1. Jason E. Russell Deloitte Tax LLP October 6, 2016 115p
Audit Pitfalls
Jason E. Russell
Deloitte Tax LLP
October 6, 2016
115p

2. Agenda Non-cash Fringe Benefits
U.S. Payroll Deposit Rules & Equity Transactions
Service Provider Documentation
Worker Classification & Settlement Program

3. Fringe Benefits Awards and prizes Award trips Loans Company cafeteria
Gift cards
Ipod, ipad, raffle prizes
Award trips
“President’s Club, Diamond Club, Century Club”
Spousal accompaniment on award trips
Loans
Date of hire payments: is forgiveness planned?
Company cafeteria
Subsidy (reduced price) is OK; free is not OK
Wellness program cash-equivalent incentives
Subsidized gym dues
Relocation
Househunting trips are taxable
Commuting is taxable, even if done via flight
Employee discounts
20% OK on services
Gross profit % OK on goods

4. Fringe benefits: Be cautious of these
W-2 inclusion is correct for many of these
Awards and prizes
Gift cards
Ipod, ipad, raffle prizes
Award trips
“President’s Club, Diamond Club, Century Club”
Spousal accompaniment on award trips
Loans
Date of hire payments: is forgiveness planned?
Company cafeteria
Subsidy (reduced price) is OK; free is not OK
Wellness program cash-equivalent incentives
Subsidized gym dues
Relocation
Househunting trips are taxable
Commuting is taxable, even if done via flight
Employee discounts
20% OK on services
Gross profit % OK on goods

5. Payroll Deposit Timing
Next (Business) Day
Payroll Deposit Timing
Deposits due the following Wednesday
Particularly for equity transactions, but these apply to all payroll liability events
Deposits due that Friday
$100,000
Wed-Fri
Sat-Tues

6. What’s the Payroll Liability Date?
Depends on the Type of Equity
Stock Options
Exercise date
See IRS Memo, which provides for transaction + 3 days to settle (up to that), and another day for the deposit to credit
RSUs
Settlement date (net shares to participant accounts)
See also: theory behind IRS memo, even though language of memo only applies to stock options
RSAs
Vesting date of the shares
Date of 83(b) election, if one is made 6

7. Field audit memorandum
On March 14, 2003, a Memorandum was issued by the IRS to audit examiners to provide guidelines surrounding assessment of employment tax penalties for NQSOs.
“It has been argued that the shares (or the value of the shares) are not available to the exerciser of the options until settlement date, and therefore no actual or constructive payment of wages takes place until that time.
There is generally only a three day delay between time of exercise and time of settlement resulting from such exercise. In fact, under 17 C.F.R. Sec c6-1(a), the SEC generally established a maximum three day settlement period for broker- dealer trades. There is presently no specific published guidance relative to whether the date of exercise or date of settlement is the appropriate date for considering assertion of the penalty for failure to deposit employment taxes attributable to the exercise of nonqualified stock options.”
Under this Field Directive, auditors “should not challenge the timeliness of deposits required under Treas. Reg. § (c), if such deposits are made within one day of the settlement date, as long as such settlement date does not fall more than three days from date of exercise.” 7

8. Payroll Deposit Penalties
1-5 days late
Payroll Deposit Penalties
6-15 days late
Based on calendar days, not business days
More than 15 days late 2% 5%
10% 8

9. Penalties
The IRS uses a First In First Out system to assign deposits, and will attribute a deposit to the most recent tax liability, even if a deposit was missed and the deposit actually relates to a later-dated liability. Unfortunately, this can cause a cascading penalty.
Taxpayers can designate to which tax period they want a specific deposit applied within 90-days of receipt of a notice of penalty.
The IRS does allow a “safe-harbor” shortfall if the shortfall is no more then the greater of $100 or 2% of the amount due, so long as the original deposit is made timely, and the shortfall is made up by the ‘make-up date.’
Example: A is required to make a deposit of $1,000 on June 15 and is a semi- weekly depositor. A makes a deposit of $900 on June 15 and would be required to make the additional $100 deposit by the first Wednesday or Friday occurring on our after July 15th. Because the shortfall is $100 and they have made up the deposit by the make-up date, no penalties are assessed. 9

10. Domestic Business Travelers
Which jurisdictions are the most active in audit of non-local companies? FL NM DE MD TX OK KS NE SD ND MT WY CO UT ID AZ NV WA CA OR KY ME NY PA MI VT NH MA RI CT VA WV OH IN IL NC TN SC AL MS AR LA MO IA MN WI NJ GA DC AK HI

11. Non-US service providers
Employee v. Contractor
Treaty Considerations (Dependent v. Independent personal services)
Totalization agreements for social taxes
Certification of non-US status
Form 8233
W-9
W-8BEN
XX% Supporting text or key insight runs here

12. Service Provider Documentation
Requiring proof of this is a recurring audit topic for the IRS
Form W-9
Used to support US taxpaying vendor providing services in the US.
Technically, original W-9 not required at vendor setup, contract initiation (except for interest, dividends
Upon receipt of taxpayer ID mismatch from the IRS, original “wet signature” W-9 should be provided to you by the service provider. Backup withholding should begin between notice by the IRS of mismatch and the provision of updated information.
Form W-8BEN
This is often provided by non-resident contractors performing services in the US
Supports 1042-S reporting
Form 8233
Non-US resident contractors performing services in the US
Provides reduced or no withholding on the income provided to them.
Annual form
Supports 1042-S reporting 12

