Achieving the Goal of Compliance with the Government Tax Laws How - - PowerPoint PPT Presentation

Achieving the Goal of Compliance with the Government Tax Laws

How to Achieve the Goal

Athlete Finance Officer Program: Schedule Identify and Practice Prioritize Issues Diet / Sleep Plan: Win Local Establish an Win Regional “Action Plan” Win National Goal: Win Olympics! Tax Compliance!

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Key Topics

• Correction of Errors
• IRS Audits
• Government Autos/Vehicles
• ACA / Opt-Out Arrangements
• Flexible Spending Account Issues
• 457(b) Deferred Comp Plans
• Accrued Leave Programs
• Proposed Tax Law Changes

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Components of the Tax Law

• Internal Revenue Code (Law of the Land)
• IRS Interpretations - Regulations, Revenue

Rulings & Private Letter Rulings (PLRs)

• Court Cases – Court Can Rule in Favor of

IRS or the Taxpayer

• IRC Sec. 61 - All Income Taxable, Except…
• Statutory Exclusions
• Doctrine of “Constructive Receipt”
• “Economic Substance” Doctrine

Correction of Errors (Page 7)

• Form 941-X
• Statute of Limitations
• Correcting Overpayments
• Employee Consents for Refunds
• Misclassified Workers
• Overpaid Wages
• Should the Agency Correct Errors

Going Forward?

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IRS Employment Tax Audits

(PAGE 11)

How Are Agencies Selected for Audit?

• Media Attention
• Special IRS Compliance Projects
• Target List
• Random Selection
• Whistleblowers

Key Issues (Page 13)

• Form 1099 Compliance
• Form W-9
• TIN Matching Program
• Employee v. Independent Contractor
• Contract City Attorneys
• Exempt Form W-4
• Information Document Requests (IDRs)

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How to Handle Audit (Page 14)

• Establish Trust; Fully Cooperate
• Respond Quickly to Document

Requests

• IRS Agents Have “Subpoena Powers”
• Answer Questions Openly and Honestly
• However, Do Not Volunteer Information

About Plans Not Under Examination

• Accept Assessment If IRS Is Right.

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Challenging the IRS (Page 14)

• Dispute Proposed Assessments

Where the Agency Has a Sound Tax Position

• Should the Statute of Limitations

Be Extended?

• Fast Track Settlement Program
• IRS Office of Appeals
• Tax Court

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Form 1099 Reporting (Page 234)

• Form 1099-MISC
• Form 1099-C (Cancellation of Debt)
• Form 1099-G (Taxable Grants)
• Form 1099-INT (Interest Payments)
• Form 1099-K (Payment Card Transactions)
• Form 1099-S (Real Estate Transactions)
• Form W-9 (Back-Up Withholding /

TIN Matching Program)

• Reporting Lawsuits, Judgments &

Settlements.

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Employee vs. Independent Contractor (Page 22)

• Facts and Circumstances
• Three-Part, Common Law Test
• Right to Control and Direct

Work of the Individual (the Method, Manner and Means)

Checklist (Page 24)

Is Worker an Independent Contractor?

• Written Agreement?
• Separate Identifiable Business?
• Is Worker Part-Time?

Is Worker an Employee?

• Employment Agreement?
• Under Direct Supervision and Control?
• Is Worker Full Time?

Contract City Attorneys (Page 35 )

• Independent Contractor or Employee?
• “Public Official” Under State Laws
• Not an “Appointed Public Official”

Under Federal Income Tax Law

• What Is Section 530 Relief?
• Contractual Arrangements with City

Attorneys.

