MyPayrollHR Scandal Serves as Reminder to Verify Employment Tax Deposits

Although the facts are still unfolding, recent developments surrounding the collapse of payroll firm MyPayrollHR serve as a reminder to employers to regularly verify the actions of payroll service providers.  This should be a routine practice, regardless of the provider’s reputation and the longevity of the relationship.  In particular, employers should open their own EFTPS accounts with the IRS and verify that all deposits are being made on-time to their payroll tax accounts with tax authorities.  If deposits are not timely reflected on accounts, it is incumbent on employers to promptly determine the source of the problem.  The IRS does not regulate payroll service companies, but the Department of Justice has prosecuted a number of people for embezzlement of payroll taxes over the years.

Nearly 8,000 employees at 400 small businesses across the country were affected by the collapse of MyPayrollHR.  The company, which shuttered earlier this month, is being investigated by the Federal Bureau of Investigation.  It is unclear exactly what happened, but reports indicate that money that should have been sent from MyPayrollHR to a third-party direct-deposit processor was instead diverted to another account under MyPayrollHR’s control.  The direct-deposit processor, which had originally deposited worker’s paychecks, reversed the transactions when it discovered it had not received the funds from MyPayrollHR.  Subsequently, due to a processing error, the transactions were reversed a second time.  Questions have been raised regarding whether the reversal of the payroll deposits was appropriate under rules governing ACH transactions.

Although employees did not receive their net pay, some reports indicate that associated payroll taxes, including federal and state income tax withholding and FICA taxes, may also have been diverted.  If that proves to be true, the employers may be on the hook for those missing taxes.  Employees, however, are protected from the consequences of diverted payroll taxes as they are entitled to a credit against their personal income tax regardless of whether the Treasury Department received the withheld taxes under section 31 of the Code.

In addition to the missing taxes, employers may also be liable for potential failure-to-deposit penalties under section 6656 and related interest.  Courts have historically considered the typical authorities that arise in reasonable cause determinations and concluded that an employer’s reliance on a payroll company, an agent, does not establish reasonable cause.  To avoid such a result, employers should proactively take steps to ensure payroll deposits are being timely made by their payroll service provider.  If the employer discovers late or missing deposits, steps should be taken to deposit promptly any late taxes in an effort to avoid or mitigate any potential penalties.

The key takeaway is that employers will not automatically be absolved of the tax obligations on wages paid to their employees because of the illegal acts committed by third-party agents.  With the tools available from the IRS through EFTPS, employers should independently verify that their payroll service providers are timely performing the tasks they agreed to perform.

IRS Plans to Resuscitate Long-Dead Form 1099-NEC

In the category of “everything old is new again,” the IRS announced in late July that it intends to require that nonemployee compensation (“NEC”) paid during the 2020 calendar year be reported on new Form 1099-NEC, instead of being reported in Box 7 of Form 1099-MISC.  A draft of Form 1099-NEC was posted on the IRS website for public comments, which are due by September 30.  The change comes in response to statutory changes made in 2015 by the Protecting Americans from Tax Hikes (PATH) Act. Continue Reading

IRS Releases Revised Draft 2020 Form W-4

Reminiscent of Kermit’s lament, “it’s not easy to be green,” it has not been easy to be the Form W-4 since personal exemptions were eliminated by tax reform in 2017.  Two days after unveiling its new Tax Withholding Estimator, which is discussed in our post of August 6, 2019, today the IRS released “the second early release draft” of the 2020 Form W-4.  This latest version of the 2020 Form W-4 eliminates “Allowance” from its name, so that it will now be known as the “Employee’s Withholding Certificate.”  This revision to the name is consistent with the fact that employees may no longer claim withholding allowances.  In addition, for employees claiming exemption from withholding, the new draft of the 2020 Form W-4 eliminates the line provided for claiming exemption, which had appeared on the earlier version of the 2020 draft as Line 4d.  An employee claiming exemption must write “Exempt” under Line 4(c) and complete only Step 1 (Personal Information) and Step 5 (the employee’s signature) before submitting the form to the employer. Continue Reading

IRS Ramps Up Efforts to Target Taxpayers Who Deal in Cryptocurrency

Last July, the IRS announced its Virtual Currency Compliance Campaign, designed to intensify the IRS’s efforts to counter the underreporting of income related to cryptocurrency use. Through the campaign, the IRS will address noncompliance through taxpayer education, increased audits and initiations of criminal investigations.

This past week the IRS began sending “educational” letters to more than 10,000 taxpayers who either potentially failed to report income and pay the tax from cryptocurrency transactions, or did not report their transactions properly. The IRS sent out three variations of the letters — Letter 6173, Letter 6174, or Letter 6174-A — depending on the severity of the perceived violation. Letters 6174 and 6174-A ask taxpayers to review their returns and file an amended return if necessary; Letter 6173 is a more serious warning that also requires a signature under perjury from the taxpayer affirming U.S. tax law compliance.

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IRS Releases Updated Tax Withholding Estimator

Today, the IRS unveiled its new Tax Withholding Estimator to help employees complete the Form W-4 and ensure that withholdings are sufficient to cover their income tax liability.  The new calculator was previewed in the draft 2020 Form W-4.  (See earlier coverage.)  A near-final draft 2020 Form W-4 is expected to be released soon.  Currently, the calculator provides guidance to employees regarding how to complete the 2019 Form W-4 based on the information they provide and whether they wish to match their withholding to their estimated tax liability or receive a refund.

