Entities Allowed Additional Time to Renew QI Agreements

In a Q&A on its list of questions and answers for qualified intermediaries (QIs), foreign withholding partnerships (WPs), and foreign withholding trusts (WTs) (see Q&A-22), the IRS today extended the deadline for submitting QI, WP, and WT agreement renewal requests from March 31, 2017, to May 31, 2017.  Applications submitted by the deadline will be granted a QI, WP, or WT agreement (as applicable) with an effective date of January 1, 2017.  This delay gives entities additional time to comply with the new application system (discussed in a prior post) and gather the necessary information to submit renewal requests.

The deadline for applications submitted for new QI agreements with an effective date of January 1, 2017, however, is extended to May 31, 2017, only if the QI is seeking qualified derivative dealer (QDD) status. To be granted an agreement with an effective date of January 1, 2017, applications for new QI agreements that are not seeking QDD status, WP agreements, and WT agreements must be submitted today.

Poor Design and Poor Defense Sink Employee Discount Plan

A recent IRS Field Attorney Advice (FAA) memorandum highlights the risk of poorly designed employee discount plans.  In FAA 20171202F, the IRS Office of Chief Counsel determined that an employer was liable for failing to pay and withhold employment taxes on employee discounts provided under an employee discount plan that failed to satisfy the requirements for qualified employee discounts under Code section 132(c).  The FAA also suggests that had the employer either kept or provided better records of the prices at which it provided services to select groups of customers, the result may have been different.  In the FAA, the IRS applied the fringe benefit exclusion for qualified employee discounts to an employer whose business information was largely redacted.  Under the employee discount program considered, an employee and a set number of participants designated by each employee (including the employee’s family members and friends) were eligible for discounts on certain services provided by the employer.  The Treasury Regulations under section 132(c) permit employers to offer employees and their spouses and dependent children non-taxable discounts of 20 percent on services sold to customers.

The employer argued that, although the discounts provided under the program exceeded the 20 percent limit applicable to discounted services when compared to published rates, they were in most cases less than the discount rates the employer offered to its corporate customers and members of certain programs.   The Treasury Regulations provide that an employee discount is measured against the price at which goods or services are sold to the employer’s customers.  However, if a company sells a significant portion of its goods or services at a discount to discrete customers or consumer groups—at least 35 percent—the discounted price is used to determine the amount of the employee discount.  Despite the employer’s argument that the determination of the amount of the employee discounts should not be based on the published rates, the IRS refused to apply this special discount rule for lack of adequate substantiation.  Although the employer provided the IRS with bar graphs showing the discounts it gave to various customers, the employer did not substantiate the information on the graphs or provide the IRS with evidence showing what percentage of its total sales were made from each of the customers allegedly receiving discounted rates.  Had the employer shown that it sold at least 35 percent of its services at a discount, then at least some, if not most of the employee discounts in excess of the published rates less 20 percent, may not have been taxable.

Having determined that the discounts offered exceeded the 20 percent limit applicable to services, the IRS ruled that the employer must withhold and remit employment taxes on any employee discount to the extent it exceeded 20 percent of the published rate.  Correspondingly, the employer must report the taxable amount as additional wages on the employee’s Form W-2.  Perhaps even more costly for the employer, the IRS determined that the entire value of the discount (and not just the amount in excess of 20 percent) provided to someone designated by an employee constitutes taxable wages paid to the employee unless the person is the employee’s spouse or dependent child.  Accordingly, if an employee designates a friend under the program who uses the discount, the entire discount must be included in the employee’s wages and subjected to appropriate payroll taxation.

Offering employee discounts on property and services sold to customers can make for a valuable employee reward program, but the technical requirements to avoid tax consequences for these programs can be overlooked.  The FAA’s analysis is consistent with the regulations under Code sections 61 and 132, and should not be surprising to anyone familiar with the rules.  Given the recent interest in employee discount programs by IRS examiners conducting employment tax examinations, it would be prudent for employers to review their employee discount programs and consider whether the programs are properly designed to avoid the potentially expensive payroll tax consequences that could be triggered by discounts that do not qualify for the income exclusion under section 132(c).

