Tax Relief Blog

Employment Taxes

If you have your own business, there is plenty going on all the time. In addition to taking care of your customers, you have to take care of your employees. Payroll can be very difficult with the many scenarios, and that can lead to an employment tax problem. Don't feel like you are alone though as 941 payroll tax problems are extremely common when it comes to the IRS and what they have to look into.

IRS tax problems can make your life a complete mess. Tax debt can cause never-ending strain and may also break marriages or even break families. Individuals facing IRS troubles should instantly seek tax help from a qualified tax relief professional to avoid drastic circumstances.

The IRS website is obviously the most comprehensive resource available. You can find all the tax forms, publications, instructions, frequently asked questions as well as resources for individuals, organizations, non-profits and all the other entities subject to tax under the United States laws. If you need any sort of help, documentation or information, the IRS webpage is the place to go.

Download any form from the webpage and you will immediately have the idea how exhausting it can be to fill a form without making even a minor mistake. Unfortunately, the smallest of mistakes can ruin your case and your request will be rejected no matter if you qualify for the IRS tax relief. This clearly illustrates you should seek professional help to get the best possible resolution for your tax problems.

The foremost thing you need to understand is that every individual faces a unique tax problem thus needs a unique solution and there is no one-size-fits-all formula to get rid of IRS tax issues. Furthermore, you must start taking steps to solve the problem as soon as you recognize it because delays will only infuriate the issues.

To get the best outcome, the plan is simple: identify your problem, choose an appropriate solution, complete the necessary paperwork and keep communicating with the IRS until you get all your problems solved. However, each step involved in the process, from pinpointing your issue to getting results, needs technical knowledge and specialized expertise.

IRS revenue agents and officers are pretty punitive because of the nature of their job. For many people this reason alone is enough to hire a tax relief professional instead of facing bullying demands by the IRS employees. When you hire a tax professional i.e. enrolled agent, CPA or tax attorney, you will be represented by your tax expert before the IRS. The expertise and experience of the tax resolution expert not only mean you should sit relaxed but also you can expect the best possible results.

How to Research Roni Deutch and other Tax Resolution Companies

Today I'm going to teach you a lesson. This lesson uses Roni Deutch as an example of what to look for when you're in the market for a tax resolution company to help with your tax problems. Personally, I have nothing against Roni Deutch. Like a lot of other companies, Roni Deutch just happens to be in the same business as I am and that business is offering tax relief to individuals and companies who have tax problems including tax audits, unfiled tax returns, wage garnishment issues, payroll tax problems, IRS tax liens and other problems with the IRS.

Get to know the BBB

But that is pretty much where our similarities end. You see, unlike my company which has an "A+" rating from the Better Business Bureau (BBB), Roni Deutch has a rating of "F". Now I don't want to single out this company because during my many years in the tax relief business, I've seen a lot of my competitors end up at the bottom of the BBB rating scale. But unlike those tax resolution companies, I've been able to keep my business at or near the top of the BBB's rating scale during those years in business.

Does this mean my business is better than Roni Deutch's business?

Whether something is better or worse than something else is always a matter of opinion, and I'm not here to judge. What I am here to do is point out all of the information you can find on a tax resolution company before you enter into a contract with that company. Learning everything you can about the companies that offer help for your tax problems may be the single, most important step in the entire tax resolution process. Yet, many people skip this step.

It's true!

I want people to stop doing this because it's really not that hard. A lot of the information you can find on practically any company is free, including the information that's reported by the BBB. And much of the information is reliable, especially information published by the BBB.

Using Roni Deutch again as an example, the BBB reports that 305 complaints have been filed against this tax resolution company. Among the complaints are 84 service issues, 80 issues involving a refund or exchange, 41 customer service issues, 38 contract issues, and more. The BBB also reports that the California Attorney General's office has filed an action against Roni Deutch, allegedly for making untrue or misleading statements.

With so much valuable information about Roni Deutch and other tax resolution companies available on a single web site, I encourage everyone seeking tax debt relief or IRS tax audit representation, to check the BBB first before proceeding any further.

I hope you've enjoyed today's lesson!

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Employment and Payroll Tax Audit & Examination:
The IRS announced its plan to audit the first 6,000 employment tax audits and small business will be their audit target. The IRS will start examining 2,000 companies every year over the next 3 years.

The IRS will utilize its audit findings to target a select group of businesses and aggressively audit their payroll tax and refine estimates to close the tax gap. IRS audit agents are specially trained to audit employment and payroll tax for the audited businesses.

Colleges and Universities Tax Audits:
The IRS will audit 400 Colleges and Universities this year. The IRS is looking for unrelated business income to focus its examination at. The IRS suspects that many universities aren't paying taxes on income from unrelated activities to their tax-exempt status, for example: stadium advertising, gym memberships, and executive pay.

Contractors with unpaid back taxes:
The IRS is cracking down hard on contractors with unpaid back taxes. The current Obama administration is developing new regulations to prevent federal contractors from receiving any government contracts as long as they owe back tax debt. In 2008, procedures were in place to prevent any contractor from bidding on government contacts if they owed $3,000 or more in tax liens and or tax judgments to the IRS.

The Revenue Service is also eyeing projects that use rehabilitation credit. IRS Agents have spotted developers claiming the 20% income tax credit on the cost of renovating certified historic buildings before they have the necessary documentation from the National Park Service to certify that the subject project is in fact historic in nature. The IRS will crack down on developers who are performing Historic structure renovations.

