the 2020 tax year, from April 15, 2021, to May 17, 2021. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed.
The IRS and the Treasury Department have automatically extended the federal income tax filing due date for individuals for the 2020 tax year, from April 15, 2021, to May 17, 2021. Individual taxpayers can also postpone federal income tax payments for the 2020 tax year due on April 15, 2021, to May 17, 2021, without penalties and interest, regardless of the amount owed.
This postponement applies to individual taxpayers, including those who pay self-employment tax. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021.
The IRS has informed taxpayers that they do not need to file any forms or call the IRS to qualify for this automatic federal tax filing and payment relief.
Individual taxpayers who need additional time to file beyond the May 17 deadline can request a filing extension until October 15 by filing Form 4868 through their tax professional or tax software, or by using the Free File link on the IRS website. Filing Form 4868 gives taxpayers until October 15 to file their 2020 tax return, but does not grant an extension of time to pay taxes due.
Not for Estimated Taxes, Other Items
This relief does not apply to estimated tax payments that are due on April 15, 2021. Taxes must be paid as taxpayers earn or receive income during the year, either through withholding or estimated tax payments. Also, the federal tax filing deadline postponement to May 17, 2021, only applies to individual federal income returns and tax (including tax on self-employment income) payments otherwise due April 15, 2021, not state tax payments or deposits or payments of any other type of federal tax. The IRS urges taxpayers to check with their state tax agencies for details on state filing and payment deadlines.
Winter Storm Relief
The IRS had previously announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns and make tax payments. The extension to May 17 does not affect the June deadline.
On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Some of the tax-related provisions include the following:
On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021. Some of the tax-related provisions include the following:
- 2021 Recovery Rebate Credits of $1,400 for eligible individuals ($2,800 for joint filers) plus $1,400 for each eligible dependent. Credit begins to phase out at adjusted gross income of $150,000 for joint filers, $112,500 for a head of household, $75,000 for other individuals. The IRS has already begun making advance refund payments of the credit to taxpayers.
- Exclusion of up to $10,200 of unemployment compensation from income for tax year 2020 for households with adjusted gross income under $150,000.
- Enhancements of many personal tax credits meant to benefit individuals with lower incomes and children.
- Exclusion of student loan debt from income, for loans discharged between December 31, 2020, and January 1, 2026.
- For tax years after December 31, 2026, the $1,000,000 deduction limit on compensation of a publicly-held corporation’s covered employees will expand to include the five highest paid employees after the CEO and CFO. The rule in current law applies to the CEO, the CFO, and the next three highest paid officers.
- For the payroll credits for paid sick and family leave: The credit amounts are increased by an employer’s collectively bargained pension plan and apprenticeship program contributions that are allocable to paid leave wages. Also, paid leave wages do not include wages taken into account as payroll costs under certain Small Business Administration programs.
The president is conducting a nationwide tour to explain and promote the over 600-page, $1.9 trillion legislation.
Stimulus Payments
Many of the 158.5 million American households eligible for the payments from the stimulus package can expect to receive them soon, White House Press Secretary Jen Psaki said the same afternoon Biden signed the legislation into law. Payments are coming by direct deposit, checks, or a debit card to those eligible.
FTC: Beware of Scams
Scammers are right now crawling out from under their rocks to fleece businesses and consumers receiving the aid, the Federal Trade Commission warned on March 12.
It is important for business owners and consumers to know that the federal government will never ask them to pay anything up front to get this money, said the FTC: "That’s a scam. Every time." The regulatory agency also cautioned that the government will not call, text, email or direct mail aid recipients to ask for a Social Security, bank account, or credit card number.
The IRS needs to issue new rules and guidance to implement the American Rescue Plan, experts said on March 11 as President Joe Biden signed his COVID-19 relief measure.
The IRS needs to issue new rules and guidance to implement the American Rescue Plan, experts said on March 11 as President Joe Biden signed his COVID-19 relief measure.
"I hope Treasury will say something very soon: FAQs, press release, something. IRS undoubtedly will have to write new regs," commented Urban-Brookings Tax Policy Center Senior Fellow Howard Gleckman. He stressed IRS certainly will have to figure out how to make the retroactive tax exemption for some 2020 unemployment benefits work. Gleckman also said he suspects the Child Tax Credit will require new guidance.
Gleckman claimed a new form this late in the tax season is unlikely. "Amended returns seems easiest," said the veteran IRS observer.
To help implement the tax-related changes in the American Rescue Plan, a colleague at the Tax Policy Center, Janet Holtzblatt, said that she, as well, is looking for guidance from the IRS on what taxpayers would do if they received unemployment benefits in 2020. Holtzblatt noted the law would exclude $10,200 of those benefits from adjusted gross income if the taxpayers’ adjusted gross income is less than $150,000.
