Much to the surprise of many business owners and those involved in financial operations, the IRS will hold responsible individuals personally liable for employee withholding taxes not turned over to the government. The entity — be it a corporation, limited liability company, or limited partnership — does not offer any protection against personal liability for these taxes.
Such withholdings are held in trust for the federal government, hence the name trust fund. When the business is unable to remit these taxes, the IRS will go after those they deem responsible and assess the amount of the unpaid withholding tax in the form of a penalty, known as the Trust Fund Recovery Penalty (TFRP). The IRS will assess each responsible person 100% of the TFRP; they will not prorate it. However, once the total is collected from any source, all parties are relieved of the liability.
In a report by TIGTA, they reviewed 256 TFRP cases and found that enforcement actions were “untimely and/or inadequate,” compromising the IRS’ ability to collect. TIGTA recommended various steps for the IRS to take to bring heightened awareness to TFRP cases. As the IRS has agreed with the various recommendations, this will assuredly lead to a greater level of successful TFRP enforcement.
If your business owes payroll taxes, now is the time to make sure you have proper representation. Please contact Larry Rubin, CPA, Aronson’s tax controversy practice lead, at 301.222.8212 for further information or to discuss your specific situation.
When does the new FATCA withholding begin?
Effective July 1, 2014, withholdable payments of U.S.-source FDAP income will be subject to 30% FATCA (Foreign Account Tax Compliance Act) withholding. The new requirement applies to payments made to Foreign Financial Institutions (“FFIs”) and Non-Financial Foreign Entities (“NFFEs”). The types of income that are subject to the withholding include interest, dividends, rents, royalties, annuities and compensation. Withholding begins on January 1, 2017 for withholdable payments of gross proceeds from the disposition of property that produces FDAP income. To avoid the 30% FATCA withholding, FFIs and NFFEs must comply with certain information reporting and due diligence requirements. The FATCA withholding regime is designed to compel information reporting and disclosure with respect to the foreign accounts of U.S. persons and foreign entities with U.S. owners.
An FFI is a foreign entity that accepts deposits in the banking business, holds financial assets for the accounts of others as a substantial part of its business, or which is engaged in the business of investing, reinvesting or trading in securities, partnership interests, commodities or derivatives. An FFI may avoid being withheld upon if it enters into an FFI agreement with the U.S. Treasury Department. An FFI agreement requires the FFI to provide information to the U.S. government regarding its U.S. accounts. The FFI has certain obligations under the agreement including compliance with verification and due diligence procedures. The FFI also must agree to impose withholding with respect to recalcitrant account holders and other FFIs that do not participate. The U.S. Treasury Department is in the process of entering into Intergovermental Agreements with other countries to provide for cooperation by financial institutions in the respective foreign country.
An NFFE is any foreign entity that is not an FFI. An NFFE may avoid being withheld upon if it discloses substantial U.S. owners that own a 10% or greater interest in the entity. An NFFE also may avoid withholding if it certifies that it does not have any U.S. owners, if it is a publicly traded entity, or if it is an active NFFE. An NFFE is active if less than 50% of its gross income is passive and less than 50% of its assets produce passive income. The NFFE must provide the appropriate withholding certificate to the withholding agent to avoid the withholding.
The IRS has not yet issued the revised Form W-8BEN withholding certificate for purposes of FATCA, nor have they issued the revised Form 1042-S that will be utilized to report withholdable payments and FATCA withholding.
The Chapter 4 FATCA withholding regime under I.R.C. Sections 1471 to 1474 applies in addition to Chapter 3 U.S. nonresident tax withholding under I.R.C. Sections 1441 to 1446.
As December signals the close of the year, one of the most frequently asked questions I receive is, “What fringe benefits do you need to include on a W-2 for a greater than 2% shareholder?” A common concept that is widely misreported on form W-2, fringe benefits paid on behalf of a greater than 2% S-Corp shareholder can result in missed deductions and a potentially higher tax liability on the shareholder’s personal return if not prepared and calculated correctly.
Pursuant to IRS Notice 2008-1, premiums paid for a greater than 2% shareholder’s fringe benefits, such as health and dental insurance, are deductible at both the corporate and shareholder level only if reported on the shareholder’s form W-2. Withholding for fringe benefits can be tricky. Premiums paid for health and accident insurance are unique in that they are taxable, but are only subject to federal and state withholding taxes and not employment taxes (i.e. FICA, FUTA, and Medicare). All other fringe benefits are subject to employment taxes.
What Is Classified as a Fringe Benefit?
Aside from the premiums paid for health and dental insurance, other fringe benefits that maybe taxable are: the cost of up to $50,000 in group term life-insurance, short-term/long-term disability premiums, long-term care premiums, and even qualified transportation expenses, including personal use of company automobiles.
Impact to 2013 Taxes
Since outlined in IRS Notice 2008-1, inclusion of fringe benefits on the W-2 of a greater than 2% shareholder always held important tax implications regarding the deduction of such benefits. In 2013, this rule has the potential to negatively impact the taxes of many shareholders if not closely followed. At the beginning of 2013, we saw the expiration of several tax breaks, including the 2.0% FICA tax discount and the return of personal exemption phase-outs (starting at $250,000 for single taxpayers, $300,000 for married couples filing joint). Not only did the personal exemption phase out return, the rules for claiming itemized deductions for medical expenses not covered by insurance now require that these expenses exceed at least 10% of your adjusted gross income (AGI). This is up from 2012, which only required that expenses exceed 7.5%.
