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Are You Missing Form W-2?

by Michael W. Blitstein, CPA 

There are times where I am asked, “I have not received my W-2 from my employer. What should I do?” Often this happens when an employer is no longer in business.  Companies sell, merge, consolidate or even close their doors – all circumstances that can lead to employees not receiving their W-2 or receiving it past the compliance deadline. You should receive a Form W-2, Wage and Tax Statement, from each of your employers for use in preparing your Federal tax return. Employers must furnish this record of earnings and withheld taxes no later than January 31st of the subsequent year.

If you do not receive your Form W-2, contact your employer to find out if and when the W-2 was mailed. If it was mailed, it may have been returned to your employer because of an incorrect address. After contacting your employer, allow a reasonable amount of time for your employer to resend or to issue the W-2.

In addition to providing you with the W-2, employers are required to file copies with IRS.  If you still do not receive your W-2 after a reasonable time, contact the IRS for assistance.  When you call, have the following information available:

  • The employer’s name and complete address, including zip code, and the employer’s telephone number.
  • The employer’s identification number (if known).
  • Your name and address, including zip code, social security number, and telephone number.
  • An estimate of the wages you earned, the federal income tax withheld, and the dates you began and ended employment.

If you misplaced your W-2, contact your employer. Your employer can replace the lost form with a “reissued statement.” Be aware that your employer is allowed to charge you a fee for providing you with a new W-2.

You still must file your tax return on time even if you do not receive your Form W-2. If you cannot get a W-2 by the tax filing deadline, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement, but it will delay any refund due while the information is verified.

If you receive a corrected W-2 after your return is filed and the information it contains does not match the income or tax withheld that you reported on your return, you must file an amended return on Form 1040X, Amended U.S. Individual Income Tax Return.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

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Retirement Plan Limitations for 2012…

by Michael W. Blitstein, CPA 

Internal Revenue Service has announced the following limitations for 2012 retirement plans:

Employee Deferrals:

IRA account – 100% of earned income up to $5,000; age 50 and older catch up $1,000
SIMPLE – 100% of earned income up to $11,500; age 50 and older catch up $2,500
401(k) – $17,000; age 50 and older catch up $5,500
457 Plan – $17,000; age 50 and older catch up $5,500

Defined Contribution Plan
The maximum annual contribution for a plan year ending in 2012 is the lesser of 100% of compensation or $50,000.  If a 401(k) contribution is used, those age 50 and older may reach $55,500.

Defined Benefit Plan
The maximum annual benefit for plan years ending in 2012 is the lesser of 100% of average annual compensation, or $200,000.

Definitions
Compensation to be used for retirement plan purposes for plan years beginning in 2012 is $250,000.

A highly compensated employee is one earning $115,000 or more for plan years beginning in 2012. The social security taxable wage base is $110,100.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

IRS Ramping Up For Increased Tax Audits

by Michael W. Blitstein, CPA 

One of the greatest fears of taxpayers is facing an audit by the Internal Revenue Service.  Many clients we have represented in IRS audits liken the experience to going to war.  There is the mentality of “us vs. them”.  And this mentality is often warranted.  Even though virtually every Federal agency is under budget scrutiny in Washington, the IRS has been provided with additional resources to add personnel to conduct taxpayer audits.

Back in the late 90’s, Congress was very critical of the IRS for aggressive collection tactics used on individual taxpayers.  Staff and budgets cuts followed.  Now, the IRS has been given initiatives to grow.  The 2012 budget calls for a 9% increase in funding.  Administrators are looking to spend $339 million with the goal of raising $1.3 billion from taxpayers. The IRS states that about 84% of taxes are paid voluntarily.  The difference is the gap they aim to reduce.

In 2006, tax returns with $1 million or more of income were audited 5.25% of the time.  By 2010 this rose to 8.36%.  Similar percentage increases exist for taxpayers with lesser income.  Businesses with less than $10 million of assets were audited just 0.32% of the time in 2004.  By 2010, that percentage almost tripled to 0.94%.

Many of these audits will be correspondence audits.  That is, rather than having to go in and meet with an IRS agent, requested information is mailed to the IRS.  Correspondence audits are less expensive for the IRS to conduct and are becoming more frequent.  Of more than 1.6 million audits conducted last year, 78% were correspondence audits.  This represents a 13% rise in audits from 2009, and a 93% increase from 2003.

While the chance of being audited may be minor, taxpayers should be aware that the possibility of selection is increasing. Compliance and documentation are key factors in navigating your way through an audit successfully. Please contact us with any questions you may have regarding your status, or if we may assist you with any audit examination matters. 