What people will want to know, Holtzblatt stated, is:
- What to do if they already filed their tax return and paid income taxes on those benefits? Do they have to file an amended tax return just to get the tax refund for that reason, or will the IRS establish a simpler method to do so?
- And going forward, what about people who have not yet filed their tax return? If a new form is not released, what should they report on the existing return—the full amount or the partial amount? And how will the IRS know when the tax return is processed whether the taxpayer reported the full amount or the partial amount? (Eventually, the IRS could—when, after the filing season is over and tax returns are matched to 1099s from UI offices—but that could be months before taxpayers would be made whole.)
For the CARES Act, Holtzblatt said the IRS generally provided guidance through FAQs on their website which was insufficient for some tax professionals and later voided. "Some of their interpretations raised questions—and in the case of the treatment of prisoners, was challenged in the courts and led to a reversal of the interpretation in the FAQ," she explained.
National Association of Tax Professionals Director of Marketing, Communications & Business Development Nancy Kasten said new rules are musts and the agency will have to issue new FAQs, potentially on all of the key provisions in the legislation. The NATP executive asserted that old forms are going to need to be revised for Tax Year 2021. "Regarding 2020 retroactive items, we are waiting on IRS guidance," said Kasten.
National Conference of CPA Practitioners National Tax Policy Committee Co-Chair Steve Mankowski said the primary rules that will need to be written ASAP relate to the changes in the 2020 unemployment, especially since it appears to be income based as well as the increased child tax credit with advanced payments being sent monthly unless a taxpayer opts out. He added there will most likely need to be a worksheet added to the 2020 tax returns to show the unemployment received and adjusting UE income down to the taxable amount.
Mankowski, immediate past president of NCCCPAP said the primary items for new FAQs include the unemployment and the income limit on the non-taxability, changes in the child tax credit; and changes in the Employee Retention Credit.
In response to an email seeking what the agency plans to do to help implement the pandemic relief measure, an IRS spokesman forwarded the following statement released on March 10:
"The IRS is reviewing implementation plans for the American Rescue Plan Act of 2021 that was recently passed by Congress. Additional information about a new round of Economic Impact Payments and other details will be made available on IRS.gov, once the legislation has been signed by the President."
Strengthening tax breaks to promote manufacturing received strong bipartisan support at a Senate Finance Committee hearing on March 16.
Strengthening tax breaks to promote manufacturing received strong bipartisan support at a Senate Finance Committee hearing on March 16.
Creating new incentives and making temporary ones permanent are particularly critical for helping American competitiveness in semiconductors, batteries and other high-tech products, Senate Banking Chair Ron Wyden (D-Ore) and Ranking Minority Party Member Mike Crapo (R-Idaho) stressed at the session.
Wyden said it is urgent business for elected officials to create conditions for the American semiconductor industry to thrive for years as part of a Congressional job creation toolkit. "I have seen too many short-term tax policies and mistakes," the Senate Finance Chair said. His sentiment was echoed by Crapo, the committee’s top Republican: "This is an area of bipartisan interest, and I welcome the opportunity to work with Chairman Wyden on this."
Crapo: Don’t Raise Corporate Rate
At the same time, Crapo cautioned Congress should not offset losses in federal revenue from increasing the stability of investment importance of protecting tax credit credits by raising the overall corporate tax rate. He said he is "very concerned" by reports he has heard that the White House is preparing to propose just that. Currently at 21 percent, the corporate tax rate was 35 percent before the 2017 Tax Cut and Jobs Act took effect.
Massachusetts Institute of Technology Sloan School Of Management Accounting Professor Michelle Hanlon told the hearing raising corporate tax rates would put American industry at a competitive disadvantage globally. She said the 2017 tax cuts should be built upon to expand manufacturing.
While saying expanding tax breaks for tech including clean energy is critical, Senator Tom Carper (D-Del) warned the federal government is looking at an avalanche of debt. To lessen that surge, he said it is important to go after the tax gap: money that taxpayers owe but they are not paying.
Senator Todd Young (R-Ind) warned that left unchanged, starting in 2022 companies will no longer be able to expense research and development expenses in the year incurred. "This would come at the expense of manufacturing jobs," he said. Young has introduced legislation to let businesses write up R&D as they are currently allowed.
If businesses are not allowed to continue to amortize their research and development expenses in the year they are incurred, it would significantly increase the cost to perform R&D in the U.S., Intel Chief Financial Officer George Davis warned the panel.
Ford Embraces Biden Proposal
Ford Motor Company Vice President, Global Commodity Purchasing And Supplier Technical Assistance Jonathan Jennings told the Senate that the auto maker embraces President Joe Biden’s proposal to provide a 10 percent advanceable tax credit for companies creating U.S. manufacturing jobs.
IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.
IRS Commissioner Charles "Chuck" Rettig told Congress on February 23 that the backlog of 20 million unopened pieces of mail is gone.
"There were trailers in June filled (with unopened paper returns). There are none today," Rettig said in an appearance before the House Appropriations Committee Financial Services Subcommittee.
When there was a delay in getting to a return, Rettig said that a taxpayer was credited on the date the mail was received, not the day the payment was processed.
The IRS leader stated that virtual currency, which is designed to be anonymous, has probably significantly increased the amount of money taxpayers owed but have not paid since the last formal figure of $381 billion was estimated in 2013.
To close the gap between money owed and money paid, Rettig said there has to be an increase in guidance as well as enforcement. "The two go together," said Rettig, who pointed out that the IRS must support the people who are working to get their tax payments right as well as working against those who are trying to thwart the agency’s efforts.
Rettig cited high-income/high-wealth taxpayers, including high-income non-filers, as high enforcement priorities. "We have not pulled back enforcement efforts for higher income individuals during the pandemic. We can be impactful," said Rettig. He added that the IRS is using artificial intelligence and other information technology (IT) advances to catch wealthy tax law and tax rule breakers. "Our advanced data and analytic strategies allow us to catch instances of tax evasion that would not have been possible just a few years ago," said the IRS leader.
Rettig contended that the agency’s IT improvement efforts are being hampered by a shortage of funding. According to Rettig, three years into a six-year business modernization plan, the IRS has received half of the money it requested from Congress for the initiative.
One of the impacts of the pandemic on the IRS and the taxpayers and tax professionals it serves, said Rettig, is the average length of phone calls has risen to 17 minutes from 12 minutes because the issues have been more complex.
On another issue related to COVID-19, Rettig said the IRS has been diligently working to alert taxpayers and tax professionals to scams related to COVID-19, especially calls and email phishing attempts tied to the Economic Impact Payments (EIPs). He said people can reduce the chances of missing their EIP payments through lost, stolen or thrown-away debit cards by filing their tax returns electronically.
The Commissioner told the panel that the delay in starting the tax filing season this year will not add to any additional delays to refunds on returns claiming the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC).
Rettig also noted that taxpayers who interact with an IRS representative now have access to over-the-phone interpreter services in more than 350 languages.
The Tax Court ruled that rewards dollars that a married couple acquired for using their American Express credit cards to purchase debit cards and money orders—but not to purchase gift cards—were included in the taxpayers’ income. The court stated that its holdings were based on the unique circumstances of the case.
The Tax Court ruled that rewards dollars that a married couple acquired for using their American Express credit cards to purchase debit cards and money orders—but not to purchase gift cards—were included in the taxpayers’ income. The court stated that its holdings were based on the unique circumstances of the case.
Background
During the tax years at issue, each taxpayer had an American Express credit card that was part of a rewards program that paid reward dollars for eligible purchases made on their cards. Card users could redeem reward dollars as credits on their card balances (statement credits). To generate as many reward dollars as possible, the taxpayers used their American Express credit cards to buy as many Visa gift cards as they could from local grocery stores and pharmacies. They used the gift cards to purchase money orders, and deposited the money orders into their bank accounts. The husband occasionally purchased money orders with one of the American Express cards.
The taxpayers also occasionally paid their American Express bills through a money transfer company. Using this method, they paid the American Express bill with a reloadable debit card, and the money transfer company would transmit the payment to American Express electronically. The taxpayers used their American Express cards to purchase reloadable debit cards that they used to pay their American Express bills, and the purchase of debit cards and reloads also generated reward dollars.
All of the taxpayers' charges of more than $400 in single transactions with the American Express cards were for gift cards, reloadable debit cards, or money orders. On their joint tax returns, the taxpayers did not report any income from the rewards program.
The IRS determined that the reward dollars generated ordinary income to the taxpayers. When a payment is made by a seller to a customer as an inducement to purchase property, the payment generally does not constitute income but instead is treated as a purchase price adjustment to the basis of the property ( Pittsburgh Milk Co., 26 TC 707, Dec. 21,816; Rev. Rul. 76-96, 1976-1 CB 23). The IRS argued that the taxpayers did not purchase goods or property, but instead purchased cash equivalents—gift cards, reloads for debit cards, and money orders—to which no basis adjustment could apply. As a result, the reward dollars paid as statement credits for the charges relating to cash equivalents were an accession to wealth.
