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December 2007 | ||
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About This Newsletter Payroll Insights is a publication from KPMG LLP’s Employment Tax Practice. It is designed to provide you with current developments in the payroll and employment tax arena and will be published periodically throughout the year as developments warrant. In This Issue | |
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IRS Roundup IRS and States Share Employment Tax Examination Results The IRS and over half the states have entered into agreements under which they will share the results of employment tax examinations. The agreements are part of the Questionable Employment Tax Practice (QETIP) initiative, and are designed to provide a centralized, uniform method for exchanging data, leveraging resources, and encouraging businesses to comply with federal and state employment tax requirements. Under the agreement, the IRS and the states can exchange audit reports and audit plans, and participate in side-by-side examinations. In addition to coordinating compliance activities, the agreements also include collaboration around outreach and educating businesses about their employment and unemployment tax responsibilities. Thus far, the participating states are Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington, and Wisconsin. Employers with workforces in these states may wish to examine their employment tax processes and procedures in light of the potential increase in enforcement arising from this new coordination effort between the IRS and the states. New Online Process to Provide Rapid The online employer identification number (EIN) process (1) eliminates the need to file form SS-4, Application for Employer Identification Number, (2) provides an EIN immediately upon completion of the online form, and (3) provides applicants with the ability to download, save, and print their EIN confirmation notice. The application is presented in an interview style and asks questions based on previous responses. The system also includes embedded help topics and hyperlinked keywords and definitions. Although an EIN will be available immediately, it will still take up to two weeks until it becomes part of the IRS’s permanent record. Thus, taxpayers must wait before filing an electronic return, making an electronic payment, or passing an IRS taxpayer identification number (TIN) matching program. Single member limited liability companies (SMLLCs) who have or will have employees within the next 12 months are required to have two EINs. One EIN is assigned to the individual owner, as a sole proprietor, and the other is assigned to the SMLLC. To apply for an EIN online for the SMLLC, a sole proprietor must already have an EIN. The IRS is providing telephone support for providing both EINs in this situation. An SMLLC can be either a corporation or a disregarded entity. To be treated as a corporation, the SMLCC must file Form 8832, Entity Classification Election, and elect to be classified as a corporation. SMLCCs that do not make this election are classified as a disregarded entity for income tax purposes. Under Notice 99-6, SMLCCs that are disregarded entities have two options for reporting and paying employment taxes. They can use the name and EIN assigned to the LLC or the name and EIN of the single-member owner. Regardless of which method is used, the single member owner has ultimate responsibility for collecting, reporting, and paying over employment taxes. New final regulations (72 Fed. Reg. 45891), effective January 1, 2009, will require SMLCCs to be treated as the taxpayer for employment tax purposes. (SMLCCs will be treated as the taxpayer for excise tax purposes as of January 1, 2008.) The SMLCC will continue to be disregarded for other federal tax purposes. IRS Announces Mileage Rates for 2008 Beginning January 1, 2008, the standard mileage rates for the use of cars (including vans, pickups or panel trucks) will be:
The business standard mileage rate cannot be used for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS), after claiming a Section 179 deduction for that vehicle, for any vehicle used for hire, or for more than four vehicles used simultaneously. Treasury Inspector General Calls for Mandatory PEO Certification In its recent audit of the IRS’s efforts to address employment tax compliance by professional employer organizations (PEOs), the Treasury Inspector General for Tax Administration (TIGTA) concluded that current regulations do not protect clients if PEOs default on paying employment taxes. In its report, TIGTA stated that the IRS currently does not have the ability to identify businesses that begin using a PEO or when the PEO relationship ends. As a result, the IRS cannot take appropriate actions against businesses that do not pay employment taxes, or it may risk unnecessarily burdening taxpayers that are paying employment taxes through a PEO. The IRS does use Form 2678, Employer/Payer Appointment of Agent, to record a business’s use of third-party employment companies, but, until this year, the