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Expense Reimbursement Plans (Page 43)

• Accountable Plans
• Substantiation
• Documentation
• Return of Excess Advances

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Expense Reimbursement Plans (Pages 45-47)

• General Per Diem Rates for

2017-2018

• Rates for Meals and Incidental

Expenses (M&IE)

• Rates for “High-Low” Method
• “Reasonable Hours” Standard

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Automobile Fringe Benefits

(Page 50)

• Personal vs. Business Travel
• Annual Lease Value
• $1.50 Per Commute
• Cents Per Mile
• Substantiation/ Documentation

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“Personal Use” (Page 54)

“Commuting” – Travel From a Residence to One or More Regular Work Locations is Personal Use. “Business Travel”:

• Travel Between Two Places of Business
• If Travel Has a “Business Purpose”, It Is

Business Travel. Travel from a Residence to a “Temporary Work Location” (and Back) Is Not Taxable, Regardless

• f the Distance Traveled.

New Development (Page 55)

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$3.00 Per Day (Page 58)

Control Employees (2017 Wages Equal

• r Exceed $151,700) Are Not Eligible

Gross Wages, Form W-2, Box 1 Plus: “Employee Elective Deferrals”

• Cafeteria Plan Contributions
• Transportation Fringe Benefits
• 457 Plan Contributions
• 403(b) Annuity Contributions

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Cents Per Mile Method

(Page 60)

• Cents Per Mile Method May Be Used If

Vehicle Value Is $15,900 or Less If Placed Into Use in 2017

• Pickup Truck or Van Value Must Be

$17,700 or Less If Placed Into Use in 2017

• Definition of a “Truck or Van”

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Special Exemptions

(Pages 62-67)

• What Is the “Physical Design” of the

Vehicle? What Does It Look Like?

• “Clearly-Marked” Police, Fire and

Public Safety Officer Vehicles

• Unmarked Fire Vehicles
• Special Rules for Pick-up Trucks
• Special Circumstances for “Utility

Workers”

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Workers’ Compensation(Page 75)

• California Workers’ Compensation Act
• “A Statute in the Nature of Workers’

Compensation Act” Can Be Created

• Cannot Exclude Payments Based On:
• Age
• Length of Service
• Prior Contributions
• 2017 Tax Court

Case (Page 76)

Affordable Care Act (Page 83)

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“Play or Pay” Mandate

(Page 87)

• Effective Date : January 1, 2016
• Large Employers (50 or More FTEs) Must Offer Their Full-Time

Employees and Dependents a Health Plan with “Minimum Essential Coverage” (MEC) that Is “Affordable” and Has “Minimum Value” (“Play”). Otherwise, the Employer Is Subject to a Monthly Assessment (“Pay”).

• An FTE’s Required Contribution to the Health Plan Is Considered

“Affordable” if the Contribution Does Not Exceed 9.69% (for 2017)

• f Household Income.
• An Employee’s Health Coverage Has “Minimum Value” if the

Employer Pays 60% or More of the Cost of Covered Claims, and the Plan Provides Substantial Coverage for Inpatient Hospital and Physician Services.

ALE Status of Related Entities (Page 91)

• Primary Government Entities May Have

Formed Related Entities or Control Related Entities.

• All Related Entities Need to Be

Combined for Purposes of Determining the “Over 50” ALE Status.

• Each Entity that Has a Separate EIN

Would Generally Need to File Form 1095-C for their Full-Time Employees.

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“Household Income” (Page 93)

A Full-Time Employee’s Required Contribution to a Health Plan is Considered “Affordable” If it Does Not Exceed 9.69% (for 2017) of Household Income. The IRS Has Established Three “Safe Harbor” Methods for Determining Household Income:

• Form W-2 Wages Method
• “Rate of Pay” Method
• “Federal Poverty Level” Method

Cash-Out Arrangements

• Where “Employer Flex Credits” Are

Available to Employees for Health Benefits, But Benefits Are Not Conditioned on a Waiver of Coverage (Page 94)

• Where Employers Offer Additional

Compensation In Exchange for Employees Declining Health Coverage (Cash-In-Lieu Benefits)(Pages 95-97)

• Flores v. City of San Gabriel Case

(Page 97)

Forms 1094-C (Page 99)

Form 1094-C (Transmittal Form for Forms 1095-C)

• Qualifying Offer Method

Simplified Reporting Allowed

• 98% Offer Method

Simplified Reporting Allowed

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Forms 1095-C (Pages 100-103)