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

S Corporation Stockholder-Employee Compensation

by Michael W. Blitstein, CPA 

S corporation stockholder-employees and their tax advisers often find themselves with conflicting goals when setting the stockholder-employee’s compensation. Typically, the stockholder-employee prefers to minimize compensation in favor of distributions to reduce payroll taxes. Tax advisers, however, are faced with a body of governing authority providing that the stockholder-employee cannot avoid the imposition of payroll taxes by forgoing reasonable compensation. Unfortunately, until recently this governing authority had offered little in terms of how to actually compute reasonable compensation, leaving tax advisers with sparse guidance upon which to rely when recommending salary amounts to their clients.

In late 2010, an Iowa district court decided Watson, a reasonable compensation case that, together with the North Dakota District Court’s 2006 decision in JD & Associates, provides the direction tax advisers have been seeking. These two cases shed much needed light on the methodology the IRS and the courts use to determine reasonable compensation in the S corporation arena.

S Corporations and Employment Taxes

As passthrough entities, S corporations generally do not pay entity level tax on their taxable income. Instead, taxable income and other attributes are allocated among the stockholders, who report the items and pay the corresponding tax on their personal income tax returns.

This S corporation flowthrough income has long enjoyed an employment tax advantage over that of sole proprietorships, partnerships, and LLCs. The advantage finds its genesis in that a stockholder’s undistributed share of S corporation income is not treated as self-employment income. In contrast, earnings attributed to a sole proprietor, a general partner, or many LLC members are subject to self-employment taxes.

As the need to fund Social Security and Medicare payments has risen, the employment tax burden on employers, employees, and the self-employed has increased dramatically. In 2011, employers will pay 6.2% of the first $106,800 of an employee’s wages toward the Social Security tax, with employees paying an additional 4.2% through wage withholding. Employers and employees will split the 2.9% Medicare tax on all wages, without limitation.

Self-employed individuals will be responsible for the entire 10.4% Social Security tax—again limited to the first $106,800 of self-employment income—and the 2.9% Medicare tax on all self-employment income.

As these employment tax obligations have climbed, the advantage of operating as an S corporation has become magnified. Since S corporation income is not subject to self-employment tax, there is tremendous motivation for stockholder-employees to minimize their salary in favor of distributions, which are not subject to payroll or self-employment tax. Consider the following examples.

Example 1: John owns 100% of the stock of S Corporation, an S corporation. John is also S’s president and only employee. S generates $100,000 of taxable income in 2011, before considering John’s compensation. If John draws a $100,000 salary, S’s taxable income will be reduced to zero. John reports $100,000 of wage income on his individual income tax return, and S and John are liable for the necessary payroll taxes. S is required to pay $7,650 (7.65% of $100,000) as its share of payroll tax, and S withholds $5,650 (5.65% of $100,000) from John’s salary toward John’s payroll obligation, resulting in a total payroll tax bill of $13,300.

Example 2: Alternatively, John withdraws $100,000 from S as a distribution rather than a salary. S’s taxable income will remain at $100,000 and will be passed through to John and reported on his individual income tax return, where it is not subject to self-employment tax. The $100,000 distribution is also not taxable to John, as it represents a return of basis. By choosing to take a $100,000 distribution rather than a $100,000 salary, S and John have saved a combined $13,300 in payroll taxes.

Reasonable Compensation History: No Salary Taken

In light of these potential employment tax savings, the IRS has long challenged attempts by stockholder-employees to minimize compensation in favor of distributions. IRS opened its attack on these perceived abuses in Revenue Ruling 74-44. In the ruling, the IRS imputed the payment of reasonable salaries to an S corporation that paid distributions but no compensation to two stockholders who provided services to the corporation.

Fifteen years later, an oft-cited decision further clarified the IRS’s position on reasonable compensation. In Radtke, the taxpayer was the sole stockholder and director of a law firm established as an S corporation. Although the taxpayer devoted all his working time to the law firm, he took no compensation for the year at issue, opting instead to withdraw $18,225 in distributions.  The IRS argued, and the district court agreed, that the distributions represented wages subject to payroll taxes, with the court adding, “where the corporation’s only director had the corporation pay himself, the only significant employee, no salary for substantial services . . . [h]is ‘distributions’ functioned as remuneration for employment.”

Soon after, the Ninth Circuit Court of Appeals expanded on this line of reasoning with its decision in Spicer.  In that case, the taxpayer was Spicer Accounting Inc. (SAI), an accounting firm established as an S corporation. SAI was owned by Spicer, who was a CPA, and his spouse. Spicer also served as president, director, and treasurer. As SAI’s lone accountant, Spicer performed substantial services, working approximately 36 hours per week.

Spicer had an arrangement with his corporation whereby he donated his services to the corporation in exchange for no compensation, and as a stockholder he withdrew his earnings as distributions. Accordingly, Spicer did not pay payroll taxes on the amounts he received.