Rebate Policy; Cash Equivalency Doctrine
The Tax Court observed that the taxpayers' aggressive efforts to generate reward dollars created a dilemma for the IRS which was largely the result of the vagueness of IRS credit card reward policy. Under the rebate rule, a purchase incentive such as credit card rewards or points is not treated as income but as a reduction of the purchase price of what is purchased with the rewards or points ( Rev. Rul. 76-96; IRS Pub. 17). The court observed that the gift cards were quickly converted to assets that could be deposited into the taxpayers’ bank accounts to pay their American Express bills. According to the court, to avoid offending its long-standing policy that card rewards are not taxable, the IRS sought to apply the cash equivalence concept, but that concept was not a good fit in this case.
The court stated that a debt obligation is a cash equivalent where it is a promise to pay of a solvent obligor and the obligation is unconditional and assignable, not subject to set-offs, and is of a kind that is frequently transferred to lenders or investors at a discount not substantially greater than the generally prevailing premium for the use of money ( F. Cowden, CA-5, 61-1 ustc ¶9382, 289 F2d 202). The court found that the three types of transactions in this case failed to fit this definition.
The court ruled that the reward dollars associated with the gift card purchases were not properly included in income. The reward dollars taxpayers received were not notes, but instead were commitments by American Express to allow taxpayers credits against their card balances. The court found that American Express offered the rewards program as an inducement for card holders to use their American Express cards.
However, the court upheld the inclusion in income of the related reward dollars for the direct purchases of money orders and the cash infusions to the reloadable debit cards. The court observed that the money orders purchased with the American Express cards, and the infusion of cash into the reloadable debit cards, were difficult to reconcile with the IRS credit card reward policy. Unlike the gift cards, which had product characteristics, the court stated that no product or service was obtained in these uses of the American Express cards other than cash transfers.
As the court noted, the money orders were not properly treated as a product subject to a price adjustment because they were eligible for deposit into taxpayers' bank account from acquisition. The court similarly found that the cash infusions to the reloadable debit cards also were not product purchases. The reloadable debit cards were used for transfers by the money transfer company, which the court stated were arguably a service, but the reward dollars were issued for the cash infusions, not the transfer fees.
Finally, the court stated that its holdings were not based on the application of the cash equivalence doctrine, but instead on the incompatibility of the direct money order purchases and the debit card reloads with the IRS policy excluding credit card rewards for product and service purchases from income.
The IRS Office of Chief Counsel has embarked on its most far-reaching Settlement Days program by declaring the month of March 2021 as National Settlement Month. This program builds upon the success achieved from last year's many settlement day events while being shifted to virtual format due to the pandemic. Virtual Settlement Day (VSD) events will be conducted across the country and will serve taxpayers in all 50 states and the District of Colombia.
The IRS Office of Chief Counsel has embarked on its most far-reaching Settlement Days program by declaring the month of March 2021 as National Settlement Month. This program builds upon the success achieved from last year's many settlement day events while being shifted to virtual format due to the pandemic. Virtual Settlement Day (VSD) events will be conducted across the country and will serve taxpayers in all 50 states and the District of Colombia.
Settlement Day
Settlement Day events are coordinated efforts to resolve cases in the U.S. Tax Court by providing taxpayers who are not represented by counsel with the opportunity to receive free tax advice from Low Income Taxpayer Clinics (LITCs), American Bar Association (ABA) volunteer attorneys, and other pro bono organizations. Taxpayers can also discuss their Tax Court cases and related tax issues with members of the Office of Chief Counsel, the IRS Independent Office of Appeals and IRS Collection representatives. These communications can aid in reaching a settlement by providing taxpayers with a better understanding of what is needed to support their case.
The Taxpayer Advocate Service (TAS) employees also participate in VSDs to assist taxpayers with tax issues attributable to non-docketed years. Local Taxpayer Advocates and their staff can work with and inform taxpayers about how TAS may be able to assist with other unresolved tax matters, or to provide further assistance after the Tax Court matter is concluded. IRS Collection personnel will be available to discuss potential payment alternatives if a settlement is reached. For those who choose to take their cases to court, the VSD process can also give a better understanding of what information taxpayers need to present to the court to be successful.
Following its first announcement of virtual settlement days in May last year, the Chief Counsel and LITCs have successfully used VSD events to help more than 259 taxpayer resolve Tax Court cases without having to go to trial.
Registration and Information
The IRS proactively identifies and reaches out to taxpayers with Tax Court cases which appear most suitable for this settlement day approach, and invites them attend VSD events. The IRS also generally encourages taxpayers with active Tax Court cases to contact the assigned Chief Counsel attorney or paralegal about participating in the March VSD events.
This year, the IRS has included the following locations where these events have never been offered: Albuquerque, Billings, Buffalo, Cheyenne, Cleveland, Denver, Des Moines, Indianapolis, Little Rock, Milwaukee, Nashville, Peoria, Omaha, Reno, Sacramento, San Diego and San Jose.
