Quality Stores. The IRS will appeal the 6th Circuit’s decision in U.S. v. Quality Stores to the U.S. Supreme Court. Bartels said the IRS just needs a little more time to file the necessary papers with the Court. Recap: The 6th Circuit ruled that a bankrupt employer’s severance pay plan qualified as FICA-free supplemental unemployment benefits (SUB pay), even though the plan didn’t meet the IRS’ criteria for SUB pay, as outlined in IRS Pub. 15-A.
Meanwhile, the IRS is holding all of employers’ protective FICA refund claims until the issue is settled, Bartels added.
Additional Medicare tax. In IRS speak, the 0.9% additional Medicare tax is known as the AdMT. Bartels reviewed the basics of this tax. It’s employee-only and applies to wages starting at $200,000. Married couples filing jointly may owe the AdMT, even if their individual wages don’t exceed $200,000. Employees can’t specifically direct their employers to withhold the AdMT, but they may refile their W-4s to request additional withholding or claim fewer allowances.
Employers report the AdMT on new Line 5d on Form 941, and in Box 6 of the W-2. Employees will reconcile their liability for the AdMT on their 1040s. To help them along, Bartels said the IRS is in the process of creating new Form 8959. The form is still in the draft phase.
Modernized electronic filing. Corporate income tax filers are already familiar with the IRS’ modernized electronic filing platform, or MeF for short. According to Bartels, the IRS is planning to roll out MeF for payroll returns beginning in 2014, including 941 forms filed for the fourth quarter of 2013. MeF allows for year-round filing, reduces correspondence from the IRS and allows the IRS to acknowledge the filing of returns in real time, she added.
Compliance initiatives. Finally, Bartels gave the audience an overview of some of the IRS’ ongoing compliance initiatives.
• 1120S officer compensation. By law, shareholder/officers of S corporations who perform substantial services for their S corp are employees. Since these individuals are the moneymakers, this is likely the case, Bartels pointed out. That means they must receive reasonable FICA-taxable compensation.
She also emphasized that the IRS specifically selects 1120S returns for audit if those returns show large amounts of distributable income and no or low FICA-taxable compensation. Another clue to FICA evasion: S corp loans to shareholders, who use those loans for daily expenses.
• 1099 compliance. The IRS uses matching programs to identify 1099s and 1040s that have name/Social Security number (SSN) mismatches. The key, Bartels noted, is to secure independent contractors’ SSNs from the start by having them complete Form W-9. If their SSNs are obviously correct—they contain nine digits in the proper order and don’t contain alpha characters—you don’t have to backup withhold.
• Accountable plan rules. Reimbursements made to employees are tax-free if they’re made under the accountable plan rules. That means there’s a business connection (i.e., employees incur a deductible business expense), those expenses are substantiated (i.e., employees submit receipts and other documentation) and excess advances are returned to the company within a reasonable period of time. Plans that fall short are nonaccountable plans; reimbursements to employees under these plans are fully taxable, Bartels warned.
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