Keep the IRS and other State Revenue Agencies at bay

1. �Keep the IRS and other State Revenue Agencies at bay� Karen Carter, CPP Oracle Principal HCM Product Manager

2. Agenda Employment tax audit activity Areas of focus Latest news Common errors Why do an employment tax liability review internally Corrections if a problem is found Healthcare reforms impact on payroll Question and Answers

3. Employment tax audit activity IRS -National Research Program Audits 6000 Employers over 3 years Random selection Only 20% of LMSB employers selected Most 2010 employers selected have been notified IRS� Large Business and International Division audits Mandate that an employment tax specialist be included on every audit team Nonqualified deferred compensation (IRC 409A) Compliance of expat/inpat employee programs Income attributable to participation in foreign pension plans Fringe benefits Worker classification

4. Employment tax audit activity State taxing authorities Worker classification Withholding on wages of nonresident employees W-4 compliance Travel and Expense records audited Beyond reimbursement of expenses, business travel can involve questions of tax liability in the state and local jurisdictions to which employees travel. Nonresidents present in a state for only a short period of time (and their employers) may be subject to state income or other taxes. As is often the case, states apply different criteria to determine what income tax is taxable, and HR and payroll departments must be aware of the specific requirements of all jurisdictions to which employees are sent on business. CT has implemented an identical provision to the NY threshold (14 days).� It is assumed that states not listed in this table require withholding on the first dollar earned for services performed in those states. Beyond reimbursement of expenses, business travel can involve questions of tax liability in the state and local jurisdictions to which employees travel. Nonresidents present in a state for only a short period of time (and their employers) may be subject to state income or other taxes. As is often the case, states apply different criteria to determine what income tax is taxable, and HR and payroll departments must be aware of the specific requirements of all jurisdictions to which employees are sent on business. CT has implemented an identical provision to the NY threshold (14 days).� It is assumed that states not listed in this table require withholding on the first dollar earned for services performed in those states.

5. Areas of focus Non-filers Fraud Foreign employers Disregarded entities COBRA Credits on 941 from HIRE Act Worker classification 20 Factor Test (Rev. Rul. 87-41) Behavior control, financial control, relationship of the parties Entrepreneurial evidence 3509 rates 530 protection & proposals in Obama budget affecting 530 Classification settlement program State rules differ Cobra � Health care tax credit is audit flag and W-11 are being supplied to the service as needed. 941 credit is a spot check of employers Not random, something of interest on the return, scanning for inequities and doing an examination, looking to see if fired person and the rehire where related to owner or other types of flags� IRS is not disclosing filters they are using. How many are being selected as a % in the neighborhood of a 1000 returns selected from overall base SBSE, Large Employer, and so forth. W-11 if it is a small number of claims with document request. If a large number asking for name, ssn, hire date, and so forth. List of a hundred employees just sample off the list. Would ask for 8 to 10 W-11 from specific Cobra � Health care tax credit is audit flag and W-11 are being supplied to the service as needed. 941 credit is a spot check of employers Not random, something of interest on the return, scanning for inequities and doing an examination, looking to see if fired person and the rehire where related to owner or other types of flags� IRS is not disclosing filters they are using. How many are being selected as a % in the neighborhood of a 1000 returns selected from overall base SBSE, Large Employer, and so forth. W-11 if it is a small number of claims with document request. If a large number asking for name, ssn, hire date, and so forth. List of a hundred employees just sample off the list. Would ask for 8 to 10 W-11 from specific

6. Areas of focus Fringe Benefits Accountable plan requirements Business connection Substantiation: Expenditures over $75 require substantiation Safe harbors for return of excess within reasonable time Fixed date method Advance is made within 30 days of expense Substantiation within 60 days of expense Excess returned within 120 days of expense Periodic statement method Employer provides employee quarterly statement of excess reimbursements Employer requests repayment within 120 days of statement

7. Areas of focus Fringe benefits Reimbursed business travel Must be �away from home� �Must determine employee�s tax home Duration (temporary vs. indefinite) Primarily for business versus primarily for personal reasons Award trips and spouse travel Frequent flyer points not income to employee unless employer pays employee for use of points State agencies are now looking hear to determine if they got their revenue in audit�. So XYZ Employee worked in New York for a week and did he or she have the right withholding for NY income taxes and local taxes and so forth�. If there is not a reciprocity agreement between states or not a certain amount of exempt hours within the state you could be considered as doing business there (Especially if you have a business location in that state� then nexus exist) State agencies are now looking hear to determine if they got their revenue in audit�. So XYZ Employee worked in New York for a week and did he or she have the right withholding for NY income taxes and local taxes and so forth�. If there is not a reciprocity agreement between states or not a certain amount of exempt hours within the state you could be considered as doing business there (Especially if you have a business location in that state� then nexus exist)

