Internal Revenue Service Federal, State, & Local Governments Louisiana Government Finance Officers Association October 5, 2011

FSLG MISSION STATEMENT §Provide Government Entities top quality service by helping them understand and comply with their tax responsibilities and by applying the tax law with integrity and fairness to all.

Types of Compliance Activities Compliance Checks & Examinations

The Compliance Check What to Expect?

The Initial Appointment §Receive an appointment letter or a phone call §Request for Information Returns Filed (941/1099/W-2/W-4) §Participation is voluntary §This is not an examination §Publication 3114

The Compliance Check §Purpose is to verify accurate information return reporting and filing §Provide an opportunity to educate §Initial interview to determine filing requirements §Inspect filed information returns for current year (941’s, 945’s, 1099’s, W-2’s, etc.)

No Adjustments to Tax §May result in a voluntary agreement to correct errors §May follow-up with another compliance check or an examination

The Compliance Check Report §Letter issued to close the compliance check §Letter will usually include recommendations for corrections §Disagree, IRS may consider an examination

Employment Tax Examination What to Expect?

The Initial Appointment §Receive an appointment letter and/or a phone call §Request for books and records related to issues examined

The Examination §There is an initial interview §Review books and records for year(s) selected §Verify information on forms 941’s, 945’s, W-2’s, and/or W-4’s, etc.

The Adjustment to Tax §May propose additional tax or reduction of tax §Based on evidence and application of the law §Entity given opportunity to provide additional evidence §Issue examination report

The Examination Report §Examination report, reflecting adjustments with supporting documents, is issued §Agree §Disagree

If you Agree: §Sign an agreement and pay the tax (normally with no interest or penalty) §Expectation of future compliance

If you do not agree: §Specialist will explain your appeal rights (Publication 5) §A meeting will be offered with the manager §30 day letter issued §Forward case to the Appeals Division

Appeals Process §Appeals officer hears position §Settlement may be offered §If accepted, case closed with agreement §No settlement accepted, proceed to court (District/Tax Court)

Issues Discovered During Compliance Checks And Examinations

Issues Retirement Contributions and Cafeteria Plan Benefits

Retirement Contributions §Employer contributions are income tax deferred (pre-tax) §Contributions are wages for “FICA” tax §457 plan contributions are deferred for FITW purposes only §“Ineligible” plans and excess contributions (403(b))

Cafeteria Plan Benefits §Benefits paid for under a qualified cafeteria plan are not subject to : 1.) Income tax 2.) FICA (OASDI or Medicare) §Dependent care benefits are reflected on the Form W-2

Fringe Benefit Issues Employer Provided: Autos §How does (your) employee account for personal use? 1.) Personal use is taxable 2.) Verified business use is not taxable 3.) Employee can reimburse employer for personal use

Fringe Benefits Reimbursement for Meals §Day Meals (taxable fringe benefit) Not excluded from income unless incurred while traveling away from home and on business overnight

Expense Reimbursements Accountable vs. Non-Accountable Expense Reimbursements

What is an Accountable Plan? §Employers can reimburse qualified business expenses that employees incur during the course of conducting business for the employer §Employee must follow certain rules in order for the reimbursement to be “non-taxable” to the employee

Accountable Plan Rules: 1.Employee must have paid or incurred deductible expenses while performing services for you, and 2.Employee must adequately account for expenses within a reasonable period of time, and 3.Amounts in excess must be returned

Non-accountable Plan if: 1.Not business related 2.Expenses are not substantiated (receipts) 3.Advances are not accounted for and/or amounts in excess are not returned to you within a reasonable period of time (120 days)

Personal Use Vehicles vs. Non-Personal Use Vehicles Automobiles Pick-up Trucks Motorcycles School Buses Semi-Tractor/Trailer Passenger Buses Personal Use Vehicles Non-Personal Use Vehicles:

Accountable Plans §For Personal Use Vehicles: l “Per Mile” Reimbursement is allowed l ( 51 cents beginning 1/1/2011) OR l Actual Expenses incurred are reimbursed. §For Non-Personal Use Vehicles l Actual expenses incurred only! Receipts for Gas/oil/tires/etc.

