News from CustomPay.
Australia, Canada, UK and US Agree to Establish Joint Task Force
IR-2004-61, May 3, 2004
WASHINGTON - Tax Commissioners of Australia, Canada, the United Kingdom and the United States have now established a joint task force to increase collaboration and coordinate information about abusive tax transactions by signing a Memorandum of Understanding (attached) in Williamsburg, Virginia on April 23, 2004.
An initial focus of the work will include the ways in which financial products are used in abusive tax transactions by corporations and individuals to reduce their tax liabilities, and the identification of promoters developing and marketing those products and arrangements.
The joint task force will assist the respective tax administrations in addressing challenges arising from abusive tax transactions. While the tax administrations operate primarily within their own borders, many abusive tax transactions employ strategies that cross borders, and many of the promoters of these transactions operate globally. Setting up a joint task force will enable the four countries to:
- Share expertise, best practices and experiences in the field of tax administration to identify and better understand abusive tax transactions and emerging schemes, as well as those who promote them.
- Exchange information about specific abusive tax transactions and their promoters and investors within the framework of the countries' existing bilateral tax treaties.
- Carry out their individual abusive tax transaction enforcement activities more effectively and efficiently.
"This represents an unprecedented international effort to combat the plague of abusive tax shelters," IRS Commissioner Mark W. Everson said. "The creation of this group sends a strong, unmistakable message to promoters who cross borders to cloak tax schemes. This effort will help us build faith in our country's commitment to a fair tax system."
Officials of the tax administrations will work together in Washington, DC during the initial phase of the task force's operations. The Commissioners will review the operation of the task force after twelve months.
ITIN Application changes
In Notice 2004-1, the IRS revised its procedures for issuance individual taxpayer identification numbers (ITINs), in part, by revising Form W-7, Application for IRS Individual Taxpayer Identification Number.
ITINs are only issued to individuals required to have a U.S. taxpayer identification number for U.S. tax purposes, but not eligible to obtain a Social Security number. The IRS has issued 7 million ITINs since 1996; only about 75% of these have been used for return purposes. The remaining 25% may have been requested solely to serve as a form of identification; like a Social Security number. However, because ITINs are strictly for tax processing, IRS does not apply the same standards as do agencies that provide genuine identity certification. The IRS has taken these steps to help ensure that ITINs are used for their intended purpose; consequently, it updated Form W-7.
Three out of four hires come from Internet referrals
[CCH, HR Management, February 2004] – The Internet has become an important source to help employers recruit job candidates. But it's surprising to learn just how unknowledgeable most employers are about the way applicants actually use the Internet to conduct job searches, according to a survey of large corporations conducted by online recruitment consultants Gerry Crispin and Mark Mehler of CareerXroads.
The study's results indicate that nearly one-third of new hires at Fortune 500 companies started their successful job search on the Internet. In addition, the number of applicants hired via the Internet increased more than 11 percentage points since 2001 when the annual survey was started.
Some of the study's key findings include:
60 percent of all external hires in 2003 can be attributed to two channels: employee referrals and the Internet, and these sources are continuing to grow. By 2005 these sources are expected to account for three out of every four hires.
Of the hires from the Internet, employers report 68 percent came from their company Web site.
Niche job sites were a larger source of hires from the Internet in 2003 than leading job boards combined:
1. Niche Sites: 17.6 percent
2. Monster.com: 8.7 percent
3. CareerBuilder: 4.1 percent
4. Hotjobs: 1.8 percent
The job market will continue to be tight. The study also showed that while more positions were filled in 2003 (6 percent) than 2002, slightly fewer positions will be filled in 2004 (-2 percent).
What does this mean to employers? Crispin notes, "It's time to hone succession plans and retention programs."
DOL statement on mutual fund market timing abuses and plan fiduciaries
[CCH, Pension and Benefits, February 2004] – The Department of Labor (DOL) issued a statement on February 17, 2004 addressing the duties of plan fiduciaries in view of recent investigations of mutual funds regarding late trading and market-timing abuses.
Plan fiduciaries should follow prudent plan procedures relating to investment decisions and document their decisions, stated Ann L. Combs, Assistant Secretary of the Employee Benefits Security Administration (EBSA). They must make appropriate efforts to act reasonably, prudently and solely in the interests of participants and beneficiaries, stated Combs.
When a specific mutual fund has been identified as being under investigation by Federal or state regulators, fiduciaries must consider the nature of the alleged abuses, the potential impact of the abuses on the plan's investments, the steps taken by the fund to limit such abuses in the future, and any remedial action contemplated to make investors whole. For funds not currently under investigation by regulators, fiduciaries will need to consider whether they have sufficient information to conclude that the funds have safeguards in place to limit abuses, Combs added.
In considering appropriate actions to take in limiting market-timing problems, Combs indicated that plans which offer mutual funds that impose sale redemption fees, or limit a participant's ability to move in or out of particular investments within a certain time period, would not run afoul of ERISA Sec. 404(c) volatility requirements.
Unfair loyalty oaths
By Jonathan Burton
SAN FRANCISCO (CBS.MW) -- After Enron, 401(k) reform seemed imperative, especially for plans loaded with company stock.
President Bush offered modest proposals, Congress balked at perceived half-measures,and two years later many 401(k) investors are still wedded to employer-sponsored retirement plans that are overly concentrated in company shares.
Many are ignoring the painful lesson they escaped.
"Employees who had a lot of money in company stock before Enron still do," says David Wray, president of the Profit Sharing/401k Council of America. "Employees definitely do not see their companies as (another) Enron. They still trust their company."
Apathy can be costly. Two years ago this month, Enron froze its company-stock-laden 401(k) and doomed employees to a sinking ship. Its stock now trades for about 5 cents a share.
Unyielding trust in company stock is a poor investment. Amassing shares doesn't get you a table in the executive dining room when creditors are claiming the silverware.