The Ninth Circuit, in analyzing the nature of the payments made to Spicer, stated that “salary arrangements between closely held corporations and [their] stockholders warrant close scrutiny.”  In an effort to determine if the distributions truly represented remuneration for services, the Ninth Circuit established a line of analysis that would be followed repeatedly in the years to follow.

The Ninth Circuit first looked to Sec. 3121(d), which defines an employee for payroll tax purposes in part as “any officer of a corporation.”  Because Spicer was the president of SAI, this requirement was easily met. The Ninth Circuit then turned its attention to Regulations Section 31.3121(d)-1(b), which provides an exception to employee status for some officers, but only to an officer who “does not perform any services or performs only minor services.”

In arriving at its decision, the Ninth Circuit held that Spicer’s services were substantial. As the firm’s lone CPA, Spicer was the only person capable of signing tax returns, performing audits, and preparing opinion letters. The Ninth Circuit concluded that distributions paid to Spicer were classified properly as compensation subject to payroll taxes because “a corporation’s sole full-time worker must be treated as an employee.”

A line of nearly identical rulings followed, with one Pennsylvania CPA at the heart of many of the decisions. In Grey, the sole stockholder of an accounting firm took no salary despite rendering significant services, opting instead to withdraw amounts as independent contractor fees. The Tax Court, using the line of reasoning established in Spicer, held that the stockholder was an employee and the accounting firm was liable for payroll taxes on the independent contractor fees.

After its victory in Grey, the IRS zeroed in on the accounting firm’s client list. In all, six of those clients found themselves in front of the Tax Court, defending the reasonableness of their compensation.  In each case, stockholder-employees who provided significant services to their S corporation withdrew the entire taxable income of their corporation as distributions, neglecting to take any salary. The Tax Court held that the stockholders were employees and recharacterized the distributions as compensation.

The abuses evidenced in these decisions did not go unnoticed. In 2005, the Treasury Inspector General for Tax Administration (TIGTA) issued a report examining the payroll tax advantage that S corporations enjoyed over sole proprietorships. The report, which analyzed S corporation tax returns filed in 2000, revealed the following:

  • Approximately 80% of all S corporations were more than 50% owned by one stockholder, giving that stockholder control in setting his or her compensation.
  • Owners of single-stockholder S corporations paid themselves salaries equaling only 41.5% of the corporation’s profits, down from 47.1% in 1994.
  • There were 36,000 situations in which the sole owners of S corporations generating over $100,000 of income took no salaries. These corporations passed through $13.2 billion to their owners free from payroll tax.
  • In total, the payroll taxes paid by single-stockholder S corporations were $5.7 billion less than the self-employment taxes that would have been imposed if the taxpayers were sole proprietors.

In 2009, a U.S. Government Accountability Office (GAO) report to the Senate Committee on Finance echoed the concerns expressed in the TIGTA findings. The GAO report noted that in 2003 and 2004 combined, S corporations had underreported their stockholder compensation by $24.6 billion, with corporations with fewer than three stockholders responsible for nearly all the underreporting.

A Rare Defeat for the IRS

Although a stockholder faces a heavy burden in proving that services provided to a corporation are not substantial, it can be accomplished. For example, in Davis, a district court held that the stockholder had proved this point and rejected the IRS’s attempt to recharacterize distributions made to a stockholder of an S corporation as “arbitrary and capricious.”

Davis was the president of the corporation but did not actively participate in its activities. The court, citing Spicer, found that based on the uncontroverted evidence of the stockholder, she did not provide substantial services to the corporation and met the exception from employee treatment provided for in the Section 3121 regulations. While this decision remains an anomaly in the relevant case history, it confirms that stockholders need not draw a salary provided they render only minimal services to the corporation.

Real Estate Professionals Allowed Late Election to Aggregate Rental Real Estate Interests

by Michael W. Blitstein, CPA 

Revenue Procedure 2011-34

In a Revenue Procedure, IRS has provided guidance that allows certain real estate professionals to make a late election under Regulation § 1.469-9(g) to treat all interests in rental real estate as a single rental real estate activity for purposes of the passive activity loss (PAL) rules.

Background

Under Code Section 469(c)(1), the PAL disallowance rules apply to any trade or business in which the taxpayer does not materially participate. A taxpayer is treated as materially participating in an activity if he meets at least one of the seven tests in Regulation § 1.469-5T. In general, any rental activity is per se a passive activity regardless of the taxpayer’s participation in the activity. However, there are exceptions to the general per se rule.

The Code’s per se rule for rental activities doesn’t apply to a qualifying real estate professional. A taxpayer qualifies as such for a particular tax year if: (1) more than half of the personal services that he performs during that year are performed in real property trades or businesses in which he materially participates; and (2) he performs more than 750 hours of services during that tax year in real property trades or businesses in which he materially participates.