FORM 1099-MISC Issues §Delinquent forms §Correct Information (Form W-9) §Penalties §Backup withholding

What is a Form MISC? §Information return required to report certain types of payments* made to non- employees and others * Payments made BY Federal, State and Local government agencies are reportable

Your Responsibility For Each Contractor: §Secure Form W-9 from each contractor when hired §Keep in each contractor’s file §Use TIN Matching §Report payments on Form 1099-MISC §Apply Backup Withholding when required

Types of Payments/Services Reported on the FORM MISC ( By Box) §Rents – Box 1 §Other Income – Box 3 §Backup Withholding (BWH)– Box 4 §Medical/Health Care Payments – Box 6 §Nonemployee Compensation – Box 7 l Attorney’s Fees - Box 7

Types of Payments/Services Reported on 1099-MISC (cont’d) §Gross Proceeds to Attorneys – Box 14 Related to Legal Services Corporate Exemption Does NOT APPLY

Who Does NOT Get a Form 1099-MISC? §Employees §Corporations Except: Attorneys or Medical or Health Care Service Providers §Businesses that provide you with: l Merchandise Inventory l Equipment, supplies, parts only* *Parts provided with services are reportable

When are Forms1099- MISC Required to be Filed? §When Payments for services = $600 or more in a calendar year §Furnish to Payee by January 31, xxxx §TO IRS with 1096 transmittal: l File Paper by last day of February l File Electronically by last day of March

Transmittal Form 1096 §Use Form 1096 for each TYPE of Information Return you file §Filer Information: Please put a contact name and a Telephone Number!

Failure to File Penalty – IRC 6721 §Graduated Penalty Rates per Return l $30 if corrected within 30 days of due date Up to Maximum of $250,000 per year l $60 if corrected 30 days after due date but by August 1 Up to Maximum of $500,000 per year l $100 if corrected after August 1 or don’t file Up to Maximum of $1,500,000 per year

Failure to Furnish Payee Statements IRC 6722 §Fail to furnish correct information by January 31, xxxx and cannot show reasonable cause §Graduated Penalty Rates per Return l $30 if corrected within 30 days of due date Up to Maximum of $250,000 per year l $60 if corrected 30 days after due date but by August 1 Up to Maximum of $500,000 per year l $100 if corrected after August 1 or don’t file Up to Maximum of $1,500,000 per year

Backup Withholding §Rate: 28% §Special Circumstances: l If Payee Information is questionable Secure Form W-9 l Fraud Document Vendor File with Form W-9 If TIN missing, or <9 digits, wrong format or alpha character ---Backup Withhold Immediately

Backup Withholding and Deposit Rules: §Use Form 945 – Annual Return of Withheld Federal Income Tax (due January 31 st ) §Non payroll liabilities deposit rules generally the same as payroll: l 2 Deposit Schedules: Monthly or Semi-Weekly l If annual tax is less than $2,500, the backup withholding deposits are not due until the return is filed.

IRS TIN Matching Program l Online System l Open to all payers of “reportable payments” Interest, Dividends, Payments Subject to Backup Withholding (Nonemployee Compensation) l Verify the payee TINs required on 1099s BEFORE filing l IRS will inform payer if name/TIN combo matches database l Find out more at our website: (Publication 2108A)

Benefits of Using TIN Matching: §Avoid TIN Errors §Reduce backup withholding notices §Meet reasonable cause to avoid penalties §Save time and money!

Treatment of Workers OR Independent Contractor? Employee?

Independent Contractor Defined An individual who is not subject to the control or direction of another as to the means and methods for accomplishing a result.

Employee Defined An individual who performs services for you; is subject to your control regarding what will be done AND how it will be done. It does not matter that you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

Both definitions use the word “control” qEmployee... the right to control and direct the details of how services are performed qIndependent Contractor... the right to control and direct only the result of the work

20 Common Law Factors 1.Instructions 2.Training 3.Integration 4.Services Rendered Personally 5.Hiring, Supervising, and Paying Assistants 6.Continuing Relationship 7.Set Hours of Work 8.Full Time Required 9.Doing Work on the Employer’s Premises 10.Order or Sequence of Set

20 Common Law Factors 11. Oral or Written Reports 12.Payment by Hour, Week, Month 13.Payment of Business and/or Travelling Expenses 14.Furnishing of Tools and Materials 15.Significant Investment 16.Realization of Profit or Loss 17.Working for More that one Firm at a Time 18.Making Service Available to the Public 19.Right to Discharge 20.Right to Terminate

Three principle areas to explore when making a determination: Behavioral control Financial control Type of relationship

Publication 1779 Independent Contractor or Employee...