How does this all relate to reporting fringe benefits on form W-2? For starters, if not done correctly (or at all), the corporation cannot deduct the premiums paid as business expenses. The more negative consequence from failure to file correctly is that the shareholder will not be able to claim the self-employed health insurance deduction and will instead have to claim the premiums as itemized medical and dental expenses subject to the 10% of AGI rule. This translates into choosing between an above-the-line deduction that reduces taxable income or itemized deductions subject to AGI phase-out rules and limitations.
Ultimately, when preparing 2013 form W-2s, it is necessary to keep in mind all components that are subject to the rigorous reporting requirements of the IRS. Failure to comply can have especially significant impacts to the 2013 personal tax returns of many S-Corp shareholders, so it is important to have a discussion regarding tax-planning with your tax advisor before the close of the year to ensure there are no negative tax implications to start off 2014. Fringe benefits and their impact on form W-2 can be a tedious and complex subject, so please contact your Aronson LLC tax advisor at 301.231.6200 if you need additional information on this topic or the preparation and presentation of form W-2.
Does your business solicit the services of independent contractors, freelancers, or other non-employee workers? If so, the IRS may have its sights on you. While much of the economy has been focused on the healthcare-related effects of the Affordable Care Act (ACA), there were several supplemental programs and provisions that were bundled with the ACA that have been largely overlooked.
One such provision is the expansion of Form 1099 reporting. Previously, under the ACA, corporations, partnerships, and sole-proprietorships were required to prepare Form 1099 for any vendor from whom they purchased more than $600 of goods or services. After much criticism, this provision was later repealed; however, this hasn’t deterred the IRS from closely scrutinizing and examining Form 1099.
Over the last year, there has been an increase of IRS notices related to Form 1099 filings. Most prevalent are IRS notices CP2100 and CP2100A. These notices specifically focus on incorrect, missing, or unissued Taxpayer Identification Numbers (TINs) used for the recipients of Form 1099. CP2100 and CP2100A reference the Form 1099s that the IRS believes have used the incorrect or missing TIN and ask the payer to correct the form(s) or begin back-up withholding on the recipient(s) in question.
Conceptually, back-up withholding is imposed when the IRS believes that the payee taxpayer is not reporting all income on a required tax return filing. The IRS therefore looks to the payer to withhold at a flat 28% rate and remit those funds to the IRS. Many 1099 recipients are not subject to back-up withholding; however, if prepared with the incorrect TIN, back-up withholding may be required. At a flat rate of 28%, back-up withholding is burdensome to both the payee from an economic perspective and to the payer from an administrative perspective. This could potentially result in a strained business relationship between you and your vendors. Additionally, penalties for failure to file correct Form 1099s range from $30-$100 per form. Ultimately, while simple in nature to prepare and issue, the reporting standards of Form 1099 are steadfastly becoming one of the IRS’s top areas of examination. What can be even more daunting are the correction procedures that the IRS has adopted.
If you have questions about the preparation, corrections, or requirements for Form 1099 or if you have received a back-up withholding notice and are unsure what to do, please contact Aronson LLC’s Tax Services Group at 301.231.6200, ext. 6804.
On March 18, 2010, the Foreign Account Tax Compliance Act (FATCA) was enacted under Sections 1471 through 1474 of the U.S. Internal Revenue Code. If certain due diligence and reporting requirements are not satisfied, FATCA generally imposes a 30% withholding requirement on payments of certain types of U.S. source income to foreign financial institutions (FFIs) and non-financial foreign entities (NFFEs). On January 17, 2013, the U.S. Treasury Department and the IRS issued final regulations under FATCA. The final regulations provided for the phased implementation of FATCA requirements beginning on January 1, 2014 and continuing through 2017. The final regulations provided that withholding would be required to begin for payments made after December 31, 2013. Due diligence for documenting payees and account holders by participating FFIs and withholding agents was required to be phased in during 2014 and 2015. Annual reporting by participating FFIs was required to be phased in starting in 2015. Full scope FATCA reporting was required to begin in 2017.
On July 12, 2013, the IRS issued Notice 2013-43 which provides a revised FATCA implementation timeline. FATCA withholding is now required to begin for certain payments made after June 30, 2014. Withholding agents generally must begin withholding on withholdable payments to payees that are FFIs or NFFEs unless the payments can be associated with documentation to substantiate an exemption. The deadline is extended only for certain payments and does not apply to other types of payments.
For purposes of FATCA, payments subject to potential withholding are payments of U.S. source FDAP income which includes interest, dividends, rents, royalties and annuities. Other types of payments are also potentially subject to withholding including foreign pass-thru payments and gross proceeds from the sale of property that produces interest or dividends.
FFIs subject to FATCA requirements include banks, hedge funds, private equity funds, broker-dealers, certain holding companies, investment managers and other entities that hold, invest or trade securities on their own behalf or for another person. NFFEs subject to the FATCA requirements are passive foreign entities with U.S. owners and more than 50% of passive income or assets that produce or are held for the production of passive income. FFIs and NFFEs must comply with certain due diligence and reporting requirements to avoid the 30% FATCA withholding.
FATCA withholding is a separate requirement which will apply in addition to the 30% U.S. nonresident withholding that already applies to payments of U.S. source FDAP income to an individual or a company that is not a resident of the United States.
Please consult your Aronson LLC tax advisor or Alison Dougherty, International Tax Services at 301.231.6290 for more information.