• Line 14 - Offers of Coverage -

Code Series 1

• Conditional Offers of Spousal Coverage
• Line 15 - Employee’s Required

Contribution

• Line 16 – Code Series 2
• Post-Employment or COBRA Coverage
• Special Issues for Elected Officials

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Health Reimbursement Plans (Page 105)

Group Health Plans

• Cannot Place Annual Limits on Essential

Health Benefits, and

• Must Provide Free Preventive Care

Medical Care Reimbursement Plans that:

• Have Annual Limits or Do Not Provide

Free Preventive Care, and Are Not Integrated with the Group Health Plan Are Subject to Excise Taxes.

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Health Reimbursement Plans (Page 105)

• ACA Market Reforms Do Not Apply to

Retiree Only Plans that Had Fewer Than Two Current Employees On First Day of Plan Year.

• 2017 Development:

Small Employers May Set Up HRA that Is Not Subject to ACA Penalties

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Health Reimbursement Plans (Page 107)

To Prevent ACA Penalties:

• Convert Medical Care Reimbursement

Arrangements to ACA-Compliant Plans

• Eliminate the Non-Compliant Plan(s)

and Increase the Taxable Salaries of Employees to Purchase Individual Insurance Policies.

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ACCIDENT AND HEALTH PLANS

(PAGE 109)

• Employer-Provided Coverage Is

Nontaxable

• Medical “Reimbursements”

Nontaxable under Qualified Plan

• Cash Rewards to Encourage

Participation in “Wellness Programs”

• Any Taxable Benefits for Retired or

Former Employees Are Generally Reported on Form W-2, Not Form 1099-MISC. (Page 110)

• Fixed-Indemnity Health Plans

(Page 111)

Employee Contributions (Page 114)

• Mandatory Contributions Are Pre-Tax
• Voluntary Contributions Are After-Tax,

Unless the Premiums are Paid through a Section 125 Cafeteria Plan.

• Example: Voluntary Deductions for a

Specific Disease, such as Cancer Coverage, Are After-Tax (Unless Offered Through a Cafeteria Plan).

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HEALTH SAVINGS ACCOUNTS (HSAs)

(PAGE 115)

• Can Be Established By All Americans

Under 65

• Used For “High-Deductible Health Plans”
• Can be Added to a Cafeteria Plan
• California Does Not Conform
• Expanded Use of HRAs Proposed Under

Health Care Reform Bills

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Other Health Care Arrangements (Pages 118 and 119)

Exchange of Future Retiree Health Benefits for Higher Compensation (Page 118) Reimbursements of Health Insurance Premiums of Retired Employees, Generally Not Taxable If Employees:

• Provide Support for Insurance Premiums, and
• Do Not Have Option to Receive Cash In Lieu of

Premium Reimbursement (Page 119).

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Same-Sex Marriage Rules

(Pages 120 and 121)

• 2013 U.S. Supreme Court Decisions in

“Windsor” and “Hollingsworth” (Prop 8)

• 2015 U.S. Supreme Court Decision in

Obergfell v. Hodges

• All Same-Sex Marriages Recognized for

Federal Tax Purposes (But Not Registered Domestic Partners)

• Health Plan Contributions for Same-Sex

Spouses Receive Favorable Tax Treatment

• Special California Rules.

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Cafeteria Plans

(Page 127)

• Choose Between Cash (or Other

Taxable Benefit) and “Qualified Nontaxable Benefits”

• Cash Option Does Not Trigger

Constructive Receipt

Special Rules

Health FSAs Limits (Page 139):

• $2,600 for 2017
• $2,650 for 2018

Health FSA Arrangements with Employer Flex Credits Could Be Subject to ACA Penalties (Pages 140 and 141)

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Educational Assistance Programs

(Page 145)

• Section 127 “Educational

Assistance Programs”

• “Job-Related” Education

Reimbursements.