Recent FAA Serves as Warning to Employers Using PEOs

A recent Internal Revenue Service Office of Chief Counsel field attorney advice memorandum (FAA 20171201F) sounds a cautionary note for employers making use of a professional employer organization (PEO).  The FAA holds a common law employer ultimately liable for employment taxes owed for workers it leased from the PEO.  Under the terms of the employer’s agreement with the PEO, the PEO was required to deposit employee withholdings with the IRS and pay the employer share of payroll taxes to the IRS.  Alas, that was not what happened.

The taxpayer did not dispute that it had the right to direct and control all aspects of the employment relationship and was thus was the common law employer with respect to the employees, but asserted that it was not liable for the unpaid employment taxes. Under the terms of the contracts between the taxpayer and the PEO, the taxpayer would pay an amount equal to the wages and salaries of the leased employees to the PEO prior to the payroll date, and the PEO would then pay all required employment taxes and file all employment tax returns (Forms 940 and 941) and information returns (Forms W-2) with respect to the employees.

After the PEO failed to pay and deposit the required taxes, the Examination Division of the IRS found the taxpayer liable for the employment tax of those workers, plus interest. The taxpayer appealed, making several arguments against its liability: (i) the PEO was liable for paying over the employment taxes under a state statute; (ii) the PEO was the statutory employer, making it liable for the employment taxes; and (iii) the workers were not employees of the taxpayer under Section 530 of the Revenue Act of 1978.

The Office of Chief Counsel first explained that the state law cited by the taxpayer was not relevant because it was superseded by the Internal Revenue Code. The FAA rejects the taxpayer’s second argument because the PEO lacked control over the payment of wages, and thus it was not a statutory employer. The PEO lacked the requisite control because the taxpayer was obligated to make payment sufficient to cover the employees’ pay before the PEO paid the workers.  Finally, the Office of Chief Counsel denied the taxpayer relief under Section 530 of the Revenue Act of 1978 because that provision only applies to questions involving employment status or worker classification, neither of which was at issue.  Although the FAA makes clear that the common law employer will be on-the-hook for the unpaid employment taxes, the FAA did indicate that it would be open to allowing an interest-free adjustment because the taxpayer’s reliance on the PEO to fulfill its employment tax obligations constituted an “error” under the interest-free adjustment rules.

The FAA serves as a reminder that the common law employer cannot easily offload its liability for employment taxes by using a contract. Indeed, it remains liable for such taxes and related penalties in the event that the party it has relied on to deposit them fails to do so timely.  Employers who choose to make use of a PEO should carefully monitor the PEO’s compliance with the payroll tax rules to ensure that it does not end up in this taxpayer’s position.  Alternatively, employers should consider whether to use a certified PEO under the new regime established by Congress (earlier coverage  available here and here).  When using a certified PEO, the common law employer can successfully shift its liability to the PEO and is not liable if the PEO fails to comply with the payroll tax requirements of the Code.

House Republicans Pull ACA Replacement Bill

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March 24, 2017

Facing likely defeat, Republicans have pulled the American Health Care Act, which would have made numerous changes to the information reporting provisions and employment tax provisions of the Affordable Care Act (ACA) (earlier coverage).   The legislation would have also created a new information reporting requirement by adding Section 6050X to the Code.  The House was scheduled to vote on the legislation this afternoon, but Republicans have struggled to appease both conservative Republicans, who wanted a more completed repeal of the ACA, and moderate Republicans, who were concerned about the potential loss of coverage that could result from the legislation. The decision to pull the bill increases the likelihood that the ACA’s information reporting regime under Sections 6055 and 6056 will remain in place, along with the additional Medicare tax and other provisions of the ACA.

Employers Likely Need to Update Their Processes Based on New Requirements for Employer Refund Claims of FICA and RRTA Taxes

On March 20, the IRS released Rev. Proc. 2017-28, providing guidance to employers on employee consents used to support a claim for credit or refund of overpaid taxes under the Federal Insurance Contributions Act (FICA) and the Railroad Retirement Tax Act (RRTA). The revenue procedure requires the employee consent to contain, among other information, the basis for the refund claim and a penalties of perjury statement. In addition, it permits employers to request, receive, and retain employee consent electronically, and clarifies the “reasonable efforts” an employer must make, if it fails to secure employee consent, to claim a refund of the employer’s share of overpaid FICA or RRTA taxes. Many of the requirements in the revenue procedure were included in a proposed revenue procedure contained in Notice 2015-15. Rev. Proc. 2017-28 also provides the circumstances under which an employee consent may use a truncated taxpayer identification number (TTIN).  Employers will need to review the new requirements and update their existing FICA refund process to ensure that process satisfies the new requirements.