13. Confirming the payee status
Must provide a certified TIN for payments of interest, dividends or other payments that are subject to broker reporting, and after receipt of B notice
For all other payments, the TIN may be provided in any manner. Verbal is acceptable in some cases, however, a log of these calls is required to be maintained
Payer may require a signed form W-9 from U.S. exempt recipients to overcome a presumption of foreign status
Non U.S. recipients would not provide a Form W-9, but instead provide a Forms W-8 or Form 8233
Disregarded entity: provide name/TIN that would be on tax return
Obtain documentation (e.g., Form W-9, Forms W-8 or Form 8233) from payee to determine their residency status. You may rely on representations on the statement unless form is invalid on its face or you have knowledge or reason to know the form is incorrect
Best Practice is to always request a signed tax form 13

14. Form W-8BEN: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)
Purpose
Establish foreign status
To claim a reduced rate of, or exemption from, withholding tax as a resident of a foreign country with which the United States has an income tax treaty
Claim status as the beneficial owner of the income for which the form is being furnished
Claim exemption from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding
Who and When
A foreign individual that is a beneficial owner of income should provide Form W-8BEN to the withholding agent or payor
This form should be provided at least every three years by the payee
This form should be updated within 30 days of a change in circumstances or address
Validity Period
Generally, a Form W-8BEN provided without a U.S. TIN will remain in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes information on the form incorrect 14

15. Form Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Used most commonly by NRA independent contractors to obtain reduced withholding
Purpose
Establish foreign status for independent services (e.g. non-U.S. independent contractor working in the U.S.)
To claim a reduced rate of, or exemption from, withholding tax as a resident of a foreign country with which the United States has an income tax treaty
Who and When
A foreign individual that is a beneficial owner of independent personal services income
This form should be provided every year by the payee
This form should be filed with the IRS 15

16. Form W-8BEN-E: Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)
Purpose
Establish foreign status
To claim a reduced rate of, or exemption from, withholding tax as a resident of a foreign country with which the United States has an income tax treaty
Claim status as the beneficial owner of the income for which the form is being furnished
Claim exemption from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding
Certify FATCA classification (to be addressed in next section)
Who and When
A foreign entity that is a beneficial owner of income should provide Form W-8BEN to the withholding agent or payor
This form should be provided at least every three years by the payee
This form should be updated within 30 days of a change in circumstances or address
Validity Period
Generally, a Form W-8BEN provided without a U.S. TIN will remain in effect for a period starting on the date the form is signed and ending on the last day of the third succeeding calendar year, unless a change in circumstances makes information on the form incorrect 16

17. Common misconceptions of worker classification
Project workers are not employees
Temporary workers are not employees
Former executives returning as “consultants” are independent contractors 17

18. Rev. Rul. 87-41 — Twenty common law factors
Instructions
Hour, week, month pay
Training
Business expense pay
Integration
Furnish tools and materials
Personal services
Significant investment
Hire, pay assistants
Realize profit, loss
Continuing relations
More than one employer
Set work hours
Full time required
Services available to public
Employer’s premises
Order, sequence set
Right to discharge
Oral, written report
Right to terminate 18

19. IRS 2006 audit manual on worker classification
Created 3 categories of evidence:
Behavioral control
Financial control
Relationship of the parties 19

20. Worker classification “Red flags”
Former employees
Form 1099 & Form W-2
Form 1099 – Multiple years
Industry focus
Leads
IRS internal database
Contractor originated
State info sharing 20

21. Facts & Circumstances Considerations
Is there a web presence for the contractor?
Does 100% of work come from single source?
Who pays any assistants? The contractor directly or the company?
Paid hourly or by the job?
Expenses paid separately or part of the overall fee? 21

22. Tax rate comparison E.g. Tax Year 2013 3509(a) Rate -1099
3509 (b) Rate –No 1099
ER Share of FICA
7.65%
EE Share of FICA
1.53% (20% of 7.65%)
3.06% (40% of 7.65%)
Total FICA
9.18%
10.71%
ITW
1.50%
3.00%
Total
10.68%
13.71%
No Relief
Section 530 Relief
CSP 1 YR (audit)
CSP 25% (audit)
VCSP 10% (no audit)
Tax Rate
13.71% + Penalties and interest
N/A
10.68%
2.67%
1.07% 22

23. Voluntary worker classification settlement program
A program that allows employers to resolve past worker classification issues at a reduced cost by voluntarily reclassifying their workers
Available to businesses, tax-exempt organizations and government entities that currently erroneously treat their workers as independent contractors, and may likely like to correctly treat them as employees in the future 23

24. Eligibility for Voluntary Program
To be eligible, an applicant must:
Consistently have treated the workers in the past as nonemployees
Have filed all required Forms 1099 for the workers for the previous three years
Not currently be under audit by the IRS, and not currently be under audit by the DOL or a state agency concerning the classification of these workers 24

25. Contact information
Jason Russell Managing Director Deloitte Tax LLP
Jan 25

26. This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. 26

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