Holding true to its holiday tradition, the IRS yet again decided to extend the deadline by which providers of minimum essential coverage (including certain applicable large employers (“ALEs”)) must furnish information statements to individuals regarding their 2019 insurance coverage. However, due to the effective elimination of the ACA’s individual mandate penalty through the Tax Cuts and Jobs Act (“TCJA”), the IRS went one step further than in past years by allowing certain providers to forgo the individual furnishing requirement, if certain notice requirements are met instead. Continue Reading
On November 14, 2019, the IRS announced that it has redesigned Notices CP2100 and CP2100A with the goal of providing more information to affected payers. These Notices are used to alert payers that the IRS received Forms 1099 containing incorrect or missing Taxpayer Identification Numbers (TINs) for payees and that the payer may need to contact payees regarding their name and TIN information and/or backup withhold at a rate of 24% as a result. Payments potentially subject to backup withholding are reportable payments, such as interest (including tax-exempt interest), dividends, broker and barter exchange transactions, rents, royalties, nonemployee compensation, payments made in settlement of payment card and third party network transactions, and certain payments from fishing boat operators. Continue Reading
Treasury Assistant Secretary for Tax Policy David Kautter attended the AICPA National Tax Conference on November 13, 2019, and commented that significant TCJA-related guidance should be expected to be released before the end of 2019. Such guidance is likely to include proposed regulations addressing (1) federal income tax withholding under section 3402, (2) the executive compensation deduction limitation under section 162(m), and (3) computation of unrelated business taxable income (UBTI) under section 512. Continue Reading
On November 6, the IRS issued its final reminder alert that the deadline for all Qualified Intermediary (“QI”) (including Qualified Derivatives Dealer (“QDD”)), Withholding Foreign Partnership (“WP”) and Withholding Foreign Trust (“WT”) applications for the 2019 year is November 15, 2019. Continue Reading
Recently enacted California Assembly Bill 5 (“AB-5”) is a game changer for businesses that use independent contractors in California — and a warning shot for employers nationwide. Subject to exemptions for certain occupations and professions, AB-5 imposes a strict “ABC” test that appears to put a thumb on the scale of classifying workers as employees rather than independent contractors.
The ABC test was adopted last year by the California Supreme Court in its Dynamex decision to determine classification of workers for purposes of the state’s Industrial Welfare Commission Wage Orders. For 20 years before Dynamex, worker classification was governed by the more relaxed “Borello” multi-factor test, which focuses on the hiring entity’s right to control an individual’s work and other secondary factors. AB-5 now makes the ABC test the default standard for determining worker classification — not just under the Wage Orders, but also for all California Labor Code, unemployment insurance, and workers’ compensation claims. Continue Reading
On August 9, 2019, Treasury and the IRS issued proposed regulations under section 861 of the Code to clarify how transactions involving digital content and cloud computing are classified for tax purposes. The new rules propose to revise and expand upon Treasury Regulation § 1.861-18 regarding digital content transactions and establish new Treasury Regulation § 1.861-19 regarding cloud computing transactions. The proposed regulations also propose changes to Treasury Regulation § 1.861-7 regarding the source rules for sales of personal property. Collectively, the rules are intended to address whether a digital transaction is characterized as a sale, lease, license, or provision of services for purposes applying various provisions of the Code, including the source rules, which are critical for purposes of determining whether withholding is required under Chapter 3 and reporting obligations under sections 6041 and 6050N, and Subpart F.
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.
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
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
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.