Background

Treasury Regulation section 31.6402(a)-2 provides general rules for employers to claim refunds of overpaid FICA and RRTA taxes. An employer must file the refund claim on the form prescribed by the IRS (e.g., Form 941-X) and designate the return period to which the claim relates, explain the grounds and facts supporting the claim, and meet other requirements under the regulations and the form’s instructions. An employer that is granted a tax refund of FICA or RRTA taxes (including any applicable interest) must give the employee his or her share.

To protect an employee’s interests, the regulations prohibit the refund of the employer share unless the employer (a) has first repaid or reimbursed the employee, or (b) has included a claim for refund of the employee share of FICA or RRTA taxes, along with the employee’s consent. Similarly, to claim refund of the employee share, the employer must certify that the employer has repaid or reimbursed the employee share or has secured the employee’s written consent for the refund claim, except to the extent taxes were not withheld from the employee. But these requirements do not apply, and the employer may claim refund for the employer share, to the extent that either (a) the taxes were not withheld from the employee’s compensation; or (b) the employer cannot locate the employee or the employee will not provide consent after the employer has made reasonable efforts to either secure the employee’s consent or to repay or reimburse the employee.

New Rules on Requesting and Retaining Employee Consent

45-day consent period. A request for consent must give employees a reasonable period of time to respond, not less than 45 days. The request must clearly state: (a) the purpose of the employee consent; (b) that the employer will repay or reimburse the employee share (including allocable interest) to the extent refunded by the IRS; and (c) that an employee cannot authorize the employer to claim a refund on the employee’s behalf for any overpaid Additional Medicare Tax. A request for consent may include an express presumption that if an employee’s response has not been received by the employer during the specified time period, the employee will be considered as having refused to provide the employee consent. However, a failure to respond may not be deemed consent. A request for consent also may include a request that the employee keep the employer informed about any change in the employee’s mailing address or email address.

Electronic Consent. An employer may establish a system to request, furnish, and retain employee consent in an electronic format that ensures the authenticity and integrity of the electronic signature and record. Although an employer may use electronic consent, the employer must provide an employee, upon request, the option to review the consent request and to provide the consent in paper format.

Reasonable Efforts. An employer may claim a refund of the employer share of FICA and RRTA tax without obtaining employee consent only if the employer makes “reasonable efforts” to repay or reimburse the employee or secure the employee’s consent and the employer cannot locate the employee or the employee will not provide consent. The reasonable efforts rule is satisfied if an employer fulfills the following requirements.

  • Request for consent. The employer properly requests the employee’s consent.
  • Email receipt acknowledgement. Any electronic request for consent asks the employee to affirmatively acknowledge the request (e.g., by clicking on a voting button (YES) or by sending a reply message). A read-receipt message is not sufficient.
  • Record retention. The employer retains a record of sending the request for consent, including the mailing or personal delivery record, the email record (including any receipt acknowledgement), or the employee’s reply declining the request.
  • Second delivery attempt. If the employer’s initial request fails to be delivered, the employer must attempt to secure consent a second time, with a 21-day response period from the date of the second request. In particular, if a mailing is undeliverable, the employer must make a good faith attempt to determine the employee’s current address and if a new address is discovered, send the request again by mail or personal delivery. Alternatively, the employer can email the request to the employee. If an email is undeliverable (e.g., due to problems with the employee’s email address) or if the employee does not acknowledge receipt of the email, the employer must send a request in paper to the employee’s last known address by mail or personal delivery.