"Everyone thinks they're an expert on their company's stock," says Kaye Thomas, a Chicago tax attorney who runs investor Web site Fairmark.com. "Working at the company makes it harder to make an objective judgment about how the stock is going to perform."
Of the nation's 420,000 401(k) plans, only about 2,400 now offer company stock, according to the Employee Benefit Research Institute, a Washington policy group. But that group covers many employees in the largest publicly traded U.S. companies.
In fact, if you work for a major U.S. company, there's a 60 percent chance your employer makes company stock available in your 401(k) program.
Faith in company shares hit records in 1998 as the bull market neared its zenith, according to Profit Sharing/401k Council data. At the time, 28 percent of major companies held more than 50 percent of 401(k) assets in company stock.
This concentration has ebbed with stock values. Still, 16 percent of these plans -- about 1 out of every 6 companies -- had more than 50 percent of assets in company stock at the end of 2002.
Meanwhile, almost half of these plans invested between 10 percent and 50 percent of assets in company stock, and 36 percent committed less than 10 percent.
"Most participants are broadly diversified and are looking at a long time horizon," says Dallas Salisbury, president of the Employee Benefit Research Council. "Individuals aren't clamoring for change."
Good thing for Congress and the White House, which stalled on the road to 401(k) diversification reform. The question no one in Washington can seem to answer: Should the financial-services companies that run 401(k) plans also provide investment advice?
Lawmakers in the House are comfortable with this arrangement, but their
Senate counterparts aren't. They may compromise by giving employees more control over their investment portfolio while considering the advice question later.
"Enron is now a long time ago in the eyes of a lot of people," says Rep. Ben Cardin, D-Md., a leading proponent of 401(k) reform. "The issue is no longer important to deal with -- even though it is."
Indeed, the farther from Enron we get, the better things look. The Standard & Poor's 500 Index is up 35 percent from its October 2002 bear-market low. The good times have gone and come again. And if your company's stock appreciates rapidly, the position can become an ungainly portion of your portfolio.
"Everybody knows that diversification makes sense, yet they ignore it when they're working for a company," says Roy Diliberto, chairman of RTD Financial Advisors, a Philadelphia investment manager. "People look at what's happening today and forget about what happened six months ago, or think it won't happen to them."
Employees might get a needed break, now that more companies are choosing independently to expand 401(k) options and flexibility. Fewer plan participants are being forced to hold company stock received as a company match until a predetermined age, for example.
"Large numbers of employers post-Enron have liberalized the provisions in their plans by their own accord, as a means of decreasing their fiduciary exposure," says Salisbury.
"Enron hit home to them that it's better to give people a choice and introduce them to the benefits of diversification."
In other words, don't sue. Moreover, don't sue the CEO.
The benefits of portfolio diversification, since that's what the actors in this drama supposedly want, are fairly straightforward. Holding stock in any single investment is risky but offers a potentially big payoff. Diversification through other investments diminishes volatility but also reduces the portfolio's total return.
Lower return but lower risk should be an acceptable trade-off for 401(k) holders. If the company stock doesn't do well, other stocks and bonds will likely hold up better and provide a base level of retirement security.
"The reality is that when you work for a company, much of your financial life -- your paycheck, your retirement plan --- is linked to how well that company does," Diliberto says. "If you want to dabble a bit, put 5 percent of your portfolio into company stock."
If 5 percent seems too little -- think of those Microsoft millionaires - then Diliberto has a short quiz for you.
"If you didn't work for the company, how much of the stock would you buy?" he asks. "And if you were building a portfolio, how much of it would you put in any one stock?
"Answer those two questions and it almost gives you the answer to what you should do," Diliberto says.
Before you decide, remember, you'll work overtime for company stock, while a diversified retirement plan works for you over time. If you don't believe that, just call an ex-Enron executive. But first, please deposit 10 shares.
FICA taxes will barely increase for high earners in 2004
[RIVERWOODS, IL, October 17, 2003] – Highly-paid wage earners may scarcely notice the
projected increase in the wage base on which Social Security taxes are due for 2004, according to
CCH INCORPORATED (CCH), a leading provider of tax and payroll information and software.
The 2004 wage base of $87,900 is a mere $900 higher than the 2003 amount, and the maximum
additional tax that might be collected on someone earning above the 2003 wage base is only
$55.80.
The tax increase will show up in the amount of FICA (Federal Insurance Contribution
Act) tax deducted next year from the paychecks of those earning above the 2003 wage
base. Although the tax rate for the Old Age, Survivors and Disability Insurance (OASDI)
portion of FICA has held steady at 6.2 percent since 1990, the amount of wages subject to
the tax can, and usually does, increase each year, based on a national wage index. The
taxes paid by employees are matched by identical amounts paid by employers into the
Social Security system.
The tax rate for the "Hospital Insurance," or Medicare, portion of FICA is 1.45 percent,
and it applies to every dollar of earnings. This amount also is matched by employers.
Avram Sacks, JD, Social Security analyst with CCH, noted that taxes for self-employed
individuals use the same earnings base, but the rates are double those of employees, since
the self-employed must also pay the "employer" portion of the taxes.
"This means that high-earning, self-employed individuals may owe as much as $111.60
in additional self-employment tax in 2004," Sacks said. "However, they can recoup some
of this amount through a deduction on their federal income tax."
About 9.2 million workers will be affected by the higher wage base in 2004.