Employers with unpaid FICA on tips:
The IRS is sending out bills to employers such as restaurants and hotels to collect on unpaid FICA on unreported tips using data they collected from form 4137 which employees use to report tip income that they didn't disclose to their employers. The IRS is sending letters to these employers instructing them to include their calculated amount on their next scheduled payroll deposit. Employers who comply will avoid any penalties and interest on the back taxes. The IRS is also revising the 4137 form to include the employer's EIN number.

Mike Habib EA actively represents taxpayers in audits and examination before all administrative levels of the IRS. Don't compromise on your representation, contact us today.

Get your free audit consultation by calling 1-877-788-2937.

Solve Your 941 Payroll Tax Problems

It's fairly common for businesses - no matter what size - to struggle with some sort of 941 tax issue or another. Even companies that use good payroll software to sort out their entire payroll related taxes are still prone to errors. The IRS implements strict guidelines when it comes to filing and paying payroll taxes in a timely manner. Are you a business owner with 941 payroll tax problems? It's going to be difficult to obtain tax relief if you have been found guilty of deliberately failing to meet your obligations.

Late filing and payment

Late payment of payroll taxes causes your business to incur penalties and additional fees, which can be a huge problem especially if your business is already contending with cash flow issues to begin with. Small businesses, for instance, rarely have ample capital to run their operations, so when unexpected fees like these come up, cash flow is compromised.

The issue gets worse if you fail to file your payroll returns on time, as you're incurring penalties for that error as well. Each monthly delay on filing can cost you 5% of your whole tax debt - and that doesn't include other penalties resulting from late payments. Tax help usually comes in to negotiate these fees but unless you get it from a reliable and licensed professional, you wouldn't be able to get anywhere as far as tax relief is concerned.

Trust fund recovery penalty

As an employer, it is your responsibility to deduct federal tax dues from your employees' paychecks and pay it to the IRS on time. Failure to do so will result in a 100% penalty and enforced collection on the responsible person, the owner of the business or an officer of the corporation. The IRS can also put a levy on your company's assets, including bank accounts and receivables until you pay for the payroll tax debt.

Handling payroll tax errors

The best ways to avoid payroll tax problems is to timely file and pay your taxes. Make sure that your payroll is current. You may want to source this work to a professional so you make sure that all the payroll taxes and withholdings are properly accounted for.

It's natural to make mistakes. To avoid messy payroll tax problems, you want to review your records every year and be on the lookout for these errors. Doing so will help you handle discrepancies as they come instead of tackling all of them two to three years later, when errors have gotten out of hand.

Know your rights!

In order to get the best tax relief possible, it is important for you to know what your rights are. The IRS will then assess you penalties according to your willfulness - that is, your awareness that a lapse in payment has taken place. It pays to have a tax professional with you so you can assess whether or not you're eligible for certain tax relief help options such as installment payments, offer in compromise, and other alternatives.

Solve your payroll tax problems now

Mike Habib can offer reliable tax relief help. Contact him through this website to obtain a free consult and assess your options.

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No More Tax Problems in 2009

Mike Habib, EA

Here is a New Year resolution you can't afford to ignore... No more tax problems!! Yes, you can get rid of your tax problems in 2009.

You can solve your tax problems and get tax relief through our tax resolution services. You can finally get a fresh start by getting rid of your looming tax problem.

Are you asking yourself ... if I have tax problems whom should I contact?

You have many options to settle your tax account and move on with your life. Here are some options that should entice you to get your life in order:

• Offer In Compromise: an offer in compromise, OIC, will usually be accepted by the taxing authority to resolve your tax problem if the amount offered to settle your tax problem is equal or exceed the taxpayer's Reasonable Collection Potential, RCP. The IRS, or the State, or the Sales Tax Agency determines RCP by using the financial analysis tools like the 433-A for individuals and 433-B for business entities.

• Installment Agreement: paying the tax amount through a negotiated installment agreement is a common way to resolve your tax problem. You should seek our professional tax advice, as the taxing authority will usually request a large monthly payment, while our firm will work on attaining an installment agreement that is reasonable and you can live with without causing a financial and economic hardship on you and your family.

• Currently Non Collectible - CNC Currently Non Collectible - CNC is accomplished when the IRS holds off an individual or business taxpayer's account from active enforcement collection efforts. There are specific rules and requirements that a taxpayer must meet before a CNC status be accomplished. The IRS would not pursue enforcement collection activity against the taxpayer and possibly the statute of limitations on the entire tax liability will run.

It makes far more sense, and will probably be less costly in the long run, to resolve your tax problem with the IRS now, rather than dealing with the potential embarrassment and financial burden of having your employer garnish and levy your wages / paycheck or the IRS freezes and levy your bank accounts.

The IRS released tax records on their most famous tax problem cases that imprisoned Al Capone, they inadvertently nabbed the Governor of New York allegedly spending tens of thousands of dollars for what they least expected. From Will Smith, to Wesley Snipes to Nicolas Cage IRS audits and collection activities are on the rise, and is expected to continue in 2009 and for many years to come!

Tax problems do not go away by themselves... Take action today by contacting Mike Habib, EA directly at 1-877-78-TAXES or CLICK HERE

Capital contributions did not restore or increase shareholders' tax bases in loans to S corporations Nathel, (2008) 131 TC No. 17

Mike Habib, EA

The Tax Court has held that taxpayers' capital contributions to S corporations did not constitute income to the S corporations and that the contributions did not restore or increase their tax bases in their loans to the S corporations.