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Masters Programs

(Pages 149 and 150)

Many Favorable Tax Court Cases

MBA Course Reimbursements Are Generally Excludable From Income, If:

• Employee Stays In the Same Job

While Completing the MBA,

• MBA Is Taken Merely to “Maintain

and Improve” Employee’s Job Skills

• And Is Not Intended to Qualify the

Employee for a New, Unrelated Position

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Quick Reference Table

(Page 152)

127 Plans Job-Related Reimbursements Formal Written Plan Needed Yes No Employee Notification Required Yes No Dollar Limit on Reimbursements $5,250 None Nondiscrimination Rules Must Be Met Yes No Education Must Be “Job-Related” No Yes Covers Transportation Expenses No Yes

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Prizes and Awards (Page 153)

• General Rules
• Provided by 3rd Party
• Prizes Funded by

Employee Group

• Employee

Achievement Awards

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Working Condition Fringe Benefits (Page 156)

• Concept-Employee Is In a

“Trade or Business”

• Substantiation Requirements
• Nontaxable to Employees

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Employee Meals

(Pages 157 to 164)

• Travel “Away from Home”
• Bona Fide, Business-Related Entertainment
• Local Conferences, Conventions and Meetings
• One-Day Training Courses
• Meals On Business Premises
• Occasional Meals for Overtime Work
• Meals at Government Events or Parties
• Meals for Law Enforcement Officers and Firefighters

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Lodging Expenses

(Page 165)

Employer-Provided Lodging

• Employee Must Be Required to Accept

Lodging as a Condition of Employment

• Lodging Must Be “On the Business

Premises of the Employer”.

• 24-Hour On-Call Requirement
• “Alternative Housing” Cannot Be

Available to the Employee

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Cell Phones and Tablets

(Pages 169 and 170)

• Agency Should Have Written Policy

Requiring Employees to Have Cell Phones for Business Use.

• Cash Allowances, Stipends or

Reimbursements Should Not Exceed Cell Phone or Tablet Cost, Including Amortization of Purchase Cost / Equipment Charge.

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De Minimis Fringe Benefits (Page 174)

• Small Dollar Amount
• Occasional, Not Regular
• Bookkeeping:

– Unreasonable? – Administratively Impractical?

• Gift Cards/Gift

Certificates/Gift Coupons

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Transportation Fringe Benefits (Page 173)

• Value of Commuter Highway

Vehicles & Transit Passes: 2017- $255 2018 - $260

• Value of Parking - $255/$260
• New Development: Parking
• Carpools and Van Pools
• Smartcard Rules

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457 Deferred Comp Plans

• Contribution Limit (Page 183)

2017 - $18,000 2018 - $18,500

• Special Catch-Up Rules

(Pages 184 to 186)

• Ineligible Plans (Page 188)

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Accrued Leave Programs (Page 197)

• Generally Taxable

When Paid

• Employee Elections to

“Cash Out” Accrued Leave Time (Pages 200 to 203)

Leave Sharing Programs (Pages 205 and 206)

• Medical Emergency Leave Sharing Plan
• Presidentially- Declared Major Disaster

Leave- Sharing Plan

• General Leave Sharing Plans

(No Tax-Favored Treatment)

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Pension Contributions

(Page 208)

• Employer Contributions - Not Taxable
• Employer’s “Pick-up” of Employee

Contributions – Not Subject To Income Tax Withholding, With Valid Section 414(h)(2) Election.

• Contributions “Designated as Employee

Contributions” but “Pick-Up” by the Employer May Be Paid by Either the Employer or Employee.

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Employee Payment of “Employer” Pension Contributions (Page 210)

Assumes CalPERS Classic Safety Employee

• 2016 Contributions, As Required Under

Existing Contract with CalPERS: – Employer Contribution 22% – Employee Contribution 8% (EPMC) – Total Pension % 30%

• In 2017, Employee Agrees to Pay 8%

Employee Contribution, plus 2% of the “Employer” Contribution (Total of 10%)

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How Do You Make the 2% Pre-Tax? (Page 211)

• Adopt (or Update) MOU, Requiring Employees

to Pay the 8 % and 2%.

