IRS issues final information reporting rules for credit card transactions

The IRS issued final regulations for information reporting for credit card transactions. The rules apply to other payment cards, such as debit cards and gift cards (referred to as stored-value cards). A 2008 law requires credit card companies and electronic payment processors to file reports for their total annual payments, from all transactions, made to individual merchants, if the merchant receives more than $20,000 and conducts more than 200 transactions each year. The law applies beginning in 2011.

The regulations describe when reporting is required for prepaid telephone cards, transit cards, mall cards, and other types of cards. The law does not apply to cash advances or to convenience checks issued to cardholders. The application of the reporting rules to electronic checks, bill paying services and other electronic products depends on the facts and circumstances. The IRS did not exempt private label cards.

The company or processor must report the gross amount of payments. This is the total dollar amount of reportable transactions without adjustments for credits, discounts, refunds or any other amounts. A payment made in foreign currency must be converted into U.S. dollars on the date of the transaction at the “spot” rate.

The required information must be reported on Form 1099-K, Merchant Card and Third-Party Payments. The first forms must be filed with the IRS and furnished to merchants in early 2012. The IRS has posted a draft of the form on its website.

The regulations also provide relief from duplicate reporting, expand penalty provisions for reporting failures, and apply the backup withholding rules to reportable amounts.

IRS announces new whistleblower guidelines

In 2006, Congress overhauled the rules that reward individuals who give the IRS information about tax evasion. The IRS recently posted guidelines for the investigation and processing of “whistleblower claims” on its web site. The guidelines explain when the IRS will pay or deny a whistleblower’s claim and reiterate that the whistleblower process is confidential.

Financial awards

There are two types of awards for whistleblowers. If the tax evasion exceeds $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the tax evasion is by an individual, his or her annual gross income must be more than $200,000. The IRS also has an award program for other whistleblowers - generally those who do not meet the dollar thresholds of $2 million in dispute or cases involving individual taxpayers with gross income of less than $200,000. The awards made through this program are less, with a maximum award of 15 percent up to $10 million. In addition, the awards are discretionary on the part of the IRS. These awards are also handled by the IRS Whistleblower Office.

The IRS explained that it takes all relevant factors, including the value of the information furnished in relation to the facts developed by the investigation of the violation, into account in determining if an award will be paid, and if so, the amount of the award. The guidance describes various scenarios when a whistleblower may receive an award.

Example. Alex identifies specific facts relating to an issue with respect to a taxpayer as well as a specific Tax Code section or specific legal theory associated with those facts. However, the IRS ultimately collects proceeds based on a different Tax Code section or different legal theory. Nevertheless, Alex will be entitled to an award based on the entirety of those collected proceeds.

Denials

The IRS will deny a whistleblower claim if the information does not result in the detection of an underpayment of taxes or the collection of proceeds. Claims are paid from collected proceeds. The IRS explained that this generally means that a payment will not be made until there is a final determination of tax liability (including taxes, penalties, interest, additions to tax, and additional amounts) owed to the IRS and these amounts have been collected by the IRS.

Confidentiality

The IRS has promised to protect the confidentiality of all whistleblowers. In some cases, however, the IRS explained that it may not be possible to pursue the investigation or examination without revealing the whistleblower’s identity. The IRS will inform the whistleblower before deciding whether to proceed in such cases.

FAQ: Can I deduct the costs incurred doing charitable work?

IRS updates FAQs on HIRE Act; provides details affidavit requirement and issues revised Form 941

The IRS has been busy issuing guidance on the provisions of the Hiring Incentives to Restore Employment (HIRE) Act, which temporarily suspends an employer’s 6.2 percent OASDI tax paid for covered employees, and also provides a new worker tax credit. The IRS has not only recently updated its online frequently asked questions (FAQs) on claiming the payroll tax forgiveness credit, the agency also issued a revised Form 941, Employer’s Quarterly Federal Tax Return, and instructions for claiming the this payroll tax exemption, applicable to qualified new hires in 2010. Further, the IRS’s updated FAQs provide more explanations of covered employees and the affidavit requirement.

Covered employees

In general, employers cannot hire a covered employee to replace another employee. The IRS’s revised instructions for Forms W-2, Wage and Tax Statement, and W-#, Transmittal of Wage and Tax Statements, provides an exception to this rule for covered employees hired to replace employees who voluntarily separated from employment or for cause (including downsizing).

Affidavit requirements

Covered employees must certify that they have been unemployed for the 60-day period immediately before beginning work or, alternatively, that they worked fewer than 40 hours for another employer during the 60-day period. The IRS issued Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, in April. Thus, employees must attest to two basic statements on the Form W-11.

The IRS’s updated FAQs explain that employers must sign the affidavit before filing an employment tax return applying payroll tax forgiveness. If an employer obtains the signed affidavit from a qualified employee after paying wages to the employee, the employer can still apply the payroll tax exemption to determine its liability on these wages. Some cases, however, may require filing a corrected return for a prior quarter.

