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Payroll Today

APA Congress Day 2: What’s on the IRS’ mind

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The highlight of Day 2 of the APA’s 34th Annual Congress was a workshop lead by Anita Bartels, Manager, Mid-States Territory SB/SE, Employment Tax, IRS. Bartels provided attendees with insight into the IRS’ latest payroll initiatives.

A tax with infinite variety

According to Bartels, there are only seven or eight payroll issues, but within that universe, there’s infinite variety. Here’s what’s got the IRS’ attention recently.

  • Certified professional employer organizations. The newest project is proposed, final and temporary regulations implementing IRS certification for professional employer organizations, or CPEOs. Clients of CPEOs will not be liable if the CPEO defaults on their payroll obligations, but Bartels acknowledged that there is a great deal of ambiguity regarding the definition of a CPEO—it’s not defined anywhere. That is something the IRS is in the process of working out, she added. The certification process begins in July, but she didn’t give any time line for how long the certification process will take.

  • NRP audits. Those intensive payroll audits, which have been conducted under the auspices of the IRS’ National Research Project, are now 99% completed. Bartels did not give attendees any hint of what the audits have revealed, but she did say that the results will be available probably in 2017. So stay tuned.

  • S corp shareholders and reasonable compensation. S corp shareholder employees must be paid reasonable FICA-taxable salaries. But what’s reasonable depends on the facts and circumstances, Bartels noted. Keys for the IRS: what these individuals are doing, how much they’re paid and what they’re responsible for. Then Bartels stated the obvious: if a one-person S corp (e.g., a doctor or a lawyer) is the only individual who is generating income for the corporation, then they’re rendering substantial services to their corporation and, therefore, they must be paid a reasonable FICA-taxable salary.

  • Routine audit areas. Bartels pointed out that when the IRS conducts a payroll audit, there are several areas that are covered as a matter of routine, including:
    • Backup withholding when independent contractors don’t provide their Taxpayer Identification Numbers (TINs) to you or when their TINs are incorrect. Since you don’t know whether a TIN is incorrect, Bartels said that the IRS is willing to cut you some slack, provided the TIN isn’t obviously wrong, by, for example, containing alpha characters
    • Fringe benefits that may be taxable. If a fringe isn’t specifically excluded from taxation, Bartels said, it’s taxable
    • Reimbursements made under accountable plans. Bartels noted two traps here. Tool plans, which reimburse employees who work with their own tools and that don’t require employees to substantiate their expenses, and employees who are paid per diems when they travel who shouldn’t be paid per diems.

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