The calculator has been updated to reflect the changes made to the Internal Revenue Code by 2017 tax reform legislation, such as the elimination of personal exemptions.   To use the calculator, an employee provides information regarding the income that he or she and his or her spouse earn at each job, tax withholding per pay period, and tax withholding year-to-date.  The calculator allows an employee to input information regarding qualified retirement plan contributions (it is worth noting that the results page displays only the amount included in box for the employee’s contribution, but the calculation appears to take into account any contribution made by a spouse), cafeteria plan salary reductions (for HSAs, FSAs, dependent care accounts, health insurance, adoption assistance, group-term life, etc.), and other pre-tax reductions, such as for qualified transportation fringes.  The prompt, however, does not make it clear what should be included in the total as employees may be unfamiliar with the term “cafeteria plan” and no reference is made in the prompt to qualified transportation fringes.  In addition, the income information asks for “wages” and if the employee inputs “taxable wages” from his or her paystub and then includes pre-tax deductions, the recommendations may result in too little withholding.  The calculator includes expandable tips that explain that “total wages” means “gross wages” before any pre-tax reductions, but employees may not complete the form without seeing the additional guidance, which is only visible if the employee clicks on a question mark. Continue Reading

IRS Rules 23andMe’s Home DNA Kit Eligible for Partial FSA Reimbursement

In May, the IRS issued a private letter ruling to an individual taxpayer regarding the deductibility of 23andMe’s at-home DNA test kits under section 213(d) of the Code, which permits the deduction of medical expenses.  In the ruling, the IRS determined that an allocable portion of the purchase price may be treated as a deductible medical expense and the taxpayer may use a medical flexible spending account to purchase the kit.

23andMe provides a DNA collection kit that is used to collect a DNA sample from an individual and to send the sample to 23andMe for genetic testing.  The sample is then tested by a third-party laboratory.  The genetic information from the test is then analyzed by 23andMe and a report is provided to the individual with results from the laboratory and general information regarding genetic health risks, carrier status, wellness, and traits. The individual may then provide the information to a healthcare provider for additional testing, diagnosis, or treatment.

The IRS determined that the health services provided by 23andMe may be deductible medical expenses based on three revenue rulings, Revenue Ruling 54-457, Revenue Ruling 71-282, and Revenue Ruling 2007-72.  Revenue Ruling 54-457 determined that an allocable share of a lump-sum fee charged by a university for medical care and other expenses is eligible for deduction under section 213(d). Revenue Ruling 71-282 holds that the fee paid for storage of medical information in a computer data bank is deductible under section 213(d). Revenue Ruling 2007-72 determined that full-body scans performed without a doctor’s recommendation and for an individual experiencing no symptoms falls within the broad definition of “diagnosis,” which encompasses determinations that a disease may or may not be present, and includes testing of changes to the function of the body that are unrelated to disease.

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IRS Updates Country-by-Country Reporting Instructions

On July 10, the IRS updated the Instructions for Form 8975 and Schedule A (Form 8975).  Form 8975 (Country-by-Country Report) is used by taxpayers that are the parent entity of a U.S. multinational enterprise (“U.S. MNE”) with annual revenue of $850 million or more.  Taxpayers must file Form 8975 to report information related to the taxpayer’s MNE’s constituent entities on a country-by-country basis, including (i) each entity’s tax jurisdiction; (ii) country of organization and main business activity; and (iii) financial and employee information for each tax jurisdiction in which the U.S. MNE does business (i.e., revenues, profits, income taxes paid, accumulated earnings, and tangible assets). Continue Reading

IRS Proposes Regulations under Section 1446(f) — Reporting Requirements and the “Backstop Withholding” Rules (Post 3 of 3)

In our first post regarding the proposed section 1446(f) regulations, we addressed the rules regarding which party is the withholding agent for purposes of section 1446(f). Sections 864(c)(8) and 1446(f) were adopted as part of tax reform. Section 864(c)(8) was enacted to reverse the holding of the Tax Court in Grecian Magnesite Mining v. Commissioner, which was affirmed by the U.S. Court of Appeals for the DC Circuit. In our second post, we addressed the amount required to be withheld. In this post, we discuss the general reporting requirements for the transferor, the transferee, and the partnership. Further, we provide an overview of the new “backstop withholding” rules that will end the suspension of the partnership withholding requirement under section 1446(f)(4). The IRS suspended partnership withholding under section 1446(f)(4) under Notice 2018-29. Continue Reading

IRS Proposes Regulations under Section 1446(f) — Determining the Withholding Amount (Post 2 of 3)

In our first post on the proposed regulation under section 1446(f), we discussed which party is the withholding agent and outlined the various exceptions to withholding that could apply. Sections 864(c)(8) and 1446(f) were adopted as part of tax reform. Section 864(c)(8) was enacted to reverse the holding of the Tax Court in Grecian Magnesite Mining v. Commissioner, which was affirmed by the U.S. Court of Appeals for the DC Circuit. This post addresses the amount the transferee is required to withhold. Our third post on the proposed regulations under section 1446(f) addresses the withholding requirements and “backstop withholding” rules. Continue Reading

IRS Proposes Regulations under Section 1446(f) — Which Party is Required to Withhold? (Post 1 of 3)

This post is the first of three installments providing an overview of recent proposed regulations under section 1446(f) that address withholding on certain sales of partnership interests by foreign partners of a partnerships engaged in the conduct of a U.S. trade or business (a “U.S. trade or business”). Sections 864(c)(8) and 1446(f) were adopted as part of tax reform.  Section 864(c)(8) was enacted to reverse the holding of the Tax Court in Grecian Magnesite Mining v. Commissioner, which was affirmed by the U.S. Court of Appeals for the DC Circuit.  This post focuses on which party is required to withhold under section 1446(f). The second post focuses on determining the appropriate amount to withhold. Finally, the third post focuses on the withholding requirements and the “backstop withholding” rules. Continue Reading

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