Return from temporary position to permanent assignment may have
been adverse action
[CCH]. A FACTUAL ISSUE existed as to whether a grocery story employee's assignment to return from
a temporary position as a skilled technical assistant to a permanent assignment as a meat wrapper
constituted an adverse employment action, ruled the Tenth Circuit Court of Appeals. The transfer
may have been an adverse action--even though her wages, seniority and title remained the same--
because the temporary position was a de facto reduction in responsibility and required a lesser
degree of skill. (Stinnett v Safeway, Inc, 10thCir, 84 EPD 41,503)
The employee was working as a meat wrapper in the store when she received the opportunity to
work as a temporary "project employee" on a data processing assignment. Her status as a project
employee was not a promotion and she did not receive any increase in pay or benefits by virtue of
her new assignment. She worked on a series of projects of varying types and time lengths. Her
final assignment as a project employee involved providing skilled technical assistance to field
technicians who worked on the store's computers. After working a total period of almost two
years as a project employee, she was told her assistance was no longer needed and she would be
returned to her position as a meat wrapper. The transfer did not result in any loss of salary,
seniority or benefits.
Following her transfer back to the meat wrapper position she filed suit against the store alleging,
in part, that her transfer back was due to sex discrimination in violation of Title VII and Colorado
state law. The district court ruled that the employee failed to establish a prima facie case of sex
discrimination because she could not show that her transfer was an adverse employment action.
However, the Tenth Circuit found that a factual issue existed as to whether the transfer was an
adverse action. The transfer may have been an adverse action because it resulted in a "significant
change in responsibilities--from providing skilled technical assistance to wrapping meat." Even
though the employee maintained her wage level, seniority and title throughout the relevant time
period, there was evidence that the reassignment constituted "a de facto reduction in
responsibility and required a lesser degree of skill."
Moreover, the employee raised a factual issue as to whether the store's stated reason for her
transfer--that her services in the temporary position were not longer needed--was a pretext for sex
discrimination because she presented evidence to show that the demand for her services in the
temporary position had not been diminished and that male employees, some with less experience,
were given this available work.
Health Premiums from Retirement Distributions.
Amounts distributed from a qualified retirement plan that distribute elects to have pay for health insurance premiums under a cafeteria plan or to reimburse medical care expenses are includable in distributee's gross income. Rev. Rul. 2003.62.
Guidance on Insurance, HMOs
The IRS, in Notice 2003-31, announced its intent to propose regulations proving guidance under Section 501(m) addressing commercial-type insurance and health maintenance organization. It also issued a field memorandum providing directives for handling examination and exemption application cases involving HMOs. The notice requests comments by August 25, 2003 and says it is withdrawing from the Internal Revenue Manual the HMO sections of the exempt organizations guideline handbook relating to Section 501 (m).
Social Security Wage Base Rises to $87,900 in 2004
The Social Security Administration (SSA) announced on Thursday, October 16, 2003 that the 2004 social security wage base will be $87,900, an increase of $900 from the 2003 wage base of $87,000. As in prior years, there is no limit to the wages subject to the Medicare tax; therefore, all covered wages are still subject to the 1.45% tax.
The FICA tax rate, which is the combined social security tax rate of 6.2% and the Medicare tax rate of 1.45%, remains at 7.65% for 2004. The maximum social security tax employees and employers will each pay in 2004 is $5,449.80. This is an increase of $55.80 from the 2003 maximum of $5,394.00.
The social security wage base for self-employed individuals for 2004 will also be $87,900. There is no limit on covered self-employment income that will be subject to the Medicare tax. The self-employment tax rate remains 15.3% (combined social security tax rate of 12.4% and Medicare tax rate of 2.9%). In 2004, the maximum social security tax for a self-employed individual will be $10,899.60. This is an increase of $111.60 from the 2003 maximum of $10,788.00.
FICA coverage threshold unchanged for domestic, election workers
The threshold for coverage under social security and Medicare for domestic employees will remain at $1,400 in 2004, unchanged from 2003; the coverage threshold for election workers will remain at $1,200 in 2004, also unchanged from 2003.
IRS Increases Standard Business Mileage Rate to 37.5 Cents for 2004
The standard business mileage rate for transportation expenses paid or incurred beginning January 1, 2004 will be 37.5 cents per mile, up from the 36 cents per mile rate in effect during 2003.
In addition, the 2004 standard mileage rate for operating a passenger car for charitable purposes will stay at 14 cents per mile. The rate for medical and moving expenses will also be 14 cents per mile, up from the 12 cents per mile rate in effect during 2003 [Rev. Proc. 2003-76, 2003-43 IRB 10-15-03].
IRS Announces Pension Plan Limits for Tax Year 2004
The IRS has announced the dollar limits applicable to pension plans that become effective January 1, 2004 under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; Pub. L. No. 107-16) and has released the cost-of-living adjustments applicable to dollar limits on benefits and contributions under qualified retirement plans unaffected by that law, as well as other items, for tax year 2004 [IR-2003-122, 10-16-03].
Limits reset or established by EGTRRA
For limitation years ending after December 31, 2003, the limit on the annual benefit under a defined benefit plan contained in §415(b)(1)(A) is increased from $160,000 to $165,000.
The limit on annual additions to defined contribution plans under §415(c)(1)(A) is increased from $40,000 to $41,000.
The limitation on the exclusion for elective deferrals under §402(g)(1) (e.g., §401(k) and §403(b) plans) is increased from $12,000 to $13,000.
The annual compensation limit under §401(a)(17) and §404(l) is increased from $200,000 to $205,000.
The compensation amount under §408(p)(2)(E) regarding elective deferrals to SIMPLE retirement accounts is increased from $8,000 to $9,000.
The limitation under §457(e)(15) concerning elective deferrals to deferred compensation plans of state and local governments and tax-exempt organizations is increased from $12,000 to $13,000.
The limitation under §416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $130,000.
The limitation under §414(v)(2)(B)(ii) for catch-up contributions to an employer's SIMPLE plan for individuals age 50 or over is increased from $1,000 to $1,500; the limitation under §414(v)(2)(B)(i) for catch-up contributions to §§401(k), 403(b), and 457 plans for individuals age 50 or over is increased from $2,000 to $3,000.
Limits not reset by EGTRRA
The limitation used in the definition of highly compensated employee under §414(q)(1)(B) remains unchanged at $90,000.
The compensation amount under §408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $450.