Background. Generally, under Code Sec. 1367 a shareholder's tax bases in the stock in, and in the loans to, an S corporation are adjusted to reflect the shareholder's share of income, losses, deductions, and credits of the S corporation as calculated under Code Sec. 1366(a)(1). Under Code Sec. 1367(a)(1), a shareholder's tax basis in his S corporation stock is increased by, among other things, the shareholder's share of the S corporation's income items (including tax-exempt income). Under Code Sec. 1367(a)(2), a shareholder's tax basis in his S corporation stock is decreased (but not below zero) by, among other things, the shareholder's share of losses and deductions. If a shareholder's tax basis in his stock in an S corporation is reduced to zero by his share of the losses of the S corporation, any further share of the S corporation's losses decreases, but not below zero, the shareholder's tax basis in outstanding loans the shareholder has made to the S corporation. (Code Sec. 1367(b)(2)(A), Reg. § 1.1367-2(b)(1)) Thus, a shareholder's tax basis in loans the shareholder has made to an S corporation may be lower than their face amount or zero because of downward adjustments in such basis caused by losses of the S corporation that are passed through to the shareholder. (Code Sec. 1367(b)(2)(A))

Facts. In calculating ordinary income relating to $1,622,050 in loan payments received from two S corporations, for purposes of Code Sec. 1366(a)(1), brothers Ira and Sheldon Nathel treated $1,437,248 in capital contributions they made to the S corporations as income to the S corporations and as restoring or increasing under Code Sec. 1367(b)(2)(B), their tax bases in loans that they previously had made to the S corporations. Ira and Sheldon then used the restored or increased tax bases in the loans they made to the S corporations to offset ordinary income that otherwise would have been reportable by them on their receipt from the S corporations of the $1,622,050 loan payments.

On audit, IRS determined that Ira's and Sheldon's $1,437,248 capital contributions were not to be treated as restoring or increasing their tax bases in their loans to the S corporations but as increasing their tax bases in their stock in the S corporations, resulting in additional ordinary income being charged to them on receipt of the S corporation loan payments.

Court's conclusion. The Tax Court held that for purposes of Code Sec. 1366(a)(1), Ira and Sheldon's $1,437,248 capital contributions to the S corporations did not constitute income to the S corporations and that under Code Sec. 1367(b)(2)(B), Ira and Sheldon's capital contributions did not restore or increase their tax bases in their loans to the S corporations.

The Court reasoned that by attempting to treat their capital contributions to the S corporations as income to the S corporations, Ira and Sheldon in effect sought to undermine three cardinal and longstanding principles of the tax law: (1) that a shareholder's contributions to the capital of a corporation increase the basis of the shareholder's stock in the corporation; (2) that equity (i.e., a shareholder's contribution to the capital of a corporation) and debt (i.e., a shareholder's loan to the corporation) are distinguishable and are treated differently by both the Code and the courts; and (3) that contributions to the capital of a corporation do not constitute income to the corporation.

For S Corporation Tax Help, For S Corporation Tax Audit, For S Corporation Back Taxes Help CLICK HERE

IT company owes nearly $1.7 million in back wages due to H-1B Visa Program violations [DOL ESA News Release, 10/30/08]:

Mike Habib, EA

An information technology (IT) company has agreed to pay $1,683,584 in back wages to 343 non-immigrant workers after a Department of Labor (DOL) investigation found that the company had violated the H-1B visa provisions of the Immigration and Nationality Act.

The H-1B program permits employers to temporarily hire foreign workers for jobs in the U.S. in professional occupations, such as computer programmers, engineers, physicians, and teachers. H-1B workers must be paid at least the same wage rate that is paid to U.S. workers who perform the same type of work, or the prevailing wage rate in the area of intended employment. From March 2005 through March 2007, employees hired by the IT company were not paid the minimum amount of wages that are required under the H-1B program.

The company also charged new H-1B workers training fees ranging from $1,000 to $2,500, which is in violation of the law.

Roundup of recent employment tax rulings

Mike Habib, EA

There have been several recent rulings issued in the employment tax area. Here is a summary:

Joint employment. A federal district court has ruled that a property management company was the joint employer of leasing consultants who worked out of the management company's call center through three different staffing agencies. As a result, the management company owed the leasing consultants overtime under the Fair Labor Standards Act (FLSA). In issuing its ruling, the district court said that the management company maintained significant control over the working conditions of the leased employees. The district court noted that although the staffing agencies provided the management company with workers, it was the management company which determined the amount it would pay, including overtime, and the total number of hours that the employees could work. The management company provided the workspace and equipment. In addition, the management company could reject any of the agency employees it did not want at its facility. In addition, the leased employees were under the management company's control and direction and were treated exactly like the management company's contract employees performing the same job [Bastian v. Apartment Investment and Management Company, DC IL, Dkt No. 07 C 2069, 10/21/08].

Family Medical Leave Act. A federal district court has denied summary judgment to an employer that terminated an employee due to excess absenteeism. An absentee rate above a certain level was grounds for dismissal. The employee claimed that her rate would not have been above this level if her employer had factored her FMLA leave into the computation [Dickinson v. St. Cloud Hospital, DC MN, Dkt. No 07-3346 ADM/RLE, 10/20/08].

