Internal Revenue Service Federal, State, & Local Governments

1. Internal Revenue ServiceFederal, State, & Local Governments IRS ISSUES Louisiana Government Finance Officers Association October 5, 2011

2. FSLG MISSION STATEMENT • Provide Government Entities top quality service by helping them understand and comply with their tax responsibilities and by applying the tax law with integrity and fairness to all.

3. Types of Compliance Activities Compliance Checks & Examinations

4. The Compliance Check What to Expect?

5. The Initial Appointment • Receive an appointment letter or a phone call • Request for Information Returns Filed (941/1099/W-2/W-4) • Participation is voluntary • This is not an examination • Publication 3114

6. The Compliance Check • Purpose is to verify accurate information return reporting and filing • Provide an opportunity to educate • Initial interview to determine filing requirements • Inspect filed information returns for current year (941’s, 945’s, 1099’s, W-2’s, etc.)

7. No Adjustments to Tax • May result in a voluntary agreement to correct errors • May follow-up with another compliance check or an examination

8. The Compliance Check Report • Letter issued to close the compliance check • Letter will usually include recommendations for corrections • Disagree, IRS may consider an examination

9. Employment Tax Examination What to Expect?

10. The Initial Appointment • Receive an appointment letter and/or a phone call • Request for books and records related to issues examined

11. The Examination • There is an initial interview • Review books and records for year(s) selected • Verify information on forms 941’s, 945’s, W-2’s, and/or W-4’s, etc.

12. The Adjustment to Tax • May propose additional tax or reduction of tax • Based on evidence and application of the law • Entity given opportunity to provide additional evidence • Issue examination report

13. The Examination Report • Examination report, reflecting adjustments with supporting documents, is issued • Agree • Disagree

14. If you Agree: • Sign an agreement and pay the tax (normally with no interest or penalty) • Expectation of future compliance

15. If you do not agree: • Specialist will explain your appeal rights (Publication 5) • A meeting will be offered with the manager • 30 day letter issued • Forward case to the Appeals Division

16. Appeals Process • Appeals officer hears position • Settlement may be offered • If accepted, case closed with agreement • No settlement accepted, proceed to court (District/Tax Court)

17. Issues Discovered During Compliance Checks And Examinations

18. Issues Retirement Contributions and Cafeteria Plan Benefits

19. Retirement Contributions • Employer contributions are income tax deferred (pre-tax) • Contributions are wages for “FICA” tax • 457 plan contributions are deferred for FITW purposes only • “Ineligible” plans and excess contributions (403(b))

20. Cafeteria Plan Benefits • Benefits paid for under a qualified cafeteria plan are not subject to : 1.) Income tax 2.) FICA (OASDI or Medicare) • Dependent care benefits are reflected on the Form W-2

21. Fringe Benefit Issues Employer Provided: Autos • How does (your) employee account for personal use? 1.) Personal use is taxable 2.) Verified business use is not taxable 3.) Employee can reimburse employer for personal use

22. Fringe Benefits Reimbursement for Meals • Day Meals (taxable fringe benefit) Not excluded from income unless incurred while traveling away from home and on business overnight

23. Expense Reimbursements Accountable vs. Non-Accountable Expense Reimbursements

24. What is an Accountable Plan? • Employers can reimburse qualified business expenses that employees incur during the course of conducting business for the employer • Employee must follow certain rules in order for the reimbursement to be “non-taxable” to the employee

25. Accountable Plan Rules: • Employee must have paid or incurred deductible expenses while performing services for you, and • Employee must adequately account for expenses within a reasonable period of time, and • Amounts in excess must be returned

26. Non-accountable Plan if: • Not business related • Expenses are not substantiated (receipts) • Advances are not accounted for and/or amounts in excess are not returned to you within a reasonable period of time (120 days)

27. Personal Use Vehicles vs. Non-Personal Use Vehicles Personal Use Vehicles Non-Personal Use Vehicles: • Automobiles • Pick-up Trucks • Motorcycles • School Buses • Semi-Tractor/Trailer • Passenger Buses

28. Accountable Plans • For Personal Use Vehicles: • “Per Mile” Reimbursement is allowed • ( 51 cents beginning 1/1/2011) OR • Actual Expenses incurred are reimbursed. • For Non-Personal Use Vehicles • Actual expenses incurred only! • Receipts for Gas/oil/tires/etc.