The compensation amount under federal regulation §1.61-21(f)(5)(i), concerning the definition of "control employee" for fringe benefit valuation purposes, remains unchanged at $80,000. The compensation amount under §1.61-21(f)(5)(iii) is increased from $160,000 to $165,000.
Rhode Island to increase minimum wage.
[CCH PAYROLL - August 1, 2003]. Effective January 1, 2004, the minimum wage in Rhode Island will increase to
$6.75 per hour (currently, $6.15 per hour). (H.B. 5115, Laws 2003, approved
July 23, 2003 and effective September 1, 2003.)
EFTPS-OnLine website undergoes major upgrade.
[CCH PAYROLL - July 30, 2003]. The IRS has announced that a major upgrade of the Internet version of the
Electronic Federal Tax Payment System (EFTPS)--the EFTPS-OnLine
website--includes several new improvements to help taxpayers. The changes
range from increased convenience in the scheduling of payments to an
expanded ability to track payment history. Users will be able to do the
following: (1) schedule all four estimated tax payments in one session
without logging out; (2) access payment history for a 16-month period; and
(3) search, print, or download payment history by date, tax type, amount,
tax form, and other factors.
With the system, users can change bank accounts by phone without completing
new enrollments; select PINs online; access links to states with electronic
tax payment systems; use an enhanced and updated glossary and information;
and take advantage of improved accessibility if visually impaired. Payments
can be made 24 hours a day, seven days a week from home or office, and
taxpayers receive an EFT Acknowledgement Number for every EFTPS transaction.
Interested parties can enroll in EFTPS by accessing the EFTPS-OnLine website
at www.eftps.gov, or by calling EFTPS Customer Service at 800-555-4477 or
800-945-8400. (IRS News Release IR-2003-90, July 21, 2003.)
New York UI law adds interest assessment surcharge.
[CCH UNEMPLOYMENT INSURANCE - July 31, 2003]. The New York Labor Law has been amended as follows:
Interest assessment surcharge. Each employer that is liable for
contributions under the New York Labor Law must pay an interest assessment
surcharge to the Commissioner at a rate established annually that is
sufficient to pay the interest due on advances from the federal unemployment
account under Title XII of the Social Security Act. The rate is effective as
of the beginning of the first calendar quarter of the year such interest
becomes due. The amounts received by the Commissioner will be credited to
the interest assessment surcharge fund. At any time the Commissioner
determines that the assessment is no longer necessary, any amount remaining
after all federal interest charges have been paid will be deposited into the
unemployment insurance trust fund and credited to employer accounts. Such
credits will be determined based on the percentage of each employer's wages
to the total statewide wages of the payroll year and credited to each
employer's account as of the computation date of the year prior to which the
assessment is no longer levied. Note that the provisions of law applicable
to the collection of contributions also apply to the collection of these
assessments.
Seven principles for keeping your employee handbook out of court.
[CCH HR MANAGEMENT - July 31, 2003]. Can your employee handbook be used against you in court? Does it give your
employees rights that you never intended? You need to be careful about what
you put in your employee handbook because every word can be used against
you, according to Paul Salvatore and Allan H. Weitzman of Proskauer Rose
LLP. They recommend following seven principles when creating an employee
manual.
1. Make sure your handbook is not an employment contract. Don’t stop with
only disclaimers in your manual. Inform employees that the policies and
procedures contained in the handbook are not intended to create a contract.
Distribute the manual and make sure your employees sign a receipt
acknowledging that they received a copy. And reserve the right to modify or
change those policies and procedures at any time.
2. Plainly state your rules, regulations and procedures. What is your
attendance policy? How often do you conduct performance appraisals? Are
there any restrictions on the use of e-mail? Clearly stating your procedures
and rules, and then making sure they are consistently followed, helps ensure
that employees understand what is expected of them.
3. Describe policies intended to assist employees. Describing policies that
are designed to help employees allows your handbook to function as an
internal public relations system. Describe your employee assistance program.
Explain your family and medical leave policy and your pregnancy, disability
and child care leaves. This shows your employees that you understand the
laws and rules and intend to follow them.
4. Communicate your commitment to equal opportunity. Your handbook should
include equal employment opportunity policy. Courts will look for this if
you are sued for discrimination. Also include an anti-harassment policy.
Define harassing behavior and give examples. Clarify supervisory
responsibility and clearly set forth your internal complaint procedure.
Designate more than one person who can receive complaints. What are your
organization’s investigation obligations? Do you have a no-retaliation
provision? These all should be clearly addressed in your manual.
5. Set termination guidelines. Include required notifications, severance pay
policies and any grievance or complaint procedures and alternative dispute
resolution procedures. Also consider tying severance pay to the requirement
that employees execute the release acknowledging they received the handbook.
This may help ensure that employees sign and return that acknowledgement.
6. Develop technology policies. The informality of communicating by e-mail
makes an e-mail policy a necessity. Employees should clearly understand that
there is no expectation of privacy in company equipment or in their
electronic communications. Reserve the right to monitor e-mail and make sure
that employees realize that all communications are “discoverable” and can be
used in any legal proceedings.
In addition, with the growing popularity of instant messaging in the
workplace, consider a policy governing this form of communication as well.
Although instant messages cannot be recorded electronically, employees, and
especially managers and supervisors, should remember that they can be
printed off when they appear on the screen. You may want to consider banning
the use of instant messages or adopting a policy similar to your e-mail
policy.
7. Include state and local legal requirements. Although keeping up with
federal laws may seem like challenge enough, don’t forget that state laws
also are important. Not only can state laws provide more generous benefits
and protections than federal laws, they can also affect many of your
policies. For example, state laws may govern your jury duty leave and
workplace smoking policies. It is important to incorporate these, and other
state and local legal requirements, into your employee handbook.