LITCs can contact their local Chief Counsel offices about the event in their area. If additional information is needed, individuals can reach out to Chief Counsel’s Settlement Day Cadre, or contact Sarah Sexton Martinez at (312) 368-8604. Pro bono volunteers are encouraged to contact Meg Newman (Megan.Newman@americanbar.org) with the American Bar Association Tax Section.
An individual who owned a limited liability company (LLC) with her former spouse was not entitled to relief from joint and several liability under Code Sec. 6015(b). The taxpayer argued that she did not know or have reason to know of the understated tax when she signed and filed the joint return for the tax year at issue. Further, she claimed to be an unsophisticated taxpayer who could not have understood the extent to which receipts, expenses, depreciation, capital items, earnings and profits, deemed or actual dividend distributions, and the proper treatment of the LLC resulted in tax deficiencies. The taxpayer also asserted that she did not meaningfully participate in the functioning of the LLC other than to provide some bookkeeping and office work.
An individual who owned a limited liability company (LLC) with her former spouse was not entitled to relief from joint and several liability under Code Sec. 6015(b). The taxpayer argued that she did not know or have reason to know of the understated tax when she signed and filed the joint return for the tax year at issue. Further, she claimed to be an unsophisticated taxpayer who could not have understood the extent to which receipts, expenses, depreciation, capital items, earnings and profits, deemed or actual dividend distributions, and the proper treatment of the LLC resulted in tax deficiencies. The taxpayer also asserted that she did not meaningfully participate in the functioning of the LLC other than to provide some bookkeeping and office work.
However, the taxpayer, a high school graduate, testified that she had “a little bit of banking education,” indicating that she had some familiarity with bookkeeping. Her ex-spouse added during trial that the taxpayer had worked at a bank for a few years. Regarding her role in the LLC, the taxpayer maintained the business' books and records, prepared and signed sales tax returns and unemployment tax contribution forms on its behalf, and worked with an accountant to prepare its tax returns. Nothing in the record indicated that her ex-spouse tried to deceive or hide anything from her.
Further, the taxpayer’s joint ownership of the LLC, her involvement in maintaining its books and records, her role in preparing and signing tax-related documents on behalf of the business, and her cooperation with an accountant to prepare the LLC’s tax returns, showed that she had actual knowledge of the factual circumstances that made the deductions unallowable. Thus, she also was not entitled to relief under Code Sec. 6015(c).
The taxpayer was not eligible for streamlined determination under Rev. Proc. 2013-34, 2013-43 I.R.B. 397, because no evidence corroborated her testimony that her former spouse had abused her in any sense to which the tax law or common experience would accord any recognition. The history of acrimony between the taxpayer and her ex-spouse called into question the weight to be given to her claims of spousal abuse. Finally, the taxpayer was unable to persuade the court that she was entitled to equitable relief under Code Sec. 6015(f). She was intimately involved with the LLC, knew or had reason to know of the items giving rise to the understatement, and failed to make a good-faith effort to comply with her income tax return filing obligations.
A married couple’s civil fraud penalty was not timely approved by the supervisor of an IRS Revenue Agent (RA) as required under Code Sec. 6751(b)(1). The taxpayers’ joint return was examined by the IRS, after which the RA had sent them a summons requiring their attendance at an in-person closing conference. The RA provided the taxpayers with a completed, signed Form 4549, Income Tax Examination Changes, reflecting a Code Sec. 6663(a) civil fraud penalty. The taxpayers declined to consent to the assessment of the civil fraud penalty or sign Form 872, Consent to Extend the Time to Assess Tax, to extend the limitations period.
A married couple’s civil fraud penalty was not timely approved by the supervisor of an IRS Revenue Agent (RA) as required under Code Sec. 6751(b)(1). The taxpayers’ joint return was examined by the IRS, after which the RA had sent them a summons requiring their attendance at an in-person closing conference. The RA provided the taxpayers with a completed, signed Form 4549, Income Tax Examination Changes, reflecting a Code Sec. 6663(a) civil fraud penalty. The taxpayers declined to consent to the assessment of the civil fraud penalty or sign Form 872, Consent to Extend the Time to Assess Tax, to extend the limitations period.
Thereafter, the RA obtained written approval from her immediate supervisor for the civil fraud penalty, and sent the taxpayers a notice of deficiency determining the same. The taxpayers contended that the civil fraud penalty was not timely approved by the RA’s supervisor because the revenue agent report (RAR) presented at the conference meeting embodied the first formal communication of the RA’s initial determination to assert the fraud penalty.