Basic Behavioral Control Factors èType of instructions given èTraining provided by the entity

Instructions given...  When to do the work  Where to do the work  What tools or equipment to use  What workers to hire to assist with work  Where to purchase supplies  What routines or patterns are to be used  What order or sequence to follow  What work must be done by which person →

Evaluation Systems

Training Periodic or on-going training provided by the entity about procedures to be followed and methods to be used (strong indication entity wants services performed in a particular manner)

Review of Behavioral Control Factors èType of instructions èEvaluation systems èTraining provided by the entity

Basic Financial Control Factors èIs there a significant investment? èDoes the worker incur unreimbursed expenses? èDoes the worker have the opportunity to make a profit or loss? èAre the worker’s services available to the public/market? èWhat method of payment does the worker receive?

Significant Investment § Equipment § Fixed expenses (rent, salaries, etc.) § Unreimbursed expenses (significant) A significant investment is not necessary for independent contractor status as some types of work simply do not require large expenditures.

Services available to others in the relevant market Independent contractors often advertise, maintain a visible business location, and are available for the relevant market.

Method of payment Hourly, weekly, or similar basis is guaranteed as a return for labor. Generally this is evidence of an employer-employee relationship. A Flat fee is generally evidence of an independent contractor relationship, especially if the worker incurs the expenses of performing the services. Irrelevant--daily, weekly, or monthly. §

Review of Key Financial Control Factors èSignificant investment, è Unreimbursed expenses, è Possibility to earn a profit or incur a loss, è Services available to relevant market, and è How paid.

Type of Relationship Factors èWritten contracts describing the relationship the parties intended to create. èDoes the Entity provide the worker with benefits such as insurance, a pension plan, vacation, or sick pay? èPermanency of the relationship. èExtent to which services performed by the worker are a key aspect of the regular business of the Entity.

Written Contract The fact that a written contract exists does not make an employee an independent contractor, but it can be one factor in showing the parties’ type of relationship.

Provides employee-type benefits Benefits:  vacation  sick pay  health insurance  contributions to a pension plan

Permanency of the Relationship Expectation- Continue indefinitely, or for a specific project or time period

Extent to which services are a key aspect If a worker provides services that are a key aspect of your Entity’s activity, it is more likely that you will have the right to direct and control his activities.

Review of Type of Relationship Factors èWritten contracts. èEmployee-type benefits. èPermanency of relationship. èPerform services that are a key aspect.

Remember …. Control-- behavioral and financial-- and type of relationship It is sufficient if the entity has the right to direct and control the worker who performs the services.

Insignificant Factors: §Part-time or full-time §Seasonal §Temporary §Place of Work §Hours of Work §Schedule §Method of Payment

Problem Areas Elected Officials are employees §the public has the right to remove them §carrying out the duties of an office as defined by statute §Oath of office? “Retired” Employees/Current employees – add’l duties

Section 218 Workers for state and local governments are employees for FICA purposes if the government unit entered into an agreement with Social Security Administration to provide FICA coverage pursuant to Section 218 of the Social Security Act. Linda Yelverton, State Social Security Administrator (225)

Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding Form SS-8 Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding

SS-8 Determination  May be initiated by either worker or entity  Form is sent to IRS, Newport, Vermont (government entities) Written determination (by IRS) sent to both worker and District  If a worker is determined to be an employee - worker will receive instructions on filing return and reporting his share of FICA tax, OR filing for a refund if already paid - employer will be instructed to convert worker to employee

Independent Contractor §Upon hiring independent contractor Secure W-9 Solicit TIN even for one time transactions If missing TIN (no TIN or TIN is obviously incorrect), begin back-up withholding If TIN is incorrect (name and TIN combination do not match or can’t be found by IRS or SSA), begin back-up withholding

Returns to be filed § Form 1099-MISC U.S. Information Return Filed & furnished annually By January 31st to payee By February 28th to IRS Include any back-up withholding on Form 1099 Form Transmittal used to send all like 1099s to IRS Form Annual Return of Withheld Federal Income Tax Filed annually - by January 31st

To Summarize….. §Independent Contractor OR Employee Behavioral Control Financial Control Relationship of the Parties §Form SS-8 Let IRS make the determination §Forms to be filed