8. Areas of focus Educational assistance Up to $5,250 excludable under qualified plan (IRC �127) Requires written plan document Non-discriminatory Not more than 5% of benefit provided to shareholders/officers Employee cannot choose between cash/benefit in lieu of education Employees must be given notice (made aware) of the program Amounts over $5,250 possibly excluded as a working condition benefit (IRC �132) Must be related to current position Must maintain or improve skills Must meet express requirements of position Cannot be for minimum educational requirement of position Cannot qualify taxpayer for new trade or business

9. Areas of focus Fringe benefits Cell Phones �No longer listed property Still the portion of personal use needs to be imputed in employee�s income unless categorized as a working condition fringe or de minimis fringe. However, the heightened substantiation requirements no longer apply in determining whether the personal use of a cellular phone is excludable as a non taxable fringe benefit

10. Areas of focus Fringe benefits Timing of fringe benefits inclusion Employer may treat non-cash fringe benefits as paid by pay period, quarterly, semi-annually, or any other basis up to annually Employer may add to regular wages for a pay period and withhold on the total, or withhold at applicable flat rate for supplemental wages Whatever date chosen, employer must withhold and deposit pursuant to ordinary timing rules Must be reported on that quarter�s Form 941, and includible wages must be reported on Form W-2 PUB 15-B is your friend for Year end and through out the year print it each year.PUB 15-B is your friend for Year end and through out the year print it each year.

11. Areas of focus Officer�s compensation Deferred compensation / 409A / FICA taxation http://www.irs.gov/irb/2004-24_IRB/ar13.html Personal use of corporate aircraft Be aware of taxation on NQ 457s High risk of forfeiture Taxation

12. Areas of focus Officer�s Compensation Equity compensation withholding issues An employee may be granted an equity award in one country, vest in that award in a second country, exercise in a third country, and ultimately sell the shares in a fourth country As a result, there could be employer reporting and withholding as well as individual tax implications in each jurisdiction Increasing legislation to capture mobile employee gains �Trailing� tax obligations: Income may be subject to tax irrespective of residency status �Exit taxes�: More and more countries are imposing charges upon departure and special reporting requirements CT has implemented an identical provision to the NY threshold (14 days).� It is assumed that states not listed in this table require withholding on the first dollar earned for services performed in those states.CT has implemented an identical provision to the NY threshold (14 days).� It is assumed that states not listed in this table require withholding on the first dollar earned for services performed in those states.

13. Areas of focus Officer Compensation Equity compensation withholding issues RSUs: Vesting and distribution are planned events, determination of withholding and reporting consequences can be determined prior to vesting Stock options: Calculations done at time of exercise. With short turnaround time, may require upfront streamlining Withholding analysis to determine �minimum statutory withholding rates� taxes for equity awards Taxable equity award income and withholding may need to be apportioned for mobile employees Using assignment locations and dates or self-certification a blended withholding rate of tax to apply to the income on the vesting date for RSUs or options upon exercise

14. Areas of Focus Payments to non-resident aliens (NRA) Form 1042-S (Foreign Person�s U.S. Source of Income Subject to Withholding): Used to report amounts paid to NRA that are subject to withholding (even if no amount is deducted and withheld) Similar to 1099 (used in lieu of for NRA) Not used to report W-2 amounts (other than treaty benefits for dependent services compensation) NRA should complete Form W-8BEN to document treaty exemption and/or reduced rate of tax withholding Form 8233 ITIN Universities and MANY MANY Other companies restaurants, hotels, mnft, all business has this requirementUniversities and MANY MANY Other companies restaurants, hotels, mnft, all business has this requirement

15. Latest news Social security wage base remains the same for 2011 $106,800 Reporting of the value of health benefits suspended for 2011 Code Y �409A deferrals �still suspended Elimination of 8109 coupons Exception �employers w/>$2,500 per quarter IRS ended mailing of 941 Q1 2011 SSA now does not have a vehicle for delivery of the Reporter Newsletter

16. Common errors Box 13 �Retirement Plan Active Participant �Forfeitures Box 12 �Code Z Use only if deferred compensation plan violates 409A and the violation has not been corrected Group Term Life in excess of $50,000 Box 11 �Used for two different reporting purposes Amounts earned in prior year, subject to FICA this year Distributions from NQDC plans It is hard for me to believe after all this time GTL reporting is still an item that comes up as an audit violation but the IRS says it is still a big area of problems It is hard for me to believe after all this time GTL reporting is still an item that comes up as an audit violation but the IRS says it is still a big area of problems

17. Why do Internal Reviews? In most organizations, Payroll and Benefits are one of the top 5 highest operating costs. Therefore, a periodic HR Risk Assessment is encouraged for the proper management of risk. The suggested areas of assessment included the following: Payroll Administration General administration activities Payroll tax withholding/filings Garnishments Fringe benefit and expense reimbursement Time keeping/attendance/leave of absence Record retention Wage & hour law compliance (multi-state)

18. Corrections if a problem is found Voluntary disclosure Unpaid federal income taxes on wages and unpaid employment taxes on deferred compensation File voluntary disclosure and request closing agreement to settle the issue No need to amend prior tax returns Pay all unpaid tax, but no penalties or interest Can negotiate a lower tax rate May require a gross up for taxes paid on employees� behalf or requirement to include in current income Statutory for misclassification, if reported