If a taxpayer is a qualifying real estate professional, the PAL rules generally are applied as if each interest of the taxpayer in real estate were a separate activity. But a qualifying taxpayer may elect to treat all his interests in rental real estate as one activity.

The election is made by filing a statement with the taxpayer’s original income tax return for the tax year. This statement must contain a declaration that the taxpayer is a qualifying taxpayer for the tax year and is making the election under Code Sec. 469(c)(7)(a).

Late filing relief

A taxpayer receiving relief under Revenue Procedure 2011-34 is treated as having made a timely election to treat all interests in rental real estate as a single rental real estate activity as of the tax year for which the late election was requested. A taxpayer is eligible for an extension of time to file an election under Revenue Procedure 2011-34 if he represents in a statement (under penalties of perjury) that he:

… failed to make the election solely because he failed to timely meet the requirements in Regulation § 1.469-9(g);

… filed consistently with having made an election under Regulation § 1.469-9(g) on any return that would have been affected if he had timely made the election. He must have filed all required federal income tax returns consistent with the requested aggregation for all of the years, including and following the year he intends the requested aggregation to be effective, and no tax returns containing positions inconsistent with the requested aggregation may have been filed by or with respect to him during any of the tax years;

… timely filed each return that would have been affected by the election if it had been timely made. He will be treated as having timely filed a required tax or information return if the return is filed within six months after its due date, excluding extensions; and

… has reasonable cause for failing to meet the requirements in Regulation § 1.469-9(g)

A taxpayer must attach the statement required to an amended return for the most recent tax year and mail it to the IRS service center where the taxpayer will file its current year tax return. The statement must contain the declaration required by Regulation § 1.469-9(g), explain the reason for the failure to file a timely election, and include the above representations. The statement must identify the tax year for which it seeks to make the late election and must state at the top “FILED PURSUANT TO REVENUE PROCEDURE 2011-34.”


Extending the COBRA Premium Subsidy…

by Michael W. Blitstein, CPA 

The American Recovery and Reinvestment Act of 2009 (ARRA) provided a temporary subsidy for the cost of COBRA continuation health coverage. On December 21, 2009, President Obama signed legislation extending the COBRA premium subsidy. The new law addresses the uncertainties employers were facing regarding the subsidy.  The following facts concerning the extension should be of interest to all employers and is excerpted from the GCG Financial, Inc. Legislative Brief: 

Eligibility Period – Extended through February 28, 2010
Before the subsidy extension, an individual had to be eligible for COBRA before December 31, 2009, in order to receive the premium subsidy. This was true even if the individual was involuntarily terminated from employment before December 31, 2009. The extension provides that individuals who become eligible for COBRA because of an involuntary termination occurring during the period from September 1, 2008, through February 28, 2010, will be eligible for the subsidy if they elect COBRA.

Length of Subsidy – Extended to 15 months

Initially, the COBRA premium subsidy was available to assistance eligible individuals (AEIs) for a maximum of nine months.  The new legislation extends the premium subsidy period by six months to a total of 15 months. However, employees and employers should keep in mind that the COBRA premium subsidy does not affect the length of COBRA coverage itself.

Retroactive Payments – How to Handle Employees Caught in the Middle

The new law contains provisions regarding AEIs whose 9-month subsidy period expired before the extension was passed. These AEIs may have let their COBRA coverage lapse because it was too costly without the subsidy. Others may have kept the coverage and started paying the full amount of the premium. These AEIs will be able to benefit from the subsidy extension retroactively. Special notices to these individuals are required, as explained below.

AEIs who failed to pay their COBRA premiums once their initial subsidy period expired can retroactively pay the premiums to maintain COBRA at subsidized rates for the additional six months. The premiums must be paid no later than February 19, 2010, or 30 days after the AEI receives notice of the extension, whichever is later.

If an AEI paid the full amount of the COBRA premiums after the 9-month subsidy period ended, but is now eligible for additional assistance, the employer must either reimburse the individual for the excess premium amount paid or provide a credit that reduces later premium payments.

Notice Requirements 
The legislation includes additional notice requirements for group health plans. In general, plan administrators must provide notice of the subsidy extension to individuals who are AEIs at any time on or after October 31, 2009. The notice must be provided by February 19, 2010. Also, election notices sent to individuals who experience a qualifying event on or after October 31, 2009, must include information regarding the subsidy extension.

The new law also requires notices to the following individuals: (a) those who are eligible to make retroactive premium payments because they let their COBRA coverage expire once their subsidy period ended, and (b) those who are entitled to receive reimbursement or credit because they are eligible for additional assistance but paid the full amount of the premium for coverage. The plan administrator must notify these individuals of the subsidy extension within the first 60 days of the individual’s transition period.  The transition period includes any period of coverage beginning before December 21, 2009, that will now be covered by the subsidy due to the extension. 

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.