Due to the use of a summons letter requiring the taxpayers' attendance, the closing conference at the end of the taxpayers’ examination process carried a degree of formality not present in most IRS meetings. The closing conference was, like an IRS letter, a formal means of communicating the IRS’s initial determination that taxpayers should be subject to the fraud penalty. Therefore, the RA communicated her initial determination to assert the fraud penalty when she provided the taxpayers with a completed and signed RAR at the closing conference. The RA had also informed the taxpayers during the closing conference that they did not have appeal rights at that time, which was incomplete and potentially misleading.
The completed RAR given to the taxpayers during the closing conference, coupled with the context surrounding its presentation, represented a "consequential moment" in which the RA formally communicated her initial determination that the taxpayers should be subject to the fraud penalty.
All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year. President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year. At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.
All eyes are on Washington as the White House and the GOP seek to avoid the so-called “fiscal cliff” before the end of the year. President Obama and House Republicans are negotiating the fate of the Bush-era tax cuts, mandatory spending cuts and more in the last weeks of 2012 and negotiations are expected to go right up to the end of the year. At the same time, the IRS has cautioned that the start of the 2013 filing season could be delayed for many taxpayers because of late tax legislation.
Taxes and spending
Almost immediately after President Obama won re-election, Democrats and Republicans scrambled to stake out their positions over the fiscal cliff. Unless the White House and the GOP reach an agreement, the Bush-era tax cuts will expire for all taxpayers after 2012 and across-the-board spending cuts will take effect. Many popular but temporary tax incentives, known as tax extenders, expired after 2011, with many more scheduled to expire after 2012. The alternative minimum tax (AMT), intended many years ago to apply to wealthy taxpayers, is on track to encroach on more middle income taxpayers because it is not indexed for inflation. Also, the employee-side payroll tax cut is scheduled to expire after 2012.
Since winning a second term, President Obama has repeated that the Bush-era tax cuts should expire for higher income individuals after 2012. The top two tax rates would rise to 36 percent and 39.6 percent after 2012. All of the remaining rates would be extended. Tax rates on capital gains and dividends would also increase for higher income individuals. On the campaign trail, President Obama described higher income taxpayers as individuals with incomes above $200,000 and families with incomes above $250,000.
President Obama has talked about trimming $4 trillion from the federal budget deficit. Approximately $1.6 trillion would come from increased taxes on higher income individuals. To achieve a target of $1.6 trillion in tax revenue, the Bush-era tax cuts could not be extended for higher income individuals. Other incentives for higher income individuals would likely be curtailed or possibly eliminated under the President’s plan. These include the personal exemption phaseout (PEP) and the Pease limitation on itemized deductions. President Obama may also re-propose his “Buffett Rule,” which, the President has explained, would ensure that individuals making over $1 million a year pay a minimum effective tax rate of at least 30 percent.
The GOP, its majority reduced in the House after the November elections, has offered few details about its plans to avoid the fiscal cliff. House Speaker John Boehner, R-Ohio, has indicated that the GOP may be open to raising revenue by closing tax loopholes and capping certain unspecified deductions for higher income individuals. Revenue could also be raised by limiting or abolishing business tax deductions and credits. Among the business tax incentives most often hinted at for elimination are ones for oil and gas producers. President Obama, however, has said that he will not support a deficit reduction plan that relies on closing undefined tax loopholes.
Possible scenarios
Looking ahead, several scenarios may play out before year-end. President Obama and the GOP could agree on a tax and deficit reduction package that meets or comes close to the President’s targets. President Obama and the GOP may agree to extend the Bush-era tax cuts and delay the spending cuts for three or six months to give everyone more time to negotiate a long-term deal. On the other hand, both sides could fail to reach any agreement before year-end and the Bush-era tax cuts would expire as scheduled. The spending cuts also would kick-in as scheduled.
Filing season
Whenever Congress changes the tax laws, the IRS has to reprogram its return processing systems. Tax laws passed late in 2012 have the potential to delay the start of the 2013 filing season depending on how long it takes the IRS to reprogram its systems.
IRS officials have told Congress that they are preparing for late tax legislation, especially legislation on the AMT. In past years, Congress has routinely “patched” the AMT to shield middle income taxpayers from its reach. The IRS appears to be anticipating that Congress will patch the AMT for 2012. If Congress does not, the IRS has warned that the start of the 2013 filing season could be delayed for as many as 60 million taxpayers.
The IRS also must reprogram its processing systems for the tax extenders. These tax law changes generally do not require the level of reprogramming the AMT patch requires. The IRS has predicted that any year-end extension of the extenders will be manageable.
Please contact our office if you have any questions about the tax and spending negotiations underway in Washington.
President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
President Obama’s health care package enacted two new taxes that take effect January 1, 2013. One of these taxes is the additional 0.9 percent Medicare tax on earned income; the other is the 3.8 percent tax on net investment income. The 0.9 percent tax applies to individuals; it does not apply to corporations, trusts or estates. The 0.9 percent tax applies to wages, other compensation, and self-employment income that exceed specified thresholds.