29. FORM 1099-MISC Issues • Delinquent forms • Correct Information (Form W-9) • Penalties • Backup withholding

30. What is a Form 1099-MISC? • Information return required to report certain types of payments* made to non-employees and others *Payments made BY Federal, State and Local government agencies are reportable

31. Your Responsibility For Each Contractor: • Secure Form W-9 from each contractor when hired • Keep in each contractor’s file • Use TIN Matching • Report payments on Form 1099-MISC • Apply Backup Withholding when required

32. Types of Payments/Services Reported on the FORM 1099-MISC ( By Box) • Rents – Box 1 • Other Income – Box 3 • Backup Withholding (BWH)– Box 4 • Medical/Health Care Payments – Box 6 • Nonemployee Compensation – Box 7 • Attorney’s Fees - Box 7

33. Types of Payments/ServicesReported on 1099-MISC (cont’d) • Gross Proceeds to Attorneys – Box 14 Related to Legal Services Corporate Exemption Does NOT APPLY

34. Who Does NOT Get a Form 1099-MISC? • Employees • Corporations Except: Attorneys or Medical or Health Care Service Providers • Businesses that provide you with: • Merchandise Inventory • Equipment, supplies, parts only* *Parts provided with services are reportable

35. When are Forms1099-MISC Required to be Filed? • When Payments for services = $600 or more in a calendar year • Furnish to Payee by January 31, xxxx • TO IRS with 1096 transmittal: • File Paper by last day of February • File Electronically by last day of March

36. Transmittal Form 1096 • Use Form 1096 for each TYPE of Information Return you file • Filer Information: Please put a contact name and a Telephone Number!

37. Failure to File Penalty – IRC 6721 • Graduated Penalty Rates per Return • $30 if corrected within 30 days of due date • Up to Maximum of $250,000 per year • $60 if corrected 30 days after due date but by August 1 • Up to Maximum of $500,000 per year • $100 if corrected after August 1 or don’t file • Up to Maximum of $1,500,000 per year

38. Failure to Furnish Payee Statements IRC 6722 • Fail to furnish correct information by January 31, xxxx and cannot show reasonable cause • Graduated Penalty Rates per Return • $30 if corrected within 30 days of due date • Up to Maximum of $250,000 per year • $60 if corrected 30 days after due date but by August 1 • Up to Maximum of $500,000 per year • $100 if corrected after August 1 or don’t file • Up to Maximum of $1,500,000 per year

39. Backup Withholding • Rate: 28% • Special Circumstances: • If Payee Information is questionable • Secure Form W-9 • Fraud • Document Vendor File with Form W-9 • If TIN missing, or <9 digits, wrong format or alpha character ---Backup Withhold Immediately

40. Backup Withholding and Deposit Rules: • Use Form 945 – Annual Return of Withheld Federal Income Tax (due January 31st) • Non payroll liabilities deposit rules generally the same as payroll: • 2 Deposit Schedules: Monthly or Semi-Weekly • If annual tax is less than $2,500, the backup withholding deposits are not due until the return is filed.

41. IRS TIN Matching Program • Online System • Open to all payers of “reportable payments” • Interest, Dividends, Payments Subject to Backup Withholding (Nonemployee Compensation) • Verify the payee TINs required on 1099s BEFORE filing • IRS will inform payer if name/TIN combo matches database • Find out more at our website: www.irs.gov/e-services (Publication 2108A)

42. Benefits of Using TIN Matching: • Avoid TIN Errors • Reduce backup withholding notices • Meet reasonable cause to avoid penalties • Save time and money!

43. Treatment of Workers OR Independent Contractor? Employee?

44. Independent Contractor Defined An individual who is not subject to the control or direction of another as to the means and methods for accomplishing a result.

45. Employee Defined An individual who performs services for you; is subject to your control regarding what will be done AND how it will be done. It does not matter that you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed.

46. Employee... the right to control and direct the details of how services are performed Independent Contractor... the right to control and direct only the result of the work Both definitions use the word “control”

47. 20 Common Law Factors • Instructions • Training • Integration • Services Rendered Personally • Hiring, Supervising, and Paying Assistants • Continuing Relationship • Set Hours of Work • Full Time Required • Doing Work on the Employer’s Premises • Order or Sequence of Set

48. 20 Common Law Factors 11.Oral or Written Reports • Payment by Hour, Week, Month • Payment of Business and/or Travelling Expenses • Furnishing of Tools and Materials • Significant Investment • Realization of Profit or Loss • Working for More that one Firm at a Time • Making Service Available to the Public • Right to Discharge • Right to Terminate

49. Three principle areas to explore when making a determination: Behavioral control Financial control Type of relationship

50. Publication 1779 Independent Contractor or Employee...