If written properly, your handbook shouldn’t contain any information to be
used against you
Source: The Employee Handbook: Every Word Counts, presented by Paul
Salvatore and Allan H. Weitzman, Proskauer Rose LLP, at the Society for
Human Resource Management’s 55th Annual Conference & Exposition, Orlando,
Florida, June 23, 2003.
PERSONNEL PRACTICES/COMMUNICATION 6011 discusses legal considerations for
handbooks while 6021 provides planning considerations; EMPLOYMENT RELATIONS
435 and 436 address handbook disclaimers.
Accountable Plans, Reimbursements and Per-Diem Allowances.
[Tax Advisor - July 2003]. Reimbursement of employees' business and travel expenses is a common and straightforward transaction. Unfortunately, the tax implications of these simple transactions are fraught with complexity that can cost both employers and employees additional taxes.
Employers and employees generally view reimbursements from accountable plans as desirable, because they have a lot to lose if reimbursements are not handled properly. Accountable-plan treatment obviates the need for income tax and FICA withholding, excludes the payments from the employee's gross income and negates the employee's need to take deductions. When expense reimbursements are from non-accountable plans, they are includible in the employee's wages and subject to withholding and payroll taxes: the employee's expenses, if deductible, are only allowed as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income threshold.
To qualify for accountable-plan treatment, several requirements must be met:
The payment must be a true reimbursement of an actual business expense;
The reimbursement must be from an accountable plan; and
The plan must meet substantiation requirements and include an obligation to return any excess reimbursement.
Reimbursement Requirement
A payment to an employee must be a true reimbursement of an actual business expense. For example, in Lickiss (Tax Court Memo), an outside salesperson's commissions were reduced by $100 per week to reflect estimated business expenses; he received a single check with a statement that indicated the amount of his commission and the expense reimbursement. The Tax Court ruled in the IRS's favor, finding no reimbursement, because licks was not required to provide his employer with any information regarding his actual business expenses.
Payments for travel expenses made to employees, whether or not they are expected to travel, will not qualify as accountable-plan reimbursements. Regs. Sec. 1.62-2(j), examples 1 and 2, further clarify the reimbursement requirement in this context. If an employer pays its engineers $200 per day, whether or not they are away from home, it cannot characterize $50 of that amount as an accountable-plan reimbursement, even for the days when an engineer is traveling away from home. The entire $200 must be treated as wages, because the amount of the payment remains the same regardless of whether the engineers travel.
In contrast, an airline that pays its pilots and flight attendants an allowance in addition to their salary, regardless of whether or not they are "away from home", has both an accountable and a non-accountable plan. Such treatment is permitted, because pilots and flight attendants can reasonably be expected to be away from home. The pilots and flight attendants who are actually away from home are deemed reimbursed from an accountable plan; those who make day trips and are not away from home are reimbursed from a non-acountable plan.
Generally, any expense allowance figured on the same basis as compensation (e.g., hours worked, miles traveled or products sold) will not qualify as a reimbursement from an accountable plan.
In any case, the employer must show that the allowance is paid with a reasonable expectation that the employee will actually incur such expenses.
IRS Reaches Out to Small Businesses.
[Associated Press - June 12, 2003]. Many small business owners will be getting letters from the IRS that won't be tax bills or audit announcements -- they'll be reminders about the benefits and requirements of retirement plans.
The agency says it's trying an approach it has never used before -- an outreach to small businesses -- in hopes of persuading owners to start retirement plans such as IRAs, SEPs, SIMPLEs and 401(k)s or to be sure their existing plans comply with federal tax regulations.
Many small businesses don't have retirement plans, and one aim of the IRS campaign is to nudge owners toward creating them by giving them more information about their options.
The IRS has several publications about small business retirement plans; they can be downloaded from the Web site or ordered by calling 1 800-TAXFORM. There is some overlap among the publications, but they nonetheless can be useful for business owners considering retirement plans for the first time.
Among the publications is 3998, "Choosing a Retirement Solution for Your Small Business," which includes a table spelling out the various plans. It also refers the reader to other IRS publications and other resources.
Publication 560, "Retirement Plans for Small Businesses" describes the plans and their requirements in more detail.
At www.irs.gov/retirement, business owners can find a link to "Small Business Resource Guide -- Starting Your Business -- Retirement Plans for Small Businesses," which is another quick look at the various plans.
O'Donnell said one impetus for the IRS outreach campaign was a pattern of compliance problems found in audits of small businesses' plans. But he added, "we do not link this letter to any kind of audit program."
When audits reveal problems in retirement plans, companies are given a chance to correct them without losing their plans' tax advantages. The IRS said it has simplified its procedures for corrections, and the agency has issued a document called Revenue Procedure 2003-44 that contains the changes.
A word of advice: Don't try to handle this yourself. Revenue Procedure 2003-44 is written in officialese. If your plan has compliance problems, get help from a tax professional as you work to resolve them.
By JOYCE M. ROSENBERG
GAO: Small Businesses Aren't Getting Their Share of Contracts.
[WebCPA, Washington - May 15, 2003]. Some government contract dollars reported as being awarded to small businesses may actually be going to large companies, a report released by the General Accounting Office has found.
In a review of five large companies that received contracts totaling $1.1 billion in fiscal year 2001, the GAO found that $460 million of that amount was listed in the Federal Procurement Data System as small business awards. According to the GAO, the mis-reporting was caused in most cases by federal regulations that permit companies to be considered as a small business over the life of the contract, even if they've grown into a large business, merged with another company, or been acquired.
Agencies also relied on databases containing inaccurate information on current business size, GAO said. A copy of the report is available at http://www.gao.gov/new.items/d03704t.pdf
In response to the report's findings, Women Impacting Public Policy, a national bipartisan group that represents 430,000 businesswomen and women business owners, called on the SBA to initiate an immediate clean up of its ProNet database and asked SBA to share results of contract awards with all agencies.
"The SBA welcomes the GAO's findings," said Fred Armendariz, Associate Deputy Administrator for Government Contracting and Business Development.