19. Healthcare reforms impact on payroll Medicare tax hike�earned income Additional 0.9% HI tax on self-employed individuals and employees with respect to earnings and wages over $200,000 ($250,000 for joint filers) beginning in 2013 (not indexed for inflation) Rules for self-employed individuals Nondeductible Wage income reduces self-employment income subject to the 0.9% tax

20. Healthcare reforms impact on payroll Medicare tax hike - earned income Rules for employers Employers must withhold the employee�s tax from wages paid to the employee over $200,000 Employers not required to consider employee�s spouse�s wages If the employer fails to collect the tax, and the employee subsequently pays it, then the tax will not be collected from the employer, but the employer will remain liable for penalties Wage threshold for tax for married filing separately to � of the $250,000 level for married filing jointly Subject to estimated tax penalties under section 6654 Effective date for tax years beginning after Dec. 31, 2012

21. Healthcare reforms impact on payroll Medicare tax hike - earned income Special concerns for employees: Unlike any other employment tax, the amount withheld will not always equal the actual tax liability #1 �Single individual A, with $225,000 in wages from employer X. Employer X withholds the additional 0.9% HI tax from $25,000 ($225) of wages exceeding $200,000. Individual A�s additional HI tax liability is $225. Withholding equals tax liability. #2 �Married individual B has $225,000 in wages from employer Y, and spouse, C does not have wage income. Y withholds $225 in additional HI tax from wages. However, if B and C file jointly, they do not owe the additional tax, because total wages do not exceed $250,000 #3 �Married individual D has $150,000 in wages from employer Z, and spouse E has $125,000 in wages from employer W. Neither employer is required to withhold, and neither does. D and E file jointly and have $275,000 of wages. They are liable for an additional $225 tax, that will (presumably) be paid with their return

22. Healthcare reforms impact on payroll Rate Changes Medicare tax hike - unearned income New 3.8 percent Medicare contribution levied on certain unearned income of individuals with AGI over $200,000 ($250,000 for joint filers) Applies to lesser of �Net investment income� or Excess of modified AGI over $200,000 (single), $250,000 (joint), or $125,000 (married filing separately) Applies to individuals, estates, trusts, and certain trades and businesses Effective for tax years beginning after Dec. 31, 2012

23. Nonresident Personal Income Tax Exemption Thresholds The states below impose various exemption thresholds (i.e., de minimis standards) upon a nonresident employee's personal income tax liability. States that have exemptions administer them in one of two ways�measuring either the number of days (as in Hawaii's 60-day exemption) or dollars earned (as in Maryland's threshold of wages in excess of $5,000). The state de minimis thresholds below are categorized under day exemptions and dollar exemptions (a few states have both). State Exemption for Nonresident Personal Income Tax Withholding Measured in Days: Arizona�Withholding is not required if the nonresident is physically present in the state for fewer than 60 days in a calendar year.Georgia�Withholding is not required if the nonresident has been employed in the state for 23 days or fewer in a calendar quarter, or if the services performed in the state are for less than 5 percent of total income or less than $5,000.Hawaii�Withholding is not required if the nonresident employee is performing services in the state for no more than 60 days.Maine�Personal services performed in the state for more than 10 days are subject to withholding.New Mexico�Wages paid for services performed in the state for more than 15 days are subject to withholding.New York�Wages paid for services performed in the state for more than 14 days, or wages paid in excess of the employee's personal exemption, are subject to withholding.

24. State Exemption for Nonresident Personal Income Tax Withholding Measured in Dollars: California��Wages in excess of �Low Income Exemption Table� amounts are subject to withholding (i.e., $449 or less is exempt from California withholding).Idaho�Withholding is required if the nonresident will be paid at least $1,000 in a calendar year for services performed in Idaho.Maryland�Wages paid in excess of $5,000 are subject to withholding.Nebraska�Payments for personal services are not subject to withholding if less than $5,000.New Jersey �Wages paid in excess of an employee's personal exemptions are subject to withholding.Ohio�Wages paid in excess of $300 in any calendar quarter are subject to withholding.Oklahoma�Wages paid in excess of $300 in any calendar quarter are subject to withholding.South Carolina�Wages paid in excess of $1,000 for the calendar year, or wages paid in excess of the employee's federal personal exemption, are subject to withholding.Virginia�Wages paid in excess of the employee's personal exemption ($900 each) and standard deduction ($3,000 for an individual) or, if elected by the employee, the employee's filing threshold (single $7,000; married $14,000) are subject to withholding.West Virginia�Wages paid in excess of an employee's personal exemption amount (one exemption equals $2,000) are subject to withholding.Wisconsin �Wages paid in excess of $1,500 are subject to withholding.

25. Question and Answers

26. Karen Carter, CPP 615-595-7763 karen.carter@oracle.com