Tax Alerts July 2016 IRS Prepares to Launch Voluntary Certification Program for Professional Employer Organizations On July 1, 2016, the IRS launched its new voluntary certification program for professional employer organizations (PEOs), also known as employee leasing organizations. A recently released guidance package describes how PEOs can obtain certification to become certified PEOs (CPEOs). PEOs An employer may contract with a PEO to complete and file returns and pay and withhold employment taxes (income tax withholding, FICA and FUTA) on wages paid to employees. Some arrangements also call for human resources and employee benefits administration. The PEO essentially becomes the workers' employer for tax and insurance purposes, while the employer retains control of the workers' day-to-day activities. Voluntary certification program The Tax Increase Prevention Act of 2014 (TIPA) instructed the IRS to create a voluntary certification program for PEOs. Under TIPA, PEOs will be able to apply to be certified to act - for purposes of the employment tax provisions - as the employer of service providers they lease to their customers. To be certified, a PEO generally must show that it satisfies requirements established by the IRS. The PEO also must adopt the accrual method of accounting to compute its taxable income. TIPA directed the IRS to establish a PEO certification program before July 1, 2015. However, the IRS responded that it lacked the resources to have a PEO certification program in place before July 1 of this year. The IRS issued temporary and proposed regulations in May. Framework The guidance sets out the process to become a CPEO, maintain CPEO status and how the IRS can suspend or revoke CPEO status. The IRS reiterated that the CPEO program is voluntary. PEOs can elect to participate or not. Applications. The first step in the certification process is to submit an application to the IRS. The IRS will notify the applicant as to whether its application for certification has been approved or denied and the effective date of its certification. If the IRS denies the application, it will inform the applicant of the reason for denial. 1
IRS Prepares to Launch Voluntary Certification Program for PEOs (continued) Business location. An organization seeking CPEO status must have been organized under the laws of the U.S. or of any state. An applicant also must have one or more established physical business locations in the U.S. where regular operations take place. Customers. The IRS regulations define a "customer" as any person who enters into a contract with a CPEO. Suspension and revocation. The IRS may suspend or revoke the certification of any CPEO as a result of a failure to meet any of the requirements and the failure presents a material risk to the collection of federal employment taxes. Tax compliance. An applicant s history of tax compliance is an important factor in determining whether certification would present a material risk to the collection of federal employment taxes. The IRS may deny an application for certification or suspend or revoke certification if the CPEO or any of its precursor entities, related entities, or responsible individuals, fail to pay any applicable federal, state, or local taxes or file any required federal, state, or local tax or information returns in a timely and accurate manner. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337). IRS Gearing Up for Revived Private Tax Collection The IRS is gearing up to outsource some taxpayer collection accounts to private collection agencies. Legislation passed in 2015 directed the IRS to resume working with private collection agencies. The revived program is expected to operate in a similar manner to past ones, with emphasis on taxpayer protections. Prior outsourcing Internal Revenue Code (IRC) Section 6306 permits the IRS to use private debt collection agencies. The IRS last contracted with private collection agencies 10 years ago (after prior outsourcing in the 1990s). At that time, the agency initially assigned 12,500 taxpayer accounts to private collection agencies. The accounts were only amounts for which the taxpayer had admitted liability. The IRS also placed some restrictions on private collection agencies. They were not authorized to take enforcement actions involving liens, levies, or property seizures, work cases where the taxpayer qualified for an installment agreement longer than five years, or be involved in offers-in-compromise, bankruptcies, hardship issues, or litigation. The IRS ended its work with private collection agencies after three years. The IRS had initially estimated that private collection agencies would collect $88 million. A study by the National Taxpayer Advocate after the program ended reported that private collection agencies had recovered nearly $86 million. 2
IRS Gearing Up for Revived Private Tax Collection (continued) Revived program The Fixing America s Surface Transportation Act of 2015 (FAST Act) instructs the IRS to contract with private collection agencies for the collection of inactive tax receivables. The law defines inactive tax receivables as a taxpayer account: 1. that is removed from the IRS s active inventory for lack of resources or inability to locate the taxpayer; 2. for which more than one-third of the applicable limitations period has lapsed and no IRS employee has been assigned to collect the receivable; or 3. for which a receivable has been assigned for collection, but more than 365 days have passed without interaction with the taxpayer or a third party for purposes of furthering the collection. Some taxpayer accounts are expressly excluded and will not be turned over to private collection agencies. These include cases where the taxpayer