• Amend Section 414(h)(2) Resolution or

Ordinance, Designating the 2% as an “Employee Contribution”, and that it Will Be “Picked-Up” by the Employer (for Payroll Tax Purposes).

• Deduct the 8% and 2% from the Employee’s

Paycheck.

Pay Raises that Offset Pension Salary Deductions (Page 216)

• How Will the IRS View the “Economic

Substance” of this Arrangement?

• Should the Pay Raise and Payroll

Deduction Be Viewed as Two Separate Transactions?

• Conservative Approach: Employee

Pension Deduction Should Be Subject to Social Security (If Any) and Medicare Taxes.

Pension Rate Stabilization Program (Page 216)

2015 PLR Approved Tax Treatment of New Rate Stabilization Program Features of Program:

• Used to Pre-Fund Pension Costs
• Local Agency Retains Control of Trust

Assets and Investment Decisions

• Trust Assets = “Rainy Day” Fund
• OBEB Debts Can Be Pre-Funded.

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Reporting of Compensation

Supplemental Wage Payments (Page 219) Form W-2 (Page 221)

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Form W-4 Reporting

(PAGE 231)

• Not Required to “Police” Form W-4s
• IRS Monitors Exemptions through the

Use of “Lock-In” Letters

• Can Reject “Invalid W-4s”
• Special Problem with “Exempt”

Elections

• Different California Rules (Page 232)
• Possible Policy to Curb Excessive

Form W-4 Submittals (Page 233)

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Social Security and Medicare (Page 246)

• Section 218 Agreements
• Employees Hired On or

After April 1, 1986 (Subject to Medicare)

• Employees Not Covered

By a “Public Retirement System”

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FICA (Page 248)

• Social Security Wage Base - $127,200 for 2017,

Increasing to $128,700 in 2018.

• Employee Wages in Excess of $200,000 Are

Subject to an Additional .9%. Employers Are Not Required to Match. Applies Regardless of Employee’s Filing Status, Income of Spouse or Income from Other Employer(s).

• Medicare Wages Include Noncash Compensation.
• Special Rules for Former Employees Who Receive

Group-Term Life Insurance in Excess of $50,000.

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Action Items?

• Does City Use a Contract City Attorney?
• Get Legal Opinion that Independent

Contractor Is Long-Standing Practice

• Pass Resolution that City Is Relying

On Section 530 Relief

• Does Your Agency Need to Adopt a

“Reasonable Hours” Standard for Reimbursing Lodging and Per Diem?

• Is Your Agency Properly Taxing the Use
• f Vehicles and Pick-Up Trucks that Are

Not “Clearly Marked” and/or Not Properly Equipped?

Action Items?

• Does the Agency Offer “Employer Flex

Credits” that May Reduce the 2017 “Employee Required Contribution”?

• Does the Agency Wish to Adopt an

“Eligible Opt-Out Arrangement”?

• Does the Agency Need to Eliminate or

Alter Medical Care Reimbursement Arrangements (HRAs) that May Cause ACA Penalties?

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Action Items?

• Does the Agency Need to Amend its

Cafeteria Plan Agreement so that Total Employee Benefits Do Not Exceed ACA-Allowed Limits?

• Do Agreements with Firefighters and

Other Employees Using “Employer- Provided Housing” Meet the IRS Requirements?

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Action Items?

• Is My Agency Properly Computing the

457 Catch-Up Calculations?

• Do Employee Leave Sharing Programs

Need to Be Implemented or Updated?

• If Classic Employees Have Negotiated

to Pay a Portion of the Employer’s Pension Contribution, Has the Section 414(h)(2) Resolution Been Updated?

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Action Items?

• Has My Agency Considered Revising

Its Transmittal Letter to New (and Existing) Vendors, Requiring that Lines 1 and 2 of Form W-9 Include the Exact Name(s) that the Vendor Uses In Filing Its Federal Income Tax Returns?

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