Updated Form 941

In late May, the IRS also posted a new version of Form 941, Employers Quarterly Federal Tax Return, and instructions, for claiming the payroll tax exemption. On the newly revised Form 941, employers will claim the exemption related to wages paid after March 31 on lines 6a through 6e. Employers will claim the exemption related to wages paid between March 19 and March 31 on lines 12C through 12e.

These lines ask the employer to report the number of qualified employees first paid exempt wages or tips during the quarter, the number of qualified employees who were paid exempt wages or tips during the quarter, and the amounts of wages and tips paid to qualified employees (which are multiplied by 0.062). The amounts are then subtracted from total Social Security and Medicare tax reported on line 5d.

The instructions also provide that employers cannot claim payroll tax forgiveness and the Work Opportunity Tax Credit (WOTC) for the same employee; employers must choose.

Audits of wealthy individuals trending upward, IRS Oversight Board reports

The IRS Oversight Board recently released its 2009 annual report to Congress. The report evaluates the IRS’s performance during the 2009 fiscal year (FY), enumerates strategic challenges affecting tax administration, and provides measures the agency’s performance during FY 2009. According to the Oversight Board’s report, audits of individuals with incomes above $1 million grew 29 percent in FY 2009 compared to FY 2008. However, the number of audits of wealthy individuals represented only 2.58 percent of all individual audits in FY 2009.

Audits

Individuals. In FY 2009, the IRS undertook 28,349 audits of individuals with incomes in excess of $1 million, according to the Oversight Board. In FY 2008, the number of audits of individuals with incomes above $1 million was 21,874. The difference between FY 2008 and FY 2009 represented a 29 percent increase, the Oversight Board reported.

In total, the IRS conducted 1,099,630 audits of individuals in FY 2009. The FY 2009 number of all individual audits was down slightly (-34,307) from FY 2008.

Corporations. Audits of corporations with assets of more than $10 million also grew in FY 2009 compared to FY 2008, but at a slower rate than audits of individuals. The IRS undertook 9,406 audits of corporations with assets in excess of $10 million in FY 2009. That number rose to 9,536 audits of corporations with assets above $10 million in FY 2009. The growth rate in audits of corporations with assets of $10 million or more from FY 2008 and FY 2009 was 1.4 percent.

Tax administration

The Oversight Board warned that U.S. tax administration has two systemic weaknesses: the tax gap and archaic information technology. The tax gap, which is the difference between what taxpayers owe and what they actually pay, is estimated to be approximately $290 billion. The Board cautioned that this to be “unacceptably high.”

The Oversight Board also warned that the IRS relies on outdated technology. The agency uses obsolete automated systems for key operational and financial management functions, the Oversight Board reported. According to the Oversight Board, the IRS has made little progress in correcting these two weaknesses.

However, the Oversight Board found some changes. The IRS launched a return preparer oversight initiative earlier this year, which the Board predicted would increase compliance with the tax laws. The agency also has restructured its Customer Account Data Engine (CADE).

Customer service

The Oversight Board also added its voice to the recent chorus of criticism about poor customer service at the IRS. “For the past two years, the IRS toll-free telephone service has been characterized by constant resources and growing demand; the inevitable result of these two factors has been a decline in service levels,” the Oversight Board noted.

June 2010 tax compliance calendar

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of June 2010.

June 3

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 26-28.

June 4

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 29-June 1.

June 9

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 2-4.

June 10

Employees who work for tips. Employees who received $20 or more in tips during May must report them to their employer using Form 4070.

June 11

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 5-8.

June 15

Monthly depositors. Monthly depositors must deposit employment taxes for payments in May.

June 16

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 9-11.

June 18

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 12-15.

June 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 16-18.

June 25

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 19-22.

June 30

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates June 23-25.

IRS allows exclusion for wrongful death payment, which included payment for emotional distress

The IRS recently determined, in a private letter ruling, that a survivor could exclude from income a payment received for the wrongful death of another. The payment was intended to provide compensation for wrongful death and personal injury, including a resulting claim for emotional distress.

Background

An individual was killed in an accident. The individual’s survivor successfully brought claims for wrongful death and intentional infliction of emotional distress. The survivor was awarded compensatory damages, prejudgment interest and punitive damages.

Subsequently, a government entity passed a law to provide compensation to the survivors of all the individuals who were killed in the accident. The law was intended to provide compensation for wrongful death and physical injury, including claims for emotional distress. The law voided all prior court judgments. The original payor of the damages transferred an amount to the government entity, which, in turn, would pay the survivors and all other claimants.

The survivor took a payment from the government entity. The survivor asked the IRS if the payment would be excluded from gross income under Code Sec. 104.

Exclusion

Generally, compensatory damages received by a taxpayer on account of personal physical injury or physical sickness are excluded from gross income while damages on account of emotional distress are not. Congress amended the Code Sec. 104 exclusion in the Small Business Job Protection Act of 1996. Among other things, the 1996 Small Business Act provides that the income exclusion is generally limited to amounts received on account of personal physical injuries or physical sickness. The 1996 Small Business Act further provides that even though emotional distress is not considered a physical injury or a physical sickness, damages not in excess of the amount paid for medical care for emotional distress are excluded from income.