IRC SECTION 3402(t) REQUIRED WITHHOLDING ON GOVERNMENT PAYMENTS

Tax Increase Prevention and Reconciliation Act of 2005 §Added section 3402(t) to Internal Revenue Code §Generally requires 3% income tax withholding by government entities on payments for property and services §Originally applied to payments made after December 31, 2010

IMPLEMENTATION DELAYS §American Recovery and Reinvestment Act of 2009 delayed implementation for one year, to payments after December 31, 2011 §Final regulations May 9, 2011, delays implementation until after December 31, 2012

AFFECTED GOVERNMENT ENTITIES §All U.S. Government agencies, including judicial and legislative branches §All state government and instrumentalities of state government (including the District of Columbia, but excluding Indian tribal governments and U.S. possessions) §A ll subdivisions of state government and instrumentalities of these subdivisions that make annual payments for property and services (excluding wages) of $100 million or more

SMALL SUBDIVISION OR INSTRUMENTALITY EXCEPTION §Less than $100 million in payments per year §Eligibility for this exception is based on payments for a “lookback period” of the accounting year ending with or within the second preceding calendar year §Under an optional rule, an entity may average payments made during any four of the previous five accounting years ending with the accounting year ending with or within the second preceding calendar year

PAYMENT ADMINISTRATOR §Any person that acts with respect to a payment solely as an agent for a government entity by making the payment on behalf of the government entity §Payments to an administrator for payment services provided on behalf of government entity are subject to the withholding §Government entity remains liable for tax

RECIPIENTS Payments to all of the following are subject to the 3% withholding: §Individuals §Trusts and Estates §Partnerships §Associations §Corporations

EXCEPTIONS TO 3402(t) Withholding is not required for payments: §For retirement benefits, unemployment compensation, or social security §Subject to backup withholding, if performed §For real property, interest or repayment of principal, public assistance or welfare, loan guarantees, grants, taxes, or investment securities §Made in emergency, disaster or hardship situations

EXCEPTION FOR EMPLOYEES Payments to employees in connection with service are excepted: §Wages §Retirement plan contributions §Fringe benefits §Expense reimbursements under accountable plans

MORE EXCEPTIONS §To other government entities, foreign governments, Indian tribes, or tax-exempt organizations §Made under confidential or classified contracts under IRC 6050M(e)(3) §To nonresident aliens and foreign corporations in certain situations

GRANTS A transfer of funds from government to recipient pursuant to agreement, when (1)Principal purpose is to carry out a public purpose, and (2)Substantial involvement between parties not expected when carrying out the activity.

EXISTING CONTRACTS §Under the final regulations, withholding is not required under existing written contracts in effect on December 31, 2012 §Exception does not apply through 2013 if there are material modifications to the contract after that date §Contract renewal is not material modification §Companion proposed regulations [REG ] provide that existing contract exception does not apply after 2013

REAL PROPERTY §Real property includes land or completed buildings §Payments for construction or improvements to existing buildings are subject to the requirement

PAYMENT THRESHOLD §All governmental entities (including Federal and state agencies) are not required to withhold on payments of less than $10,000. §$10,000 threshold is applied separately to each payment and each payee §3% withholding applies to total amount paid in any form §Payor and payee may agree to have withholding apply to payments that are not subject to withholding (including those under $10,000)

ANTI-ABUSE RULE §Withholding is required if a payment is divided solely for the purpose of avoiding the withholding requirements §Government entity payer is not liable for failure to withhold unless it knew or had reason to know that payee was structuring payments to avoid withholding

HOW TO REPORT §Withholding required at time of payment (by entity or payment administrator) §Withheld amounts are shown on Form 945 §Included with other Form 945 liabilities in applying deposit rules §Payee takes credit for withholding on income tax return

HOW TO REPORT §Withholding reported to recipients on Form 1099-MISC, Miscellaneous Income §Withholding may not be used by payee as a credit against employment or other taxes §3402(t) withholding may be taken into account in making estimated tax payments

FAILURE TO WITHHOLD §In general, a government required to withhold under this provision that fails to do so is liable for the tax §If government entity failed to comply, it is not liable for the withholding if it can establish that the payee included the payment on its income tax return and paid the income tax due on that payment.

Forms or Assistance §IRS website: §FSLG website: §Forms: TAX-FORM §Assistance: Contact your FSLG Specialist

QUESTIONS??