FICA tip credit. IRS Chief Counsel has concluded that the IRC §45B credit (also known as the FICA tip credit) may be claimed by an employer on its income tax return in the year (current tax year) that the IRS issued a notice and demand for payment of the FICA taxes from the employer, even though that was not the year (previous tax year) in which the unreported tips were received by the employee. The employee had failed to report the tips to his employer in the previous tax year. The employer in the current tax year received a notice and demand for the employer share of FICA taxes from the IRS. Chief Counsel concluded that for purposes of the credit, the tip amounts are deemed to be paid on the date on which the IRS notice and demand for the employer portion of the FICA tax is made to the employer [Chief Counsel Advice 200845052].

Trust fund recovery penalty. A federal appeals court has ruled that the president of a day care facility's board of directors was a responsible person liable for the IRC §6672(a) trust fund penalty. Under IRC §6672(a), when an employer fails to properly pay over its payroll taxes, the IRS can seek to collect a penalty equal to 100% of the unpaid taxes from a "responsible person," i.e., a person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. In this ruling, the president played an active role in various aspects of the day care facility's operation and could have ensured that it paid its taxes, but chose instead not to exert any authority over these business affairs. Further, he didn't qualify for the protection from the penalty given voluntary board members under IRC §6672(a) [Jefferson v. U.S., CA 7, 102 AFTR 2d 2008-6572, 10/8/08].

Calculation of disability benefits. A federal appeals court has ruled that per diem payments that an employer made to an employee should have been classified as "wages" for purposes of calculating benefits under the Longshore and Harbor Workers' Compensation Act. On June 10, 2002, Otis Pearley injured his back in the course of his employment with B&D Contracting. From June 2002 through January 2006, Pearley received $241.52 per week in temporary disability benefits from B&D. The company specifically excluded its per diem payments to Pearley in the calculation of his benefits rate. Pearley challenged the amount of these payments before a Department of Labor administrative law judge (ALJ). The ALJ concluded that B&D should have included Pearley's per diem payments as wages for purposes of calculating his average weekly wage. Accordingly, the ALJ calculated Pearley's average weekly wage as $761.98, with a corresponding benefits rate of $507.98. The Benefits Review Board (BRB) agreed with the ALJ's ruling. The U.S. Court of Appeals for the Fifth Circuit has now denied any further review of the BRB decision [B&D Contracting v. Pearley, CA5, Dkt. No. 07-60495, 11/6/08].

Timely reminder for small businesses to steer clear of trouble on payroll tax and retirement plan contributions IRS Employee Plan News (Fall 2008)

In these trying times, with cash scarce and credit hard to find, a small business might be tempted to "temporarily" use money it deducts for taxes and retirement plan contributions from employees' wages. The Fall 2008 issue of IRS's Employee Plans News [http://www.irs.gov/pub/irs-tege/fall08.pdf] suggests that practitioners remind clients that failing to remit payroll taxes and retirement plan contributions in a timely manner not only would violate an employer's legal obligation, but also could subject them to heavy penalties.

Payroll taxes. IRS suggests that small business employers be reminded that when they deduct income and Social Security taxes from employees' wages, the money is not theirs to use, even for a short period of time. Deducted amounts must be remitted, along with their portion of payroll taxes, by the next scheduled Federal Tax Deposit deadline. An employer that doesn't deposit the money on time could be hit with:

• penalties for making late deposits and for not depositing the proper amount; and
• penalties for failing to file returns and pay taxes when due, for filing false returns, and for submitting bad checks.

Observation: Perhaps the most compelling argument to make is that a company owner could be personally on the hook for unpaid payroll tax. Under Code Sec. 6672, when an employer fails to properly pay over its payroll taxes, IRS can seek to collect a penalty equal to 100% of the unpaid taxes from any "responsible person," i.e., a person who (1) is responsible for collecting, accounting for and paying over payroll taxes and (2) willfully fails to perform this responsibility.

Final regs include new process for reporting employment tax adjustments and refund claims T.D. 9405, 06/30/2008, Reg. § 31.6011(a)-1, Reg. § 31.6011(a)-4, Reg. § 31.6011(a)-5, Reg. § 31.6205-1, Reg. § 31.6302-1, Reg. § 31.6402(a)-1, Reg. § 31.6413(a)-1, Reg. § 31.6403(a)-2

Mike Habib, EA

IRS has issued final regs on employment tax adjustments and refund claims, effective Jan. 1, 2009. The final regs modify the process for making interest-free adjustments for both underpayments and overpayments of Federal Insurance Contributions Act (FICA) and Railroad Retirement Tax Act (RRTA) taxes and Federal income tax withholding (ITW).

Background on interest-free adjustments and refunds. While generally interest must be paid to IRS on any tax underpayment and to a taxpayer on any tax overpayment, an exception applies to employment taxes. Where an incorrect amount of tax under Code Sec. 3101 (employee FICA tax), Code Sec. 3111 (employer FICA tax), Code Sec. 3201 (employee RRTA tax), Code Sec. 3221 (employer RRTA tax), or Code Sec. 3402 (ITW) is reported to IRS for any payment of wages or compensation, Code Sec. 6205(a) and Code Sec. 6413(a) allow employers to make interest-free adjustments for underpayments and overpayments, respectively.

Under the prior Code Sec. 6205(a) regs, if a return is filed and less than the correct amount of employee or employer portions of FICA or RRTA tax is reported and paid, the employer adjusts the underpayment (a) by reporting the additional amount due as an adjustment on a current return, or (b) by reporting such additional amount on a supplemental return. For overpayments of employment taxes, Code Sec. 6413(b) allows a refund claim to be filed when an interest-free adjustment cannot be made. Under the prior Code Sec. 6413 regs, IRS allows taxpayers to choose between filing a claim for refund and making an interest-free adjustment to correct an overpayment of employment taxes.