Additional tax on higher-income earners
There is no cap on the application of the 0.9 percent tax. Thus, all earned income that exceeds the applicable thresholds is subject to the tax. The thresholds are $200,000 for a single individual; $250,000 for married couples filing a joint return; and $125,000 for married filing separately. The 0.9 percent tax applies to the combined earned income of a married couple. Thus, if the wife earns $220,000 and the husband earns $80,000, the tax applies to $50,000, the amount by which the combined income exceeds the $250,000 threshold for married couples.
The 0.9 percent tax applies on top of the existing 1.45 percent Hospital Insurance (HI) tax on earned income. Thus, for income above the applicable thresholds, a combined tax of 2.35 percent applies to the employee’s earned income. Because the employer also pays a 1.45 percent tax on earned income, the overall combined rate of Medicare taxes on earned income is 3.8 percent (thus coincidentally matching the new 3.8 percent tax on net investment income).
Passthrough treatment
For partners in a general partnership and shareholders in an S corporation, the tax applies to earned income that is paid as compensation to individuals holding an interest in the entity. Partnership income that passes through to a general partner is treated as self-employment income and is also subject to the tax, assuming the income exceeds the applicable thresholds. However, partnership income allocated to a limited partner is not treated as self-employment and would not be subject to the 0.9 percent tax. Furthermore, under current law, income that passes through to S corporation shareholders is not treated as earned income and would not be subject to the tax.
Withholding rules
Withholding of the additional 0.9 percent Medicare tax is imposed on an employer if an employee receives wages that exceed $200,000 for the year, whether or not the employee is married. The employer is not responsible for determining the employee’s marital status. The penalty for underpayment of estimated tax applies to the 0.9 percent tax. Thus, employees should realize that the employee may be responsible for estimated tax, even though the employer does not have to withhold.
Planning techniques
One planning device to minimize the tax would be to accelerate earned income, such as a bonus, into 2012. Doing this would also avoid any increase in the income tax rates in 2013 from the sunsetting of the Bush tax rates. Holders of stock-based compensation may want to trigger recognition of the income in 2012, by exercising stock options or by making an election to recognize income on restricted stock.
Another planning device would be to set up an S corp, rather than a partnership, for operating a business, so that the income allocable to owners is not treated as earned income. An entity operating as a partnership could be converted to an S corp.
If you have any questions surrounding how the new 0.9 percent Medicare tax will affect the take home pay of you or your spouse, or how to handle withholding if you are a business owner, please contact this office.
Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.
Taxpayers who do not meet the requirements for the home sale exclusion may still qualify for a partial home sale exclusion if they are able to prove that the sale was a result of an unforeseen circumstance. Recent rulings indicate that the IRS is flexible in qualifying occurrences as unforeseen events and allowing a partial home sale exclusion.
Home sale exclusion
Generally, single taxpayers may exclude from gross income up to $250,000 of gain on sale or exchange of a principal residence and married taxpayers filing jointly may exclude up to $500,000. The exclusion can only be used once every two years.
To qualify for this exclusion, taxpayers must own and use the property as their principal residence for periods totaling two out of five years before sale. The five-year period can be suspended for up to 10 years for absences due to service in the military or the foreign service.
Partial exclusions are available when the ownership and use test or two-year test is not met but the taxpayer sells due to change of employment, health or unforeseen circumstances. Without these mitigating circumstances, all gain on the sale of a residence before the two years are up is taxed.
Unforeseen circumstances safe harbors
The IRS offers several "safe harbors," that is, events that will be considered to be unforeseen circumstances. These include the involuntary conversion of the taxpayer's residence, casualty to the residence caused by natural or man-made disasters or terrorism, death of a qualified individual, unemployment, divorce or legal separation, and multiple births from the same pregnancy.
Facts and circumstances test
If a taxpayer does not qualify for any of the safe harbors, the IRS can determine if a sale is the result of unforeseen circumstances by applying a facts and circumstances test. Some of the factors looked at by the IRS are proximity in time of sale and claimed unforeseen event, suitability of the property as the taxpayer's principal residence materially changes, whether the taxpayer's financial ability to maintain the property is materially impaired, whether the taxpayer used the property as a personal residence and whether the unforeseen circumstances were foreseeable when the taxpayer bought and used the property as a personal residence.
Events deemed as unforeseen circumstances
Recently, the IRS has decided that several non-safe harbor events were unforeseen circumstances. These include sales because of fear of criminal retaliation, the adoption of a child, a neighbor assaulting the homeowners and threatening their child, and a move to an assisted living facility followed by a move to a hospice.
