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IRS Tax Law By Wendy Speelman 11/14/06 Federal Agencies State Agencies Municipal Governments County Governments School Districts Federal, State, & Local.

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Presentation on theme: "IRS Tax Law By Wendy Speelman 11/14/06 Federal Agencies State Agencies Municipal Governments County Governments School Districts Federal, State, & Local."— Presentation transcript:

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2 IRS Tax Law By Wendy Speelman 11/14/06

3 Federal Agencies State Agencies Municipal Governments County Governments School Districts Federal, State, & Local Government (FSLG)

4 Compliance Activities Outreach events Compliance checks Review of adherence to recordkeeping and information reporting requirements Examinations What to expect IRS vs. State audit

5 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

6 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

7 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

8 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

9 FRINGE BENEFITS Any benefit an employee receives in addition to their normal wage Could be monetary, equipment or services Treasury Regulations (a)(3)

10 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

11 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

12 Non-Taxable Fringe Benefits No additional cost service Qualified employee discounts Working condition fringe De minimis fringe Qualified transportation expenses Qualified Moving Expense Reimbursements

13 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

14 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

15 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

16 Non-accountable Plan Does not meet all 3 requirements for an accountable plan Benefit is fully taxable when paid

17 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

18 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 & (c)

19 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 & IRC 162(a)(2)

20 Meal Allowance when not traveling Meals with business meetings - NOT taxable if: clear business setting directly related Employer buys you lunch - Taxable as wages

21 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

22 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

23 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

24 Automobile Expenses Employee car used for employer’s business 2006 Federal Mileage Rate At this rate or less: Non-taxable to employee Excess over rate: Taxable to employee - only the excess amount

25 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)

26 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

27 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)

28 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

29 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 T(k)

30 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

31 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

32 Personal Use If No record kept: Value of ALL use is taxable If record kept: Only Personal Use is taxable

33 Automobile Valuation Rules Cents-Per-Mile Rule Treasury Regulations (d) Commuting Rule Treasury Regulations (e ) Automobile Lease Valuation Rule Treasury Regulations (f)

34 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

35 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)

36 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.

37 Lease Valuation Rule 1. Determine FMV of vehicle 2. Use table in Reg (d)(iii) or Publication 15-B 3. Determine % of personal use 4. Multiple Annual Lease Value by % of personal use 5. Value the fuel if provided 5.5 cents

38 Uniforms Cost and upkeep of clothes are excluded from employee’s income if: 1. Condition of employment 2. Not suitable for everyday wear and 3. Not worn while away from work IRC 162 & 262 Donnelly v. Commissioner 262 F.2d 411 Yeomans v. Commissioner 30 T.C. 757

39 Uniforms If suitable to replace regular clothing then include in wages Mella v. Commissioner T.C. Memo Pevsner v. Commissioner 628 F.2d 467 Must meet accountable plan rules Treasury regulations (c)(1)

40 Uniform law IRC 162 & 262 Regulation (c)(1) Donnelly v. Commissioner 262 F.2d 411 Yeomans v. Commissioner 30 T.C. 757 Revenue Ruling Mella v. Commissioner T.C. Memo Pevsner v. Commissioner 628 F.2d 467 Drill v. Commissioner 8 T.C. 902

41 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

42 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 , IRB 31

43 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 aliens IRC 6041A(f) requires vendor to furnish information

44 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

45 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

46 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

47 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

48 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

49 Examples of Service Auto repair Construction Custodial Maintenance Landscapers Locksmiths Referees Printing Services Professional Services Accountants Appraisers Architects Consultants Engineers Advertising

50 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 § * Do not report payments to pharmacies or tax exempt hospitals

51 Payments to Attorneys Section 1031 of the House Bill and Proposed Regulation 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

52 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)

53 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

54 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

55 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

56 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

57 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

58 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

59 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

60 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

61 Resources Publication determination on status of worker as either an independent contractor or an employee Publication 963 Chapter 3 Revenue Ruling – 20 factors IRC 3401

62 Employee or Contractor?? Many state and local government officials are employees by statute Elected Officials are always employees Withhold taxes Report on Form W-2

63 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

64 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.

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

66 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 15 th of following month

67 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

68 Look back period

69 How to Deposit Payment with return Coupons Form 8109 – get from IRS Deposit with authorized depositary Electronic deposits EFTPS – Electronic Federal tax Payment System

70 Form 941 – Liability Summaries Monthly depositor -Line 15 (2 nd page) Semiweekly depositor - schedule B Schedule B total should match total liability on 941 (Line 10)

71 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

72 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

73 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

74 Form 941C Do not use to correct errors previously reported on: Monthly Deposits on Form 941, 2 nd page line 15 Schedule B Number of employees on Form 941 line 1 Wages on Form 941 line 2

75 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

76 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

77 Forms W-4 If employee claimed exempt status they must submit new Form W-4 by Feb. 15 th If not, change to Single Zero If employee gets Advanced EIC, Form W- 5 by December 31 st

78 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 and Private Letter Ruling

79 Revenue Ruling 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)

80 Recent Rulings TAM Gift Certificates Revenue Ruling HSA accounts with beneficiaries Revenue Ruling What is a valid pick up plan

81 Gift certificates TAM 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

82 Revenue Ruling 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

83 Rev. Rul 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!

84 “Pick up” of employee contributions by Employer Revenue Ruling Requirements to conform with §414(h)(2) Provides transition relief for pre-existing “pick-ups” Only addresses federal income tax

85 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

86 Questions?? Wendy Speelman (419) Amy Myers (419) Trudee Billo (419)

87 Wendy Speelman (419) Allen Ashtabula Auglaize Crawford Cuyahoga Darke Defiance Erie Fulton Geauga Hancock Hardin Henry Huron Lake Lorain Lucas Medina Mercer Ottawa Paulding Putnam Sandusky Seneca Trumbull Van Wert Williams Wood Wyandot

88 Amy Myers (419) 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

89 Trudee Billo (419) 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

90 Resources Business and Specialty Tax line EFTPS hotline Employee Plans Taxpayer Assistance Form 941 Online filing program (E-help) To get IRS Forms Copy A, Form W-2 reporting questions, SSA employer reporting service or Information reporting program customer service or Information reporting web page

91 List of Resources The quarterly “Federal, State and Local Governments Newsletter” is available on the IRS Web site at 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 link to Educational Products, then on the Taxable Fringe Benefit Guide 117 pages

92 List of Resources e-Help Desk Toll Free Number Supports e-file, Electronic Federal Tax Payments System, and future e-Services customers. Operational hours of the e-Help Desk can be found at 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 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.

93 List of Resources IRS e-News for tax Professionals - Ohio If you want to subscribe to this mailing list, please send a blank to mailto: ohio- to subscribe. e-Services, including TIN Matching link to Tax Professionals; scroll to bottom of page and link to e-services-New Products. Must register to access products.

94 List of Resources Questions relating to information returns (forms 1099) contact Martinsburg Computing Center or call Fire System or Reporting Program Customer Service at or at Electronic submission of information returns (forms 1099) use FIRE system (Filing Information Returns Electronically) IRS Government Call Site EFTPS


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