"SBA has identified the same concerns and we think that our proposed regulation requiring small contractors to certify their small business status annually will help us to ensure that small businesses get their fair share of federal procurement dollars," -- Melissa Klein
IRS to increase oversight of tax-exempt organizations.
[WASHINGTON - May 9, 2003]. The IRS intends to increase examinations of tax-exempt organizations, Exempt Organization Director Rosie Johnson announced at an April 24 conference.
To accomplish this goal, Johnson said Form 990, a common form filed by exempt organizations, will be reformed. Johnson said in its current form, Form 990 is too cumbersome to complete and unintelligible to both IRS examiners and the tax-exempt community. The goal is to revise Form 990 to make it easier for IRS examiners to more easily identify compliance issues and provide information that is more easily understood by contributors and the tax-exempt community.
With the revised Form 990, examination reviews are likely to increase. Johnson stressed that the IRS will conduct more pre-examination research prior to contacting taxpayers. An agent may request compliance checks under which the IRS may request clarification of issues from the taxpayer before coming out to examine the taxpayer. If the taxpayer under review does not provide a satisfactory answer to the early requests, the compliance check might generate an IRS examination.
The IRS also will be watching the tax-exempt organizations through market segment studies. It will generate demographic data to build profiles within particular market segments. These market study segments will begin with colleges and universities, hospitals, fraternal organizations, arts and humanities organizations, private foundations, elder housing programs and supporting organizations. They might be expanded to other segments of the tax-exempt community after that.
By compiling and examining this information, the IRS believes it will be better able to examine unrelated business income tax issues, fund-raising, non-exempt activities and inurnment issues.
Rising unemployment causing adopting new tax strategies.
[Based on the article "Helping your unemployed clients regroup and move on" by George G. Jones and Mark A. Luscombe. Accounting Today - June 1, 2003.]
While many of the tax principles applicable to those individuals that may be "between the jobs" have remained fairly static over the past few years, some new developments - both in the tax law and in its application to changing compensation practices - call for a revision of certain strategies. Here are some concepts and ideas that may help.
Compensation strategies
Severance pay. Severance payments are generally considered taxable wages. Union severance or strike payments are presumed to be taxable also, since the union dues that cover them were generally deductible in the first place.
Tort payments. Under section 104(a)(2), gross income does not include the amount of any damages received on account of personal injuries or sickness. The Small Business Job Protection Act of 1996 amended section 104(a)(2) to limit the exclusion to amounts received for personal physical injuries or physical sickness, applicable to amounts received after Aug. 21, 1996.
Emotional distress, including related physical symptoms, such as insomnia, headaches and stomach disorders, by itself is not a physical sickness or injury for purposes of the exclusion. Unless a termination settlement is the result, at least in part, of a physical injury that happened on the job, payments must be included in income.
Employers often require employees to release any personal injury claims against the employer in exchange for a termination payment. However, typical boilerplate release language covering unidentified, undisclosed or potential personal injury claims against the employer will not render any part of a severance package excludable as damages for personal injury.
Unemployment compensation. Unemployment insurance payments are taxable as income. FICA taxes, however, are not applicable. Payments to laid-off employees from company-financed supplemental unemployment benefit plans (referred to as "guaranteed annual wage" plans) also constitute taxable income to the employees in the year received.
Year-end payments. Unemployment benefits are not taxed at a flat rate. Someone earning a high salary who is let go late in the year will pay tax on unemployment compensation that is received for the rest of the year at rates that start with income he has already earned or realized for the year.
This income also may impact the ability of the taxpayer to deduct medical insurance premiums paid under COBRA, or initial job-search expenses, since itemized medical deductions have a 7.5 percent adjusted gross income floor threshold and job-hunting expenses come under a 2 percent AGI floor applicable to all miscellaneous itemized deductions.
Severance may be paid to cover a certain period (say, six months' salary), it is taxed when paid. If paid in a lump sum, it is taxed at that time. Ironically, many taxpayers who are terminated toward the end of the year who receive a substantial severance package will find themselves in a higher tax bracket than had they continued working. Providing for installment payments within a severance package may be worthwhile from both the employer's and the former employee's perspectives.
In addition, while income must be included in income as soon as it is able to come under the control of the taxpayer, termination near year's end may create an opportunity for an employer to delay making a payment due to "normal administrative procedures" until after year's end, when the taxpayer will be in a lower tax bracket.
Deferred comp. Deferred compensation payments are often triggered by termination of employment. As soon as the deferred compensation is pay-able, it is taxed to the former employee.
Incentive stock options. Incentive stock options are not taxed as income at the time the stock option is granted to an employee, nor are they taxed as regular income at the time the employee exercises the option and buys the stock. Instead, tax is generally deferred until the employee sells the stock, at which time (and after a two-year holding period) the lower capital gains tax rates apply. Status as a current employee, however, is not required to benefit from these rules, so a former employee who is terminated should try to stick to a long-term plan that will yield the capital gain benefit.
Wage withholding. If an employee terminates employment before the end of the payroll period, the tax is determined on the wages paid during the short period but the withholding exemptions and the tax itself are computed on the basis of the regular payroll period.
This method of computation is more advantageous to the employee because he gets the benefit of the full withholding exemption. In circumstances where a spouse is working and a joint return is filed, that spouse might want to apply for lower withholding as soon as is practicable.
Job placement services. To the extent that a severance package includes job placement counseling, a resume service, office space, or the like, the IRS has ruled that it generally will be considered a tax-free fringe benefit offered for a business reason. Equal treatment to all terminated employees is not required for this treatment to apply. However, if the employer offers cash to the employee as an alternative, the services are taxed to the extent of the additional cash that is offered.