New Rules on Employee Consent

Required Items. Employee consents are subject to a list of requirements, two of which are noteworthy. First, the employee must identify the specific basis of the refund claim. The revenue procedure provides a detailed example: “request for refund of the social security and Medicare taxes withheld with regard to excess transit benefits provided in 2014 due to a retroactive legislative change.” It is unclear how detailed the basis provided must be to satisfy this requirement. Second, the consent must contain the employee’s signature under a penalties of perjury statement. The penalties of perjury requirement will complicate efforts to obtain employee consents and written statements as employees are often reluctant to sign documents under threat of perjury even when they are certifying true statements. This is particularly true with regard to former employees.

In addition to the two requirements described above, an employee consent must:

  • contain the employee’s name, address, and taxpayer identification number (TIN);
  • contain the employer’s name, address, and employer identification number (EIN);
  • contain the tax period(s), type of tax (e.g., social security and Medicare taxes), and the amount of tax for which the employee consent is provided;
  • state that the employee authorizes the employer to claim a refund for the overpayment of the employee share; and
  • with regard to refund claims for employee tax overcollected in prior years, include the employee’s written statement certifying that the employee has not made previous claims (or that the claims were rejected) and will not make any future claims for refund of the overcollected amount.

Use of TTIN. To address concerns regarding identity theft, the revenue procedure allows the use of a TTIN in place of the employee’s complete social security number (SSN) if the employer prepares the employee consent and prepopulates the TIN field with the TTIN. A TTIN may not be used, however, if the employer requests the SSN as the employee’s TIN or if the employee furnishes the TIN as part of the consent.

As a result of the new guidance, many employers will need to update their employee consent procedures to comply with the new rules, most of which are not specified in the Code or the implementing Treasury regulations. FICA tax overpayments frequently occur, and failure to obtain the proper employee consent, or failure to follow the procedures for requesting consent, can delay the employer’s refund claim. The new requirements apply to employee consents requested on or after June 5, 2017.

Revised House ACA Repeal Will Delay Repeal of AMT until 2023

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March 24, 2017

Last night, Republican leadership released a manager’s amendment to the American Health Care Act (AHCA) that would delay the repeal of the additional Medicare tax (AMT) of 0.9% imposed on certain high-income individuals from 2017 until 2023.  The move is an effort to shore up Republican support for the bill in advance of an expected vote late this afternoon or this evening.  The delay comes three days after an earlier manager’s amendment moved up the repeal of the AMT from 2018 to 2017, and added a transition rule related to employer withholding of the tax.  That change was also made in an effort to shore-up Republican support ahead of the House vote, which was originally expected to happen yesterday.  Our earlier analysis of the information reporting and employment tax provisions of the AHCA is available here.

IRS Negotiating CbC Information Exchange Agreements

The IRS is engaging in negotiations with individual countries to implement country-by-country (CbC) reporting according to Douglas O’Donnell, Commissioner of IRS’s Large Business and International Division.  In a March 10 speech at the Pacific Rim Tax Institute that, he clarified that the IRS is only negotiating with jurisdictions that have both an information exchange instrument and adequate information safeguards.  Mr. O’Donnell did not provide a definitive timeline for those negotiations, but he said that they would be completed in a timely manner.  The IRS’s approach to negotiating information exchange agreements is consistent with the United States’ existing approach to negotiating IGAs and related agreements under FATCA.

Companies are anxiously awaiting the agreements, as they could face reporting obligations in certain jurisdictions with which the United States does not have agreements in place, causing them to potentially prepare multiple CbC reports. Companies are also urging the IRS to release information on the expected scope of the U.S. information exchange network, as lack of knowledge on the scope could negatively impact companies’ ability to do business in certain countries if the companies do not comply with local filing requirements.

These information exchange agreements arise from recent recommendations provided by the Organization for Economic Co-Operation and Development (OECD) (additional information on OECD guidance on CbC reporting available here) on jurisdictions with respect to information on multinational corporations, requiring jurisdictions to exchange such information in a standardized format beginning in 2018 (please see prior post for additional background).  The IRS released final regulations in June 2016 imposing CbC reporting on U.S. persons that are the ultimate parent entity of a multinational enterprise group with revenue exceeding $850 million in the preceding accounting year (prior coverage).