forms were not transcribed or stored in a searchable order. The TIGTA report noted that 22 states require PEOs to be bonded as a means of protecting the state, but the federal government does not have a bonding requirement. A bill introduced during the last Congress, H.R. 4985, proposed that PEOs be certified by an independent certified public accountant that would (a) review a PEO’s tax payments to ensure that it had withheld and made deposits of all taxes, and (b) annually report whether the PEO's financial statements were reported fairly and in accordance with Generally Accepted Accounting Principles. In light of an increased occurrence of PEOs defrauding their clients, TIGTA recommended that: 1. The Commissioner of the Small Business/Self-Employed Division and the Office of Chief Counsel work with the Department of Treasury’s Office of Tax Policy to (a) consider a legislative proposal requiring all PEOs to become certified (including the posting of a bond for payment of taxes), and (b) explore options (including use of a revised Form 2678) to establish accurate links between PEOs and their clients. 2. The Commissioner of the Small Business/Self-Employed Division (a) require that an employer’s Quarterly Federal Tax Return (Form 941) filed by a PEO list the clients on whose behalf the PEO is filing, and (b) ensure that outreach efforts sufficiently inform taxpayers of the potential risks of using a PEO. The IRS has agreed with TIGTA’s recommendations, and will be working with the Department of Treasury to explore ways to implement the above initiatives. Interestingly, the Small Business Payroll Protection Act of 2007, S. 1773, introduced in July – before the TIGTA report was issued – addresses many of the issues raised in the report. The bill would amend the Internal Revenue Code to require the establishment of a registration system for payroll tax deposit agents (e.g., providers of payroll processing or tax filing and deposit services to one or more employers). The bill would also require payroll tax deposit agents to either submit a bond or submit to quarterly third-party certifications; disclose to their clients information regarding liability for payment of employment taxes; and pay penalties for failure to collect or pay employment taxes or for attempting to evade or defeat payment of employment taxes. Finally, the bill would require Treasury to issue a notice of confirmation of any address change for an employer making employment tax payments, and to send the notice to the employer’s former and new addresses. The bill is currently awaiting consideration by the Senate Finance Committee. | |||
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Federal Court Bars “No-Match” Letters The U.S. District Court for the Northern District of California has issued a preliminary injunction barring the Social Security Administration (SSA) from issuing “no match” letters to approximately 140,000 employers covering approximately 8 million employees. The court found that the balance of hardships of the no-match letter program “tips sharply” in the plaintiffs’ favor and that the arguments presented by the plaintiffs raised serious questions. Subsequent court filings indicate that the Department of Homeland Security (DHS) is reconsidering its no-match regulations. AFL-CIO v. Chertoff, No. C 07-04472 CRB (N.D. Cal. October 10, 2007). Background When the SSA is unable to match a worker’s name and social security number submitted by employers on Forms W-2 with worker names and social security numbers in its database, it posts the worker’s earnings to its Earnings Suspense File until they can be matched with SSA records. In 1994, in an attempt to correct the mismatched records, the SSA began sending “no-match” letters, requesting corrected information from employers. The focus of the no-match letters has traditionally been related to typographical errors, name changes, and incomplete forms. Employers have responsibilities under the Immigration Reform and Control Act (IRCA) to not “knowingly” hire an unauthorized alien or continue to employ an individual who is or whose status has changed to that of an unauthorized alien. IRCA also contains provisions protecting workers from immigration-related discrimination. In 2006, DHS proposed a regulatory change that would include receipt of a no-match letter as an example of something that might lead to a finding that the employer had constructive knowledge of an employee’s unauthorized status. Final regulations, issued on August 15, 2007 (72 Fed. Reg. 45611), provide that constructive knowledge includes situations where an employer fails to take reasonable steps after receiving information, such as a no-match letter, that an employee may be an alien whose employment is not authorized. The regulations also include a safe harbor under which a no match letter would not be considered to be constructive knowledge if certain verification steps are followed and documented within 90 days of receiving the notification. SSA revised its no-match letter to bring it into alignment with the DHS regulation. The revised letter