If you think you may be eligible for a reduced home sale exclusion because of an unforeseen circumstance, give our office a call.
More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.
More small businesses get into trouble with the IRS over payroll taxes than any other type of tax. Payroll taxes are a huge source of government revenue and the IRS takes them very seriously. It is actively looking for businesses that have fallen behind in their payroll taxes or aren't depositing them. When the IRS finds a noncompliant business, it hits hard with penalties.
Your most important responsibility is depositing all of your payroll taxes on time. Before you do that, however, you have to know:
- Who are your taxable workers?
- What payroll taxes apply?
- What compensation is taxable?
- When are your payroll taxes due?
- What payroll and other returns should you file?
Taxable workers
The first step is to determine who is a taxable worker. If you hire only independent contractors, they, and not you, are responsible for paying federal payroll taxes.
It's more likely that you hire employees. In that case, you are responsible for withholding federal income tax and Social Security and Medicare taxes. You are also responsible for federal unemployment (FUTA) taxes along with any state taxes.
There are some exceptions to who is an employee for payroll taxes but they are few. The most common are real estate agents and direct sellers.
If you have any questions about the status of your workers, give our office a call. Misclassifying workers is a common mistake. If you treat an employee as an independent contractor, and your treatment is wrong, you will be liable for federal income tax and Social Security and Medicare taxes. They add up very quickly.
What taxes apply
Once you've determined that your workers are taxable employees, you have to determine what federal payroll taxes apply. Most employers must withhold federal income tax and Social Security and Medicare taxes. You are also liable for federal unemployment taxes (FUTA) but these are not withheld from an employee's pay. Only you pay FUTA taxes.
You have to withhold at the correct rate. Form W-4, which your employee fills out, tells you how much federal income tax to withhold for an employee. The Social Security, Medicare and FUTA tax rates are set by statute.
Failing to withhold at the correct rate is a surprisingly common mistake. Sometimes, an employee completes a new W-4 but the employer forgets to adjust his or her withholding. It's a good idea to review the W-4s of all your employees and make sure they are current.
Compensation
Almost every type of compensation, and not just wages, is taxable. The IRS wants its share of tips, bonuses, employee stock options, severance pay, and many other forms of compensation. This includes non-cash or in-kind compensation.
There are exceptions. Health insurance plans generally are not subject to federal payroll taxes. Per diem payments and other allowances, if they do not exceed rates set by the government, are generally not taxable as wages. Some fringe benefits are not taxable, such as employee discounts, an occasional taxi ride when an employee must work overtime and inexpensive holiday gifts.
Determining what compensation is taxable and what is not is often difficult. The complex tax rules are easy to misinterpret and you may be failing to withhold taxes on taxable compensation. It's a mistake that can be avoided with our help.
Deposit schedule
Most small employers deposit payroll taxes monthly. Large and mid-size businesses make semi-weekly deposits. Very small employers may make annual deposits.
Your deposit schedule is based on the total tax liability that you reported during a four-quarter "lookback" period. The lookback period begins July 1 and ends June 30. If you reported $50,000 or less of taxes for the lookback period, you make monthly deposits. If you reported more than $50,000, you make semi-weekly deposits.
Determining the lookback period is tricky. If the IRS finds that your lookback period is wrong, you could be heavily penalized for not making timely deposits. Your deposit schedule can also change and you have to know what can trigger a change.
Forms
If you withhold federal payroll taxes, you must file Form 941 quarterly. Of course, there are exceptions. The most important one is for very small employers. They file their returns annually instead of quarterly.
The IRS encourages employers to file Form 941 electronically. Depending on how large your business is, you may have no choice but to file electronically. A common mistake is filing more than one Form 941 quarterly. This only causes unnecessary delays.
Penalties are costly
Often, a small business just doesn't have the cash on hand to make a timely deposit. The owner thinks that he or she will double-up the next time and make things right. More often than not, that doesn't happen and the unpaid liability snowballs.
The penalties for failing to withhold or deposit federal income tax and Social Security and Medicare taxes are severe and they can be personal. If your business cannot pay the unpaid taxes, the IRS will go after you personally.
You may be using a payroll agent to pay your taxes. Keep in mind that you are still liable for those taxes if your agent doesn't pay them. Reliance on a payroll service, or anyone else, does not excuse your failure to pay.
Reporting obligations
Your payroll tax obligations also do not end with filing tax returns and depositing payments. You have reporting obligations to your employees and, in some cases, to your independent contractors.
Staying out of trouble with the IRS
Even if you believe you understand and are compliant with the federal payroll tax rules, give our office a call. The rules are riddled with exceptions that we haven't even touched on in this brief article. We'll take a look at your operations and make sure you are 100 percent compliant. It's worth avoiding any costly mistakes down the road.