Late in 2007, IRS issued proposed regs on employment tax adjustments and refund claims (see Federal Taxes Weekly Alert 01/03/2008). The proposed regs have now been adopted with only minor changes.

Revised adjusted return process. The final regs are issued in connection with IRS's development of new forms to report adjustments to employment taxes which will replace the existing process of reporting adjustments on regularly filed employment tax returns. The regs are part of IRS's effort to reduce taxpayer burdens by allowing employers to make employment tax adjustments on a separately filed form as soon as an error is ascertained, rather than as a line adjustment on the regularly filed employment tax return. The new adjusted return will not affect the liability reported on the current return. Under the regs, the forms used to accept an assessment of employment taxes after an examination (Form 2504, Agreement and Collection of Additional Tax and Acceptance of Overassessment (Excise or Employment Tax), and Form 2504-WC, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment in Worker Classification Cases (Employment Tax)) constitute adjusted returns. (Reg. § 31.6205-1)

Interest-free adjustments. The final Code Sec. 6205 regs set out the procedures for making interest-free adjustments for underpayments of employment taxes. If a return is filed and less than the correct amount of employee or employer FICA or RRTA tax is reported, and the employer discovers the error after filing the return, the employer adjusts the resulting underpayment of tax by reporting the additional amount due on an adjusted return for the return period in which the wages or compensation was paid. The adjustment must be made by the due date of the return for the return period in which the error is ascertained, and the amount of the underpayment must be paid by the time the adjustment is made, or interest will begin to accrue from that date. An underpayment adjustment can only be made within the period of limitations for assessment. For underpayments of ITW where the incorrect amount was withheld, subject to limited exceptions, an adjustment can only be made for errors ascertained during the calendar year in which the wages were paid. (Reg. § 31.6205-1(b)(2))

The final regs also provide for interest-free adjustments of underpayments of FICA tax, RRTA tax, and ITW under certain circumstances where the underpayment arises because the employer failed to file an original return or failed to report and pay the correct type of tax. (Reg. § 31.6205-1(b)(3), Reg. § 31.6205-1(c)(3))

The final Code Sec. 6413(a) regs set out the procedures for making interest-free adjustments for overpayments of employment taxes. If an employer ascertains an overpayment error within the applicable period of limitations on credit or refund, it's required to repay or reimburse its employees the amount of overcollected employee FICA or RRTA tax before the expiration of that period. However, the requirement to repay or reimburse doesn't apply to the extent that taxes weren't withheld from the employee or if, after reasonable efforts, the employer cannot locate the employee. In such a case, the employer can make an adjustment for only the employer share of FICA or RRTA tax. An interest-free adjustment for an overpayment cannot be made once a claim for refund has been filed. (Reg. § 31.6413(a)-1)

Once an employer repays or reimburses an employee to the extent required, the employer may report both the employee and employer portions of FICA or RRTA tax as an overpayment on an adjusted return. The employer must certify on the adjusted return that it has repaid or reimbursed its employees to the extent required.

Under the final regs, the reporting of the overpayment constitutes an interest-free adjustment if the overpayment is reported on an adjusted return filed before the 90th day prior to expiration of the period of limitations on credit or refund. Similar rules apply for making interest-free adjustments for ITW overpayments, except that an interest-free adjustment can only be made if the employer ascertains the error and repays or reimburses its employees within the same calendar year that the wages were paid and reports the adjustment on an adjusted return. (Reg. § 31.6413(a)-2)

No repayment or reimbursement for interest-free adjustments of overpayments. Unlike in the proposed reg, in the final regs the employer isn't required to repay or reimburse the employee or to adjust the overpayment by the due date of the return for the return period following the return period in which the error is ascertained. (Reg. § 31.6402-2(a)(1)) After reconsideration, IRS determined there was insufficient reason to impose a timing restriction other than the period of limitations on credit or refund of taxes. (T.D. 9405, 06/30/2008)

Deposits, payments, and credits. An employer making an interest-free adjustment must pay the amount of the adjustment by the time it files an adjusted return. The timely payment satisfies the employer's deposit obligations for the adjustment. (Reg. § 31.6302-1(c)(7)) In determining the amount of accumulated taxes in an agricultural employer's lookback period (which determines the employer's deposit schedule), adjustments to tax liability made under the filing of adjusted returns or refund claims aren't taken into account; new agricultural employers are treated as having employment tax liabilities of zero for any lookback period before the date the employer started or acquired its business. (Reg. § 31.6302-1(g)(4))

If the underpayment amount isn't paid when the adjusted return is filed, interest begins to accrue as of the date the adjusted return is filed. (Reg. § 31.6205-1(b)(2))

The adjusted overpayment amount will be applied as a credit toward payment of the employer's liability for the calendar quarter (or calendar year for annual returns being adjusted) in which the adjusted return is filed, unless IRS notifies the employer that the credit will be applied to a different return period or that the employer isn't entitled to the adjustment under applicable laws or procedures. (Reg. § 31.6413(a)-2(b)(2))

Refunds for overpayments. As in the prior regs, instead of making an interest-free adjustment for an overpayment, employers can file a claim for refund for the amount of the overpayment. Furthermore, if an employer can't make an interest-free adjustment for an overpayment because the period of limitations for claiming a credit or refund for the overpayment will expire within 90 days or because IRS has otherwise notified the employer that it's not entitled to the adjustment, the employer can recover the overpayment only by filing a claim for refund. (Reg. § 31.6413(a)-2(d))