includes use of a false name or social security number, or that the social security number is assigned to someone else as a new “common reason” why the Form W-2 did not match SSA records. The letter also now states that the no-match letter does not, by itself, make any statement about an employee’s immigration status, and includes a letter from DHS which employers are instructed to follow. The DHS letter states that if the no-match letter is disregarded and it is determined that employees listed in the letter are found to be unauthorized, DHS could determine that the employer violated the law by knowingly employing unauthorized persons, leading to possible civil and criminal sanctions. The Case The group of unions and businesses sued and obtained a temporary restraining order barring DHS from implementing the rule. The court received briefs and held a hearing before issuing the injunction. In issuing the injunction, the court noted that serious questions have been raised regarding whether (1) the rule is arbitrary and capricious because DHS failed to supply a reasoned analysis for its new position that a no-match letter, in and of itself, is sufficient to put an employer on notice of an employee’s unauthorized status; (2) DHS exceeded its authority by interpreting IRCA’s anti-discrimination provision; and (3) DHS violated the Regulatory Flexibility Act by not conducting a final flexibility analysis. Further, the court found that plaintiffs would experience hardships because they would be subject to greater compliance costs and employees would be exposed to an increased risk of termination. The court noted that DHS and SSA were posed to issue no-match packets to 140,000 employers, identifying over 8 million employees for whom there is no match. That, combined with the DHA regulation’s 90-day compliance deadline, would require development and implementation of human resources systems capable of resolving the related issues within the 90-day timeframe. The court also cited research findings that mass layoffs often follow receipt of no-match letters, increasing the likelihood that authorized workers unable to resolve their status within 90 days could be fired. This action prevents DHS from enforcing the rule until a trial on the merits is conducted. A trial date has not yet been set, but the case is proceeding. Recent court filings indicate that DHS is undertaking additional rulemaking to address issues raised by the court. DHS has requested that the court stay proceedings in the case until March 24, 2008 (or until an amended regulation is issued). The unions and business have indicated to the court that they do not oppose the stay. | |||
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Worker Classification Worker classification issues continue to make headlines – drawing the attention of both federal and state officials. Federal Contractor’s Classification of Workers Questioned Federal contractor Blackwater USA has come under the scrutiny of Senator John Kerry (D-MA), Chair of the Committee on Small Business and Entrepreneurship, and Congressman Henry Waxman (D-CA), Chair of the House Committee on Oversight and Government Reform. At issue is the classification of security workers in Iraq as independent contractors, not employees. The chairman of Blackwater testified before the House Committee on Oversight and Government Reform in early October, commenting on its model of treating workers as independent contractors. Congressman Waxman subsequently learned that the IRS had determined that the company’s classification of a worker in Afghanistan as an independent contractor was “without merit,” and although the ruling applied only to the individual in question, it may be applicable to other individuals engaged by the firm. Waxman contacted the company, and expressed concern that the Blackwater tried to conceal the IRS ruling and the evasion of taxes from Congress and law enforcement. Blackwater responded that it had been told by the Small Business Administration (SBA) that in applying “criteria used by the IRS,” SBA had determined that Blackwater’s security contractors were not employees. Blackwater also contended that the IRS field office letter determining that the contractor should not have been classified as an independent contractor was not a final determination and that the firm had appealed the ruling. The involvement of the SBA triggered an inquiry by Senator Kerry. He wrote to the SBA administrator seeking all documentation regarding this determination and clarification on whether the SBA is making “employee versus independent contractor determinations for tax purposes.” The SBA administrator responded, indicating that SBA had issued a size determination on a Blackwater affiliate solely for the purpose of ascertaining eligibility for SBA programs, and not for tax purposes. This prompted Sen. Kerry to request that Senate Finance Committee leadership initiate an investigation to determine whether Blackwater was potentially evading taxes due to the erroneous misclassification of workers, and he also pressed the SBA for detailed documentation