is seeking innocent spouse relief, taxpayers in combat zones, taxpayers under an installment agreement or offer-in-compromise, cases under examination, and others. Without delay President Obama signed the FAST Act into law in December 2015. Congress instructed the IRS to implement private tax collection without delay. To carry out the twin goals tax collection and taxpayer rights, lawmakers further directed the IRS to make it a priority to use collection contractors and debt collection centers currently approved by the U.S. Department of Treasury. Safeguards Private collection agencies must adhere to the federal Fair Debt Collections Act. The Act prohibits debt collection companies from using abusive, unfair or deceptive practices to collect past-due debts. Additionally, collection agencies cannot telephone at times they know, or should know, are inconvenient, such as before 8 a.m. and after 9 p.m., unless the individual agrees otherwise. Another protection involves payment. Taxpayers will not make payments directly to the private collection agencies. Payments are required to be processed by employees if the IRS. Additionally, taxpayers can request that their accounts be returned to the IRS and no longer worked by the private collection agency. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337). 3
Earned Income Tax Credit Rules for Members of the U.S. Military To claim the Earned Income Tax Credit (EITC), a taxpayer must satisfy two tests with respect to earned income. First, the taxpayer must have some earned income. Second, the taxpayer s earned income must fall within certain ranges, as the credit is subject to income phaseout. As the taxpayer's adjusted gross income (or, if greater, earned income) rises beyond the phaseout threshold, the credit is reduced according to a percentage phaseout, until it is eliminated at the completed phaseout amount. For 2016, a taxpayer is able to claim the EITC if: the taxpayer had three or more qualifying children and earned less than $47,955 ($53,505 if married filing jointly); the taxpayer had two qualifying children and earned less than $44,648 ($50,198 if married filing jointly); the taxpayer had one qualifying child and earned less than $39,296 ($44,846 if married filing jointly), or the taxpayer did not have a qualifying child and earned less than $14,880 ($20,430 if married filing jointly). For 2016, the maximum amount of investment income a taxpayer can have in order to qualify for the credit is $3,400. For 2016, the maximum amount of EITC is: $6,269 with three or more qualifying children $5,572 with two qualifying children $3,373 with one qualifying child $506 with no qualifying children A qualifying child must meet satisfy four tests: (1) relationship, (2) age, (3) residency, and (4) joint return. Examples of a qualifying child are a taxpayer s son, daughter, stepchild, foster child, or a descendant of any of them (for example, grandchild), or brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them. Special EITC rules apply to members of the U.S. Armed Forces. For purposes of the EITC, the term Armed Forces refers to officers and enlisted personnel in all regular and reserve units under the command of the U.S. Secretaries of Defense, Army, Navy, Marine Corps, Air Force, and Coast Guard. Members of the U.S. Armed Forces do not have to report nontaxable pay for purposes of the EITC. They can elect to exclude from the EITC calculation the Basic Allowance for Housing (BAH), the Basic Allowance for Subsistence (BAS), and the amount of combat pay. Taxpayers must exclude all combat pay and not only a part of combat pay from earned income. A number of areas across the world have been designated as combat 4
EITC Rules for Members of the U.S. Military (continued) zones. These include Afghanistan, beginning September 19, 2001; Somalia, beginning January 1, 2004; Yemen, beginning April 10, 2002, and other areas. The amount of a taxpayer s nontaxable combat pay is reflected on the taxpayer s Form W-2, in box 12, with code Q. Example. Eugene, who serves in the U.S. Navy, and Karla are married and file a joint federal income tax return. The couple has one daughter, who is a qualifying child for purposes of the EITC. Eugene earned $10,000 in nontaxable combat pay. Eugene and Karla can elect to exclude the $10,000 in nontaxable combat pay from their calculation of the EITC or they can include the amount in the calculation of the EITC. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337). Is the Cost of a Weight-Loss Program for Obesity Tax Deductible? Yes, but only if it is a medical necessity. The IRS has ruled that uncompensated amounts paid to participate in a weight-loss program as treatment for a specific disease or diseases (including obesity) diagnosed by a physician are deductible expenses for medical care. The deduction is subject to the limitations of Internal Revenue Code (IRC) Section 213 and its regulations. Generally, IRC Section 213(a) provides a deduction for uncompensated expenses for medical care of an individual, the individual s spouse or a dependent, subject to certain limitations. The term medical care is broad and encompasses the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. If an expense is merely beneficial to a person s general health, the expense is not a qualified expense for medical care for tax purposes. In 1979, the IRS ruled that the cost of participation in a weight-loss program merely to improve appearance, general health or sense of well-being was not deductible. The individual s participation in the weight loss-program was not to cure or treat a disease or specific illness. The IRS modified its position in 2002. That year, the IRS announced that expenses for certain weight-loss programs would qualify as a medical deduction. The IRS explained that in 2000, the World Health Organization (WHO) recognized that obesity is a disease. Where a physician has diagnosed an individual as suffering from a disease (including obesity), the cost of the individual s participation in the weight-loss program as treatment for his obesity is an amount paid for medical care under IRC Section 213. Uncompensated amounts paid to participate in the weight-loss program as treatment for the disease are deductible expenses for medical care, subject to the limitations of IRC Section 213. Keep in mind that only taxpayers who itemize their deductions may claim the deduction for qualified medical expenses. 5