Tapping into retirement savings
Most employees who are terminated anticipate a cash flow problem or, at least, want to take steps to avoid one. Tempting sources of cash are qualified retirement plans, 401(k)s and IRA assets. Cashing out, however, should be undertaken only as a last resort. Some factors to consider include:
Once funds are withdrawn from an IRA, they cannot be replaced after 60 days - future tax-deferred accumulation is therefore sacrificed if funds are withdrawn.
Qualified retirement funds often can be withdrawn penalty-free for "financial hardship," depending upon the plan terms. Financial hardship, however, is not necessarily the same as unemployment.
Once 401(k) contributions are made for the year, they are irrevocable. Once IRA contributions are made for any year, they may be re-characterized and taken back by the taxpayer up until the time that the return for that year is filed.
Employees with a balance in their 401(k) plans of at least $5,000 can generally leave it there. Especially if the plan allows for loans to all participants, this option would allow an employee to borrow funds without withdrawal penalties - an option unavailable to roll-over IRAs.
Unemployment compensation does not count when determining compensation for contributing to an IRA.
Job-hunting expenses
Deductions by an employee for job-seeking expenses are classified as miscellaneous itemized deductions, and may be taken only to the extent that all miscellaneous itemized deductions for the year exceed 2 percent of adjusted gross income. Until 2006, these deductions are also subject to the overall limitation on itemized deductions that applies to taxpayers whose AGI exceeds a threshold amount.
Same trade or business. To be entitled to deduct job-hunting expenses, an employee must seek employment in the same trade or business as the one in which he is engaged. Such expenses include the preparation and mailing of resumes, as well as travel expenses. Job-hunting expenses are not deductible, however, if an individual is seeking employment in a new trade or business.
Just what constitutes a "new field" is not necessarily intuitive. The IRS has held that different types of jobs in the same employment sector are, nevertheless, jobs in different fields. In making this determination, focus is generally on the nature of the employment rather than the status of the taxpayer as employee or self-employed (for example, a CPA or an attorney).
Temporary jobs taken while searching for permanent employment will not affect the deductibility of job-search expenses. On the other hand, part-time employment presumably can qualify a taxpayer to search either for full or part-time employment in the same field and fully deduct job-search expenses, restricted only by the limitation that they be reasonable for the position sought. Someone working part-time who wishes to go back to work full-time, presumably, can deduct his job search expenses.
An additional requirement for deducting job-hunting expenses is that there must be no substantial lack of continuity between the preceding employment and the search for new employment. Generally, a month or two is acceptable; so is keeping within Department of Labor statistics on average length of time to find a position within specified categories.
Taking temporary work in another line of business while continuing a rigorous search in the taxpayer's former line of business will not preclude the job-hunting deduction.
Networking expenses. Ironically, perhaps, expenses incurred in doing what most experts believe is the best way to land another job - networking - are generally not deductible. Establishing friendships and professional contacts for networking purposes for the inevitable time when a job search is resumed in earnest are generally not sufficiently direct to warrant a miscellaneous itemized deduction.
However, attending professional meetings and events during a period of unemployment to generate job leads should qualify, if detailed records of who was contacted, etc., are kept (and the charges are reasonable). "Networking evenings" sponsored for graduate-school alumni should fall into this category. Similar to the rules governing when business meals are deductible, however, any preliminary contact work in which a job search is not mentioned would likely fail IRS scrutiny.
Lifetime learning credit. Brushing up classes to make a taxpayer more marketable, or even to prepare for changing careers, may be covered by the lifetime learning credit. Eligible expenses include expenses for undergraduate or graduate-level and professional degree courses, as well as expenses with respect to any course of instruction at an eligible educational institution to acquire or improve job skills.
As of 2003, the credit is equal to 20 percent of up to $10,000 of the qualified tuition and related expenses. The credit is subject to an AGI phaseout, starting at $41,000 for singles and $82,000 for joint filers in 2003, making the timing for taking such classes during any tax year relevant to some. These classes, however, must be academic in nature, so that payment of courses on resume writing or job hunting cannot be transformed into an expense eligible for a credit, rather than a miscellaneous itemized deduction.
Starting a separate business. Although job-hunting expenses are deductible only if in the same trade or business, starting a new business to replace lost income may in fact yield higher tax deductions. The expenses of starting a business may be deducted on Schedule C, without the limitation of a 2-percent floor. The hobby loss rules and the rule requiring the capitalization of certain startup costs must be navigated, but the reward is an overall above-the-line loss deduction for these expenses.
Home office deduction? An interesting consideration applicable to job hunting arises as the result of the change in the law in 1998 on when a home office deduction is allowed. In reaction to the Supreme Court's Soliman decision, Congress provided that a taxpayer's home office will be considered his principal place of business if it is used by the taxpayer to conduct administrative or management activities of any trade or business of the taxpayer.
The question now arises whether a taxpayer's continuing in the same trade or business in the capacity of job hunting may itself qualify the tax-payer's home office as a principal place of business while job hunting.
No IRS guidance has been issued on the subject, and it likely would reject an interpretation of the rule that would allow such a home-office deduction on the grounds that job hunting, per se, is not a taxpayer's trade or business. Again, being an independent contractor or sole proprietor with a home office avoids the issue entirely, since efforts to find work during any hiatus in business is simply "a part of the business."
Conclusion
Due to a more fluid employment environment, losing a job does not carry the stigma it once did. Many people anticipate having five, six or more jobs over the course of their professional careers. Advance planning is especially important, particularly when individuals have deferred compensation or other arrangements.
Mexican Immigration to the United States.
[AmeriStat. - May 2003]. The United States and Mexico share a border more than 3,000 miles long, and Mexico is the single largest source of both legal and undocumented immigration into the United States. Data from the Census 2000 Supplementary Survey indicate that about 8.8 million people living in the United States in 2000 were born in Mexico. This represents just under 30 percent of the total U.S. foreign-born population. There are three states in which Mexican Americans make up the majority of the foreign-born population: Arizona, New Mexico, and Texas. All three states share a border with Mexico and are therefore easier to reach than destinations farther north or east.
