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

New Rule Permits Employers to Include Truncated TINs on Forms W-2 and Forms W-2c

Yesterday, the IRS released final regulations that aim to prevent identity theft by permitting, but not requiring, employers to truncate the taxpayer identification numbers (TINs) on copies of Forms W-2 and Forms W-2c furnished to employees.  The regulations finalize proposed rules issued in 2017.  Generally, this rule applies to Forms W-2 required to be filed or furnished after December 31, 2020, so employers still have time to decide whether to implement the change.  The delayed effective date is intended to allow states and local governments time to update their rules to permit the use of truncated TINs, if they do not already do so.

The TIN for most individuals (and all employees whose income is required to be reported on Form W-2) is his or her social security number (SSN); therefore, instead of including an individual’s full nine-digit SSN, the final rule permits employers to truncate this sensitive personal identifying information.  In place of the full SSN, employers may use a truncated TIN, which is in the format of XXX-XX-#### or ***-**-#### with the #’s replaced by the final four digits of the employee’s social security number.  Full TINs are still required on copies of Form W-2 filed with the Social Security Administration, however.  In addition, payers of third-party sick pay must include full TINs on statements to employers of employees to whom the third-party paid sick pay.  However, truncated TINs may be used on Forms W-2 that report third-party sick pay issued by employers to employees.

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D.C. Starts Collecting Taxes to Fund New Paid-Leave Program

In 2017, the District of Columbia passed the Universal Paid Leave Amendment Act of 2016 (the “Act”), which called for the creation of a paid-leave program for private sector employees who work in D.C. Earlier this year, the D.C. Office of Paid Family Leave adopted final regulations to implement this new paid-leave program. One of the most notable requirements implemented by the regulations is the imposition of the Act’s 0.62% payroll tax assessed on employers subject to the Act beginning today, July 1, 2019. Employers subject to the Act will have until July 31, 2019, to file the appropriate return and pay the tax without incurring a penalty.

With this upcoming deadline, employers with employees in D.C. need to determine whether they are subject to this tax, and if they are, timely report and pay the tax to avoid potential penalties. Continue Reading

IRS to Launch FATCA Compliance Campaign for FFIs

Last week, the Acting Director of IRS of Field Operations for the LB&I Foreign Payments Practice (“FPP”) announced that the IRS will launch a compliance campaign this summer focused on foreign financial institutions (“FFIs”) that are not satisfying their reporting obligations under the Foreign Account Tax Compliance Act (“FATCA”).  Speaking at a tax controversy forum at NYU, Kimberly Schoenbacher indicated that the IRS will be sending notices to FFIs that failed to file Forms 8966 (FATCA Report) reporting assets held in accounts by U.S. persons.

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IRS Warns Withholding Agents to Consider FPP Correction Program to Avoid Penalties

Last week, Kimberly Schoenbacher, the Acting Director of Field Operations for the LB&I Foreign Payments Practice (“FPP”), sent a message to taxpayers who may be noncompliant with Chapter 3 and FATCA withholding and reporting: the IRS is actively honing in on Form 1042 nonfilers, Form 1042 failures, and Forms 1042 and 1042-S that do not reconcile. Schoenbacher remarked at the International Tax Withholding and Information Reporting Conference in New York that the IRS has sent letters to thousands of taxpayers across the country regarding compliance failures related to Forms 1042 (Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) and 1042-S (Foreign Person’s U.S. Source Income Subject to Withholding). The letters were issued under the Form 1042/1042-S compliance campaign announced by LB&I in 2018. The campaign seeks to address withholding, deposit, and reporting noncompliance on the part of withholding agents making payments of U.S.-source income to foreign persons.

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