An employer can file a claim for refund of an overpayment of FICA or RRTA tax, but must certify that it has repaid or reimbursed the employee's share of FICA or RRTA tax to the employee or has secured the employee's written consent to allowance of the refund or credit. However, the employer isn't required to repay or reimburse the employee or obtain the written consent of the employee to the extent that the overpayment doesn't include taxes withheld from the employee or, after reasonable efforts, the employer cannot locate the employee or the employee, once contacted, will not provide the requested consent. (Reg. § 31.6402(a)-2(a)) The final regs under Code Sec. 6414 set out similar procedures for filing a claim for refund of overpaid ITW, except that an employer can't file a claim for refund of an overpayment of ITW for an amount the employer deducted or withheld from an employee. (Reg. § 31.6414-1(a))

IRS intends to issue guidance to provide examples of how the final regs apply in different factual scenarios. (T.D. 9405, 06/30/2008)

Recap of recent state employment tax laws, developments, and changes taking effect in July

Several states and localities are making employment tax changes that take effect in July. In addition, several new employment tax laws and developments have occurred recently. Here are some of the highlights from the following states:

Alabama
Unemployment. Effective for benefit years beginning after July 5, 2008, a claimant must serve a one-week waiting period prior to receiving unemployment benefits. The maximum weekly benefit will also increase from $235 to $255 [L. 2008, H427].

California
Employment Taxes. A state of emergency was declared on June 12th in the following counties: Sacramento, San Joaquin, Stanislaus, Merced, Madera, Fresno, Kings, Tulare, and Kern, due to the drought. Affected employers may request up to a 60-day extension of time to file their state payroll reports and deposit state payroll taxes with the Employment Development Department (EDD). All requests will be evaluated on a case-by-case basis. For further information, contact the Taxpayer Assistance Center at (888) 745-3886 [EDD Announcement, 6/13/2008].

Wage and Hour. The California Court of Appeal has ruled that an employee who received a premium holiday pay rate for work performed on Labor Day, and who worked 12 hours on Labor Day and 60 hours during the week, was only entitled to overtime based on her regular pay rate. The employer is entitled to credit the time-and-a-half premium pay on holidays against otherwise earned overtime [ Advanced-Tech Security Services, Inc. v. Superior Court, Cal. Ct. App., Second App. Dist., Division Five, Dkt. No. B205186, 6/3/08].

Colorado
Unemployment. The Colorado Department of Labor & Employment (DLE) reminds employers to review adjustments to their account on line 15 of Form UITR-1, Unemployment Insurance Tax Report (Tax Report), before determining their tax payment for the quarter [DLE UI Quarterly News, 2nd Quarter 2008].

Connecticut
Employment Taxes. The state is setting up a joint task force on worker misclassification issues (i.e., employee vs. independent contractor) [L. 2008, H5113].

Unemployment. New registration requirements go into effect for professional employer organizations (PEOs), beginning in 2009 [L. 2008, H5113].

Wage Payment. Effective Oct 1, 2008, wage deductions are permitted for contributions that are attributable to automatic enrollment in IRC §401(k), 403(b), 408, 408A, or 457 retirement plans [L. 2008, S157].

District of Columbia
Time Off. Effective Nov. 13, 2008, all Washington, D.C. employers must provide paid leave for illness and absences associated with domestic violence, sexual abuse, or stalking of employees or their family members [D.C. Register, Vol. 55, No. 21, 005886, 5/23/08; DC Law 17-152, 5/13/08].

Idaho
Wage and Hour. Effective July 1, state employees who do not qualify for the executive exemption under Idaho law, or the administrative or professional exemption under federal law, and state employees not designated as exempt under any other complete exemption in federal law, are eligible for overtime compensation.

Illinois
Wage and Hour. The minimum wage rate will increase from $7.50 per hour to $7.75 per hour on July 1.
Iowa
Wage and Hour. Effective July 1, the following enterprises are exempt from Iowa minimum wage rules, regardless of whether sales are $300,000 or more: (1) enterprises engaged in the business of laundering, cleaning, or repairing clothing or fabrics; (2) enterprises engaged in construction or reconstruction; (3) hospitals and schools; and (4) public agencies.

Indiana
Wage Payment. A federal court has ruled that store managers who were no longer employed by a company were not entitled to unpaid bonuses, since one contingency for receiving the bonuses was continued employment. The bonuses did not qualify as wages under either Indiana wage payment or wage claim statutes because of the contingency [ Harney v. Speedway SuperAmerica, LLC, CA7, Dkt. No. 07-3488, 5/30/2008].

Withholding. Indiana law requires the withholding of adjusted gross income tax and local option income tax from a pension distribution, if the payee requests withholding. The withholding request must be made in writing and should include the payee's Indiana county of residence [Indiana Information Bulletin IT13, 06/01/2008].

Kansas
Withholding. Effective July 1, employers with an annual total withholding tax liability of over $45,000 (before July 1, over $100,000) may be required to remit taxes by electronic funds transfer [Kan. Stat. Ann. §75-5151, as amended by L. 2007, H2434, §13].

Unemployment. Wage reports, contributions returns, and payments due after June 30, 2008, must be filed electronically by employers with 250 or more employees, and third-party administrators with 250 or more client employees.