regarding its determination, including the information relied on in making the size determination, the number and location of site visits made to confirm the information provided by Blackwater, and how the IRS’s Twenty Factor Common Law Test was used. We can expect to see continued discussion of the Blackwater matter, as well as other congressional interest in the worker classification issue. As discussed in a recent Special Edition of Payroll Insights, the Independent Contractor Proper Classification Act (S. 2044) was recently introduced by Sen. Barack Obama (D-IL) and has been referred to the Senate Finance Committee for consideration. IRS Reissues Guidance on Monitoring of Classification Settlement Program Agreements The IRS has reissued a memorandum for employment tax territory managers, group managers and specialists regarding the monitoring of Classification Settlement Program (CSP) agreements. The memorandum reiterates that CSP monitoring and follow-up activities are centralized in the Cincinnati Workload Identification Unit, and states that the entire CSP process and the duties and responsibilities of local coordinators are under study. Meanwhile, in the States… Several states have moved to address the issue of worker classification with particular focus on the construction industry. Illinois passed the Employee Classification Act (H.B. 1975) and New Jersey passed the Construction Industry Independent Contractor Act (A.B. 4009) to specifically establish rules and criteria for classification in the construction industry. Washington passed S.B. 5926, establishing a legislative task force to examine what it calls the “underground economy” in the construction industry. The task force is expected to issue its report in early 2008. | |||
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StateWrap Up Kansas: New Form K-4 Kansas has traditionally accepted the federal Form W-4, however because of differences between state and federal withholding policies, the Kansas Department of Revenue has developed a new form (Form K-4) for state withholding purposes, effective January 1, 2008. Employees hired after January 1, 2008, must use the new form. The form is optional for employees hired before January 1, 2008, unless they want to adjust their withholding. Individuals who repeatedly underpay or underestimate Kansas tax liabilities will be contacted by the state and required to submit a new Form K-4 to their employers. New York: Employer Responsible for UI When Rehiring
Employees In a case of first impression in New York, the New York Supreme Court has ruled that an employer must pay unemployment insurance for employees it “rehired” mid-year from a professional service organization (PEO) with which it previously had a contract. In re RobsonWoese, 42 A.D.3d 774 (July 19, 2007) RobsonWoese, Inc. entered into a contract with Tri-Net under which Tri-Net agreed to provide payroll, benefits, and employer-of record services, implement human resources, risk management, and communications policies, and “administer the employment relationship.” RobsonWoese’s employees became the employees of Tri-Net. As required by New York law, Tri-Net made unemployment insurance contributions on account of the employees. RobsonWoese terminated the contract with Tri-Net part way through a subsequent year, and immediately rehired the employees who had been employed by Tri-Net at RobsonWoese’s work site. The state assessed the company for unemployment insurance contributions for the year in question. The company paid the contributions and requested a refund, claiming that it had already paid the contributions through Tri-Net. An initial determination denying the refund request was overruled by an administrative law judge. The Unemployment Insurance Appeal Board reversed the administrative law judge, and RobsonWoese appealed. The court held that RobsonWoese was responsible for the unemployment insurance contributions because when RobsonWoese rehired the employees, it became a new employer statutorily obligated to make contributions on the employees’ behalf for the remainder of the year. The court accepted the logic of RobsonWoese’s contention that it should not have to pay the contributions twice in one year, however, the court found there was no statutory authority to exempt an employer from making contributions if it rehires employees from a PEO during the calendar year (as there is during an asset-based transaction). North Dakota: New PEO Legislation North Dakota passed legislation (S.B. 2036) regulating professional employer organizations (PEOs). The new law establishes PEO licensing requirements, including the submission of audited financial statements; and defines the PEO-client relationship. Utah: PEO Provisions Modified Utah passed legislation (H.B. 29) amending its PEO provisions. Changes include adding officers, directors, shareholders, partners, or managers of a client to the definition of covered employee; adding a provision on employment-related economic incentives; and adding a registration requirement. | |||
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