Proposed regs

The IRS has issued proposed regs relating to the exclusion from gross income for amounts received on account of personal physical injuries or physical sickness. The proposed regs also provide that a taxpayer may exclude damages received for emotional distress attributable to a physical injury or physical sickness. Additionally, the proposed regs eliminate the requirement that injuries or sickness be based on tort or tort-type rights.

IRS analysis

The IRS determined that the survivor’s recovery, awarded by the government entity, would be for the wrongful death of the decedent. The wrongful death recovery would be received on account of a personal injury under Code Sec. 104(a)(2). Therefore, the recovery payment would be excluded from the taxpayer’s gross income.

IRS issues forms, instructions for HIRE Act employer tax incentives

Wasting little time in helping important business hiring, the IRS has released forms and instructions for the employer tax breaks in the Hiring Incentives to Restore Employment (HIRE) Act. The IRS unveiled new Form W-11, Employee Affidavit, which covered employees can use to certify that they meet the criteria of the HIRE Act. It also revised Form 941, Employer’s Quarterly Federal Tax Return, and Forms W-2, Wage and Tax Statement, and W-3, Transmittal of Wage and Tax Statements, to reflect the HIRE Act.

Temporary incentive

Under the HIRE Act, qualified employers can enjoy a payroll tax holiday from their share of OASDI tax paid for covered employees. The “holiday” applies to all covered employees for wages after March 18, 2010 and before January 1, 2011. Additionally, the new employee can begin employment anytime after February 3, 2010, although only 2010 wages paid after March 18 count for the holiday.

The HIRE Act also allows qualified employers to claim a worker retention credit. For each covered employee, the employer’s general business credit is increased by the lesser of $1,000 or 6.2 percent of the retained worker’s wages during a 52-week consecutive period. That 52-week period can start anytime after February 3, 2010 and through December 31, 2010.

Form W-11

The HIRE Act requires employers to obtain a statement from each eligible new hire certifying that he or she has been unemployed or underemployed. Employers can use new Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit.

Form W-11 asks the covered employee to certify that he or she has been unemployed or has not worked for anyone for more than 40 hours during the 60-day period ending on the date that the individual began employment with the employer. The covered employee must sign the form under penalties of perjury. Form W-11 does not have to be filed with the IRS but the employer must make the form available to the IRS if requested.

Form 941

The IRS has also revised Form 941, Employer’s Quarterly Federal Tax Return, for the HIRE Act. The payroll tax exemption is claimed on Form 941 beginning with the second quarter of 2010. For wages paid to covered employees during the period of March 19 through March 31, 2010, the payroll tax exemption is claimed on the employer’s Form 941 for the second quarter of 2010.

Forms W-2, W-3

Employers that hire a covered employee under the HIRE Act must report the amount of Social Security wages and tips paid after March 18, 2010 for which the employer claimed a payroll tax exemption. Employers will report these amounts in Box 12 on Form W-2 using new code CC. The amount may not exceed $106,800 (the maximum Social Security wage base for 2010). The total of code CC is reported in new Box 12b on Form W-3.

www.irs.gov

Tax Court takes broad view of personal service business

A recent decision by the U.S. Tax Court shed more light on how the court views a qualified personal service corporation. The court found that land surveying should be included in the field of engineering for purposes of the flat 35 percent income tax rate imposed on personal service corporations. The decision follows one in 2007 where the same court declined to limit services performed in the field of accounting to those requiring state licensure. The court considered that the field of accounting historically included tax return preparation and bookkeeping services.

Personal service corporation

Under Code Sec. 448 and its regulations, a qualified personal service corporation (PSC) is a corporation that satisfies a function test and an ownership test. The function test requires that substantially all of the corporation’s activities involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting. PSC status requires PSC income to be taxed at the highest 35 percent corporate tax rate, without the benefit of the lower marginal corporate tax brackets.

Land surveying

The taxpayer in this case did business as a land surveyor. It did not provide any services that state law required to be performed only by a licensed engineer.

In the Tax Court, the taxpayer argued that its land surveying activities were outside the field of engineering because engineering and land surveying were separately licensed and administered under state law. The two activities were governed by separate statutes and boards. Additionally, surveyors and engineers had to successfully complete different examinations.

Common definition

The court found that whether a service is performed in one of the fields under Code Sec. 448 is to be decided by all relevant indicia. These include the text of the statute, its legislative history and regulations, application of the normal meaning of the terms, and examination of services historically regarded as within the qualifying field.

The court found that the common definition of engineering is the science by which the properties of matter and the sources of energy in nature are made useful to man in structures, machines and products. Civil engineering is a branch of engineering concerned primarily with public works (as land surveying, the building of highways, bridges, waterways, or harbors) but also embracing private enterprises (as railroad and airport building, private building construction, and farm drainage). Under this definition, land surveying is within the ordinary meaning of engineering, the court found.

The court further found that Congress intended surveying and mapping to be treated as services performed in the field of engineering for purposes of the function test. The conference agreement to the final bill explained that the function test is met if substantially all the activities of the corporation are the performance of services in the field of health, law, engineering (including surveying and mapping), architecture, accounting, actuarial science, performing arts, or consulting.

Kraatz & Craig Surveying Inc., 134 TC No. 8

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