Kentucky
Wage and Hour. The minimum wage rate will increase from $5.85 per hour to $6.55 per hour on July 1.
Massachusetts
Wage and Hour. Effective July 13th, treble damages will be awarded for all wage and hour violations, even if there was no "willful misconduct" by the employer.

Maryland
Time Off. The Flexible Leave Act amends the state's family leave provisions, effective Oct. 1, 2008. The provision will apply to employers with 15 or more employees working in the state. Employers will not only be able to allow employees to take "leave with pay" for the birth or adoption of a child, but also to care for a spouse, child, or parent. "Leave with pay" includes sick leave, vacation time, and compensatory time. In cases where an employee earns more than one type of leave, the employee may elect the type and amount of paid leave to be used [L. 2008, H40].

Minnesota
Withholding. Effective beginning after Dec. 31, 2008, payments to independent contractors are subject to state backup withholding if they are subject to federal backup withholding. Previous legislation that required third-party bulk filers to withhold from independent contractors was deleted before the provision took effect [L. 2007, H3149].

Mississippi
New Hire Reporting. Beginning in July, certain employers, third-party employers, contractors, and subcontractors will be required to register and use the federal Department of Homeland Security E-Verify program for all new hires. Required compliance is phased in through July 2011, based on the number of employees.

Michigan
Wage and Hour. The minimum wage rate will increase from $7.15 per hour to $7.40 per hour on July 1.
Montana
Unemployment. Effective July 1, the administrative fund tax for governmental experience-rated employers is 0.09% of total wages.

Nevada
Employment Taxes. The Nevada Tax Commission has approved a tax amnesty program that calls for waiving interest and penalty on certain tax liabilities, including the modified business tax (on payroll). The program is scheduled to start on July 1, 2008, and end on Sept. 30, 2008. To be eligible for amnesty, a business or taxpayer must be in full compliance with state law and pay the entire tax due by the end of the amnesty period. The Nevada Department of Taxation is in the preliminary stages of developing specific guidelines and requirements for the program [ Nevada Press Release, 6/2/08].

Unemployment. Effective July 1, all unemployment tax payments of $10,000 or more (including interest and penalties) must be remitted electronically.

Wage and Hour. Effective July 1, the state minimum wage will increase to $5.85 per hour for employees who receive qualified health benefits, and to $6.85 per hour for all other employees.

New Jersey
Withholding. Employees are allowed to exclude certain employer-provided commuter transportation benefits from their taxable gross income, up to a maximum amount that is adjusted annually for inflation. The maximum amount for 2008 is $1,440, up from $1,410 for 2007. Amounts in excess of $1,440 must be included in an employee's gross wages on Form W-2 or other written statement [Div. Tax. Notice of Employee Commuter Transportation Benefit Limits, 06/02/2008].

Oklahoma
Withholding. A federal district court has suspended the enforcement of a statute that required contractors to withhold from workers who could not produce federal documents showing that they were authorized alien labor. The court found the Oklahoma law to be an attempt to regulate behavior, not to impose a new tax. The injunction continues until the merits of the case are finally decided [Chamber of Commerce of the U.S.A. v. Henry, DC OK, Dkt. No. CIV-8-109-C, 6/4/2008].

The governor has signed into law a tax amnesty bill. A taxpayer will be entitled to a waiver of penalty, interest, and other collection fees due on eligible taxes (including withholding taxes), if the taxpayer voluntarily files delinquent tax returns and pays the taxes due during the compliance initiative. The program is scheduled to take place from Sept. 15 until Nov. 14, 2008 [L. 2007, S2034 (c.395), §1].

Oregon
Time Off. The state Supreme Court has ruled that while employers are required to provide minimum rest breaks as per Or. Admin. R. § 839-020-0050(1)(b) , violations do not give rise to a wage claim for additional wages [Gafur v. Legacy Good Samaritan Hosp. & Med. Ctr., Or. Sup. Ct., Dkt. No. SC055175, 5/15/08].

Pennsylvania
Withholding. Effective July 1 through Dec. 31, 2008, Philadelphia tax rates are reduced to 3.98% for residents and 3.5392% for nonresidents. The tax rate that should be used is the rate in effect on the date that the taxable compensation is actually paid to the employee. For example, wage tax on a paycheck dated July 1, 2008, for wages paid for the period from June 16 to June 30, 2008, should be withheld at the rate in effect as of July 1, 2008 [Philadelphia Bill No. 080161, 05/22/2008; Important Notice: Wage Tax Rate Reduction, Philadelphia Dept. of Rev., 06/04/2008].

South Carolina
New Hire Reporting. New legislation requires all employers to verify the employment eligibility of new hires beginning as early as Jan. 1, 2009 [L. 2008, H4400].

Withholding. Effective June 4, 2008, withholding agents must withhold 7% state income tax on compensation paid to an individual that was reported on Form 1099, if the individual: (1) fails to provide a taxpayer identification or Social Security number; (2) fails to provide a correct taxpayer identification or Social Security number; or (3) provides an IRS-issued taxpayer identification number issued for nonresident aliens. There are exceptions to this rule [S.C. Code Ann. §12-8-595, as amended by L. 2008, H4400].

Texas
Unemployment. The state has begun mailing checks to experience-rated employers eligible to receive the surplus tax credit [TWC Tax Department Tip of the Month, June 2008].

Vermont
Withholding. Effective July 1, the state may grant EFT filers up to six additional days for payment (prior to that, four additional days).