Is the Cost of a Weight Loss Program for Obesity Tax Deductible? (continued) Reimbursement for weight-loss expenses from a flexible spending account are also subject to the IRC Section 213 rules, as well as review by the plan administrator. For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337). California E-file and E-pay Mandate for Employers (Assembly Bill 1245) New state law mandates electronic submission of tax returns, wage reports, and payroll tax deposits for all employers. Beginning January 1, 2017, employers with 10 or more employees will be required to electronically submit employment tax returns, wage reports, and payroll tax deposits to the Employment Development Department (EDD). All remaining employers will be subject to this requirement beginning January 1, 2018. Any employer required under existing law to electronically submit wage reports and/or electronic funds transfer to the EDD will remain subject to those requirements. For more information, visit FAQs on E-file and E-pay Mandate for Employers at www.edd.ca.gov. Benefits of Electronic Filing and Payments Increases data accuracy Protects data through encryption, which is safer and more secure than paper forms Reduces paper and mailing costs Eliminates lost mail Faster processing of returns and payments File and Pay Electronically with E-Services for Business Employers can use e-services for Business to comply with the e-file and e-pay mandate. E-Services for Business is a fast, easy, and secure way to manage your employer payroll tax accounts online. With e-services for Business, you can: Register for an employer payroll tax account number File returns and reports Make payroll tax deposits and pay other liabilities View and update account information Waiver This mandate contains a waiver provision for employers who are unable to electronically submit employment tax returns, wage reports, and payroll tax deposits. 6
California E-file and E-pay Mandate for Employers (Assembly Bill 1245) (continued) Penalties for Not Complying with the E-file and E-pay Mandate Penalties will incur for non-compliance of this mandate. Penalties for Not Electronically Filing or Paying Type Forms Penalty Tax Returns DE 9 Quarterly Contribution Return and Report of Wages DE 3HW Employer of Household Worker(s) Annual Payroll Tax Return $50 per return DE 3D Quarterly Contribution Return Wage Reports DE 9C Quarterly Contribution Return and Report of Wages (Continuation) DE 3BHW Employer of Household Worker(s) Quarterly Report of Wages and Withholdings $20 per wage item Payments DE 88 Payroll Tax Deposit 15% of amount due Other Electronic Filing and Payment Options The following options also fulfill the e-file and e-pay mandate: Federal/State Employment Taxes (FSET) Bulk Transmissions Electronic Funds Transfer (EFT) State Data Collector Automated Clearing House (ACH) Credit For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337). 7
California LLC Statement of Information Filing Requirement Changed This article is reproduced with permission from Spidell Publishing, Inc. Limited liability companies (LLCs) that do not have any changes in the information reported to the Secretary of State (SOS) on the biennial Statement of Information will now submit a Form LLC-12NC, LLC Statement of No Change. Previously, such LLCs checked a box on the LLC Statement of Information (LLC-12) indicating that no changes had occurred since the last complete Statement of Information was filed. The LLC-12 (not the LLC-12NC) must be filed if any of these changes occur: LLC's business address or mailing address; LLC managers or members: addition or removal of current members or an address change of a current member or manager; agent for service of process: substitution of the previous agent or change in the current agent's address; type of business; or chief executive officer: substitution of the previous officer or change in the current officer's address. The LLC-12 must be filed with the Secretary of State within 90 days after filing Form LLC-5, Application to Register, and when any change in the items listed above occur. Therefore, either the LLC-12 or LLC-12NC is filed biennially during the applicable filing period. The applicable filing period is the calendar month in which the Form LLC-5 was filed and the immediately preceding five calendar months. So, for example, if an LLC was formed in January 2013, the next time it would be required to file its biennial LLC-12 would be anytime during the period August 2015 through January 2016. The LLC-12 and LLC-12NC should be mailed to the following address: Secretary of State Statement of Information Unit P.O. Box 944230 Sacramento, CA 94244-2300 The chart on the next page outlines the filing requirements, due dates, and fees. 8
California LLC Statement of Information Filing Requirement Changed (continued) For more information about this article, please contact our tax professionals at taxalerts@windes.com or toll free at 844.4WINDES (844.494.6337). 9
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