But in absolute numbers, California has the largest Mexican-born population at 3.7 million people. In fact, the Mexican-born population in California accounts for almost half of the entire U.S. Mexican-born population.
The U.S. population born in Mexico is a subset of a larger group of people who identified with the "Mexican American or Chicano" ethnic group in the 2000 Census. In 2000, over 20 million individuals, including many first- and second-generation U.S. residents, identified themselves as Mexican American.
PCAOB Requires Foreign Firms to Register.
[AccountingWEB US - April 2003] - The Public Company Accounting Oversight Board (PCAOB) voted unanimously this week to require foreign accounting firms doing business in the United States to register with the Board by April 26, 2004. The European Commission had hoped for a total exemption from the registration requirements.
U.S. accounting firms that generate audit reports for public companies must register with the Board by October 24 of this year. The PCAOB watchdog panel, created as part of the Sarbanes-Oxley Act of 2002, was launched late last year with a $1.9 million loan from the Treasury Department. The organization plans to repay the loan.
Registering the foreign firms is critical to the Board's mission of rooting out fraud in corporate America. Created by Congress last summer in the wake of corporate and accounting industry scandals, the Board will inspect accounting firms and levy sanctions when appropriate.
Deduction for Nontaxable Alimony.
[Practical Accountant - May 2003]. IRS Chief Counsel Advice Memorandum 20025 1004 concludes that an individual who pays alimony for a former spouse residing abroad can still claim the section 215 deduction even though the spouse is not subject to U.S. tax on alimony due to a foreign treaty.
ESOP tax shelter shut down.
[Practical Accountant - May 2003]. Rev. Rul. 2003-6 indicates that certain arrangements involving employee stock ownership plans (ESOP's) that hold employer securities in an S corporation are being used to claim eligibility for the delayed effective date of Section 409(p). The ruling says that the tax benefits "purportedly" generated by these transactions are not allowable for federal income tax purposes.
An S corporation ESOP described in the ruling is not eligible for the delayed effective date and so is subject to the non-allocation rules of Section 409(p) effective for plan years ending after March 14, 2001. The ruling points out that the Service is developing further guidance to address other abusive arrangements involving S corporation ESOPs.
Pre-Tax Health Insurance "reimbursements/Loans" are taxable.
[The Tax Advisor - May 2003]. In Rev.Rul. 2002-80, the IRS concluded that amounts paid to an employee as "advance reimbursements" or "loans" without regard to whether the employee has already suffered a personal injury or sickness, or incurred medical expenses, are not excludible from the employee's gross income. In the more recent ruling, 2 employers designed their health plans so that a share of the insurance cost is contributed by the employee. Such contributions are pre-tax contributions made through salary reductions and are not subject to FICA and FUTA taxes. The employer applies the salary reduction amounts to the payment of the group health insurance policy during the year. To minimize the additional cost to the employee, the employer pays the employee amounts to equate the employee's after-tax pay with the pay had the additional salary reduction not occurred. These payments are treated as advance reimbursements or loans, depending on situation and are included in in the employee's gross income and are subject to FICA and FUTA taxes.
Tax Trap for Second-Time U.S. Residents.
[The Tax Advisor - February 2003]. Practitioners need to be aware of a special tax trap for foreign individuals who become U.S. tax residents for a second time. These taxpayers include foreign nationals who came to the U.S. to work under an H, L, E or other nonimmigrant work permit. When the economy softened, most of these special visitors left. While here, they typically filed a return as a U.S. tax resident. Many were in the U.S. for at least three years; some were granted permanent residency visas (i.e., "green cards").
Sec. 7701 (b)(10) provides that an alien treated as a U.S. resident for at least three consecutive calendar years (the initial residency period) who ceases to be a U.S. resident, but becomes one again before three years after the end of the initial residency period, is subject to tax under sec. 877(b), for the period after the initial residency period closed, until the day before the second residency began.
Exempt Organizations - IRS targets Excess Benefits Transactions.
[The Tax Advisor - May 2003]. Enactment of Sec.4958 was perhaps the most important change in Federal income tax law for tax-exempt organizations in the past 30 years. It gives the IRS a way to curtail excess-benefit abuses by public charities and social welfare organizations insiders. Excess benefits comprise compensation packages, loans, unreported benefits and transfers of property and other transactions with insiders or related parties. If the Service determines that a not-for-profit organization confers an excess benefit, it can assess and impose the following intermediate sanctions:
- A penalty on the recipient equal to 25% of the excess contribution
- A 200% penalty on the recipient if the taxpayer does not return the amounts deemed excessive
- A 10% penalty on the organization's manager (even a noncompensated board member) who approved the transaction.
S-corporation treatment of employee-shareholder fringe benefits.
[The Tax Advisor - May 2003]. According to Rev. Rul. 91-26, an S corporation treats taxable fringe benefits paid on behalf of its 2% employee shareholders as additional compensation subject to Federal tax withholding (and, generally, subject to employment taxes). However, payments made under a plan providing accident and health coverage (including payments of insurance premiums) and treated as compensation to a 2% employee shareholder are not subject to employment taxes, because such payments are not deemed wages for such purposes; see Secs. 3121(a)(2) and 3306(b)(2) and Ann. 92-16. However, the additional compensation is subject to Federal income tax withholding.
Rev. Rul. 91-26 specifically provides that a 2% employee-shareholder may be eligible for an above-the-line deduction under Sec.162(1) for the accident and health insurance premium the corporation paid. The deduction is 100%(for 2003) of the amount paid for medical insurance for the employee-shareholder and his or her spouse and dependents, and is reported as an adjustment to income. However, the deduction is not available for calendar months in which the shareholder or spouse is eligible to participate in another employer-subsidized health insurance plan, nor can it exceed the taxpayer's earned income (as defined in Sec. 401©(2). S shareholders can treat their Social Security wages from the S corporation as earned income for purposes of this limit.
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