Virginia
Withholding. The Virginia Supreme Court has ruled that the requirement in Va. Code Ann. § 58.1-1815 to "truthfully account for and pay over such tax" is violated by one who willfully fails either to "account for" or "pay over" the tax. Therefore, a criminal penalty could be assessed against a person who failed to pay his withholding tax obligation, even though he had truthfully accounted for the obligation [Gibson v. Cmwth. of Virginia, Va. Sup. Ct., Dkt. No. 072023, 6/6/2008 ].

West Virginia
Withholding. A business registration certificate may be revoked for repeated, willful refusal to remit state withholding taxes when due [West Virginia Administrative Decision 08-052 F, 06/08/2008].

Wage and Hour. The minimum wage rate will increase from $6.55 per hour to $7.25 per hour on July 1.
Wisconsin
Withholding. Wisconsin will follow federal rules that require "disregarded entities" to pay their own employment taxes and file their own employment tax reports, beginning with wages paid in 2009. As an "employer," a disregarded entity must obtain a Wisconsin employer identification number [Wisconsin Dept. Rev. Tax Bulletin 156, 04/01/2008].

The state has issued a tax release that clarifies the circumstances under which "public speaking services" are subject to Wisconsin's nonresident entertainer prepayment law [Wisconsin Dept. Rev. Tax Bulletin 156, 04/01/2008].

Wyoming
Unemployment. Effective July 1, 2007, employers were required to submit "Wyoming Employee Wage Listings" as part of their quarterly reporting responsibilities. Beginning in 2009, the state may increase an employer's tax rate by a 2% penalty rate if the employer has failed to submit the wage listing [Wy. Quarterly Connection, 1st Qtr. 2008].

IRS focusing efforts on four employment tax initiatives

American Payroll Association 26th Annual Congress May 13-17 (Austin, TX)

John Tuzynski, IRS Chief, Employment Tax Operations, told attendees at APA's 26th Annual Congress that the IRS is focusing its efforts on the following four key employment tax initiatives: (1) worker classification, (2) tip reporting compensation, (3) officer compensation, and (4) fringe benefits.

Worker classification. Approximately 30% of IRS audits focus on the employee vs. independent contractor issue. The IRS may further review a personal income tax return which, over a period of several years, has only included 1099-source income.

Tip reporting. The IRS is looking for voluntary compliance in this area. Tuzynski believes some employers in the food and beverage industry may not be aware of the Attributed Tip Income Program (ATIP). ATIP provides benefits to employers and employees similar to those offered under other tip reporting agreements, including protection from audits. However, ATIP does not require employers to meet with the IRS to determine tip rates or eligibility.

Officer compensation. There are many S corporations with significant distributable income that report very little officer compensation, even though the officer provided key services to the corporation. These corporations may not be paying their fair share of employment taxes.

Fringe benefits. The IRS continues to target improper employee tool and equipment expense reimbursement plans.

New initiative. The IRS does not currently follow up on notices that it sends to employers asking them to begin backup withholding on employees with mismatches between their name and taxpayer identification number. Tuzynski said that the IRS will soon have a new initiative in this area.

IRS or State Payroll Tax Audit & Employment Tax Audit

The word audit can strike a very real sense of fear into the hearts of even the most courageous of men. When you own a business, there is even more at stake than a few minor penalties or fees; you can lose everything you've worked so hard to create. If you are facing a payroll tax audit you need to make every effort to cooperate with your auditor. The best way to prepare for a payroll tax audit, and therefore survive the audit, is to keep excellent records for several years past on hand and have them stored completely and according to year in case you are faced with an audit many years after the fact.

The first thing you need to do in order to keep everything straight when it comes to surviving a payroll tax audit is to keep your accounting practices current. Many businesses do this by either outsourcing their payroll responsibilities to firms that deal exclusively with payroll matters, including payroll taxes, or hiring an in-house bookkeeper to handle their payroll. The benefits of either of these is great because laws regarding payroll taxes and withholdings change regularly and are so complex in general.

You should also insure that you have the proper resources in place when it comes to avoiding a payroll tax audit or at the very least coming away from one without owing any back taxes, fines, or penalties is one of the biggest responsibilities a business owner faces. If you aren't willing to pay for outsourcing this responsibility to someone that is qualified as an outsider you very well may want to consider hiring a fulltime staff member who has the expertise and qualifications to devote to insuring accurate payroll deductions are made. As a licensed tax professional specializing tax problems resolution, I can represent you in your payroll tax audit to advocate your position and make sure your options and your rights are taken care of.

You should also take the time each year to review your records and check for mistakes. While it won't help you avoid a payroll tax audit this little effort made each year can save you a great deal of time and many headaches should one arise. In addition you will find out during the course of the 'internal audit' whether or not any information is missing, incomplete, or inaccurate and handle it immediately rather than finding out two or three years after the fact.

If you find, during the course of your internal audit or review, that you are going to have problems with your payroll tax audit it would be wise to secure the services of our firm in order to help you deal with the outcome of your payroll audit and assist you when negotiating payment options and reducing penalties. The IRS is a formidable foe and you do not want to face them unprepared or alone if it can be avoided. It could cost considerably more than it has to. There are options available, even if you owe a considerable amount of money.

As a licensed tax professional specializing tax problems resolution, I may be able to negotiate some amazing things on your behalf when it comes to your payroll tax audit and a potentially negative or outright negative outcome. Honest mistakes are made every day when it comes to handling payroll taxes don't allow your mistakes, when discovered through a payroll tax audit be the end of your business -- especially when a well qualified and experienced tax professional like Mike Habib, EA can make all the difference in the world.