Enforcement. That was the word from John Tuzynski, the IRS’ chief of employment tax policy, when he spoke at the American Payroll Association’s mid-year Capital summit, held in Washington, D.C., March 10-14.
Mind your p’s and q’s
More than 1,000 employers have now taken up the IRS on its offer of the opportunity to change their workers’ status from independent contractor to employee under the Voluntary Classification Settlement Program (VCSP). Tuzynski underscored a recent change to VCSP, which allows employers undergoing audits for anything other than payroll taxes to participate. His suggestion: Since any audit can morph into a payroll audit, employers should be proactive and sign up for VCSP if the IRS begins an income tax audit.
Another continuing enforcement initiative focuses on whether S corp shareholders are paid reasonable salaries. Last year, the IRS won big in Watson v. U.S., when a federal appeals court ruled that it was unreasonable for an S corp shareholder to be paid $24,000 in FICA-taxable salary, but hundreds of thousands of dollars in FICA-free dividends. (See “Court shoots down S corp’s low salary/high dividend ploy.”) Tuzynski noted that the IRS performs thousands of S corp audits a year specifically on this issue. He also warned attendees that the IRS has always had the power to recharacterize dividends as FICA-taxable salary.
Tools in trade
Abuse of tool reimbursement plans under the accountable plan rules keeps popping up. Tuzynski said that although the IRS encounters the issue on an ongoing basis, it doesn’t have any immediate plans to issue more guidance.
Problem: Employers are sold plans that illegally recharacterize wages as tool reimbursements. These plans can take several forms, including rental agreements for tools employees already own or tool allowance plans that reimburse employees by the hour for use of their tools, but don’t require employees to substantiate their expenses or require them to return excess reimbursements.