House Republicans’ ACA Repeal-and-Replace Bill Would Change Health Coverage Reporting Requirements

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March 7, 2017

A House Republican bill, entitled the American Health Care Act, would repeal many provisions of the Affordable Care Act (ACA) but retain and expand the information reporting rules.  Released on March 6, the proposal consists of two parts: (1) a bill drafted by the House Ways and Means Committee, to eliminate the ACA’s taxes and income-based subsidies, zero out penalties for the individual and employer mandates, and establish a new individual tax credit; and (2) a bill drafted by the House Energy and Commerce Committee, to freeze and reform Medicaid.

The Ways & Means bill would help taxpayers pay for health insurance by expanding health savings accounts, and by providing an advanceable, refundable tax credit—the “health insurance coverage” credit—for purchasing state-approved, major medical health insurance and unsubsidized COBRA coverage.  Unlike the leaked bill obtained by Politico on February 24, the bills do not cap the tax exclusion for employer-provided health insurance.  Although the legislation is unlikely to pass in its current form, as it is headed for markup by the two Committees later this week, it does provide insight into the thinking of House Republicans.

Those hoping for a full repeal of the ACA’s reporting provisions will be disappointed as the ACA’s reporting regime would largely survive, at least temporarily.  Applicable large employers (ALEs), for instance, would still be required to file Forms 1094-C and 1095-C pursuant to Code section 6056, even though the bill would reduce penalties for failure to comply with the employer mandate to zero beginning in 2016.  Similarly, the Ways & Means bill does not eliminate the requirement for providers of minimum essential coverage to report coverage on Form 1095-B (or Form 1095-C) despite eliminating the penalty on individuals for failing to maintain coverage.

However, the Ways & Means bill would alter health insurance reporting in three ways.  First, the bill would establish new information reporting rules under Code section 6050X for the health insurance coverage credit beginning in 2020.  Second, the bill would expand information reporting under Code section 6055 regarding the ACA’s premium tax credits used for qualifying off-Exchange coverage in 2018 and 2019.  Third, the bill would repeal the additional Medicare tax and thereby eliminate employers’ corresponding reporting and withholding obligations beginning in 2020.

New Reporting Rules for Health Insurance Coverage Credits Beginning in 2020

The bill would replace the ACA’s premium tax credit with the health insurance coverage credit for purchasing eligible health insurance—state-approved, major medical health insurance and unsubsidized COBRA coverage—starting in 2020.  Generally, an individual is eligible for this credit only if he or she lacks access to government health insurance programs or offer of employer coverage.  The credit amount varies from $2,000 to $4,000 annually per person based on age, and phases out for those earning over $75,000 per year ($150,000 for joint filers).  The credit maxes out at $14,000 per family, and is capped by the actual amount paid for eligible health insurance.  Treasury would be required to establish a program for making advance payments of the credit, on behalf of eligible taxpayers, to providers of eligible health insurance or designated health savings accounts no later than 2020.

Reporting for Health Insurance Coverage Credit.  To administer the health insurance coverage credit, the bill would create Code section 6050X that would require providers of eligible health insurance to file information returns with the IRS and furnish taxpayer statements, starting in 2020.  The return must contain the following information: (a) the name, address, and taxpayer identification number (TIN) of each covered individual; (b) the premiums paid under the policy; (c) the amount of advance payments made on behalf of the individual; (d) the months during which the individual is covered under the policy; (e) whether the policy constitutes a high deductible health plan; and (f) any other information as Treasury may prescribe.  The bill does not specify how often providers would be required to file returns reporting this information with the IRS, but it would authorize Treasury to require a provider to report on a monthly basis if the provider receives advance payments.  A provider would also be required to furnish taxpayers, by January 31 of the year after the year of coverage, written statements containing the following information: (a) the name, address, and basic contact information of the covered entity required to file the return; and (b) the information required to be shown on the return with respect to the individual.

Employer Statement for Advance Payment Application.  The advance payment program would require an applicant—if he or she (or any qualifing family member taken into account to determine the credit amount) is employed—to submit a written statement from the applicable employer stating whether the applicant or the qualifying family member is eligible for “other specified coverage” in connection with the employment.  Other specified coverage generally includes coverage under an employer-provided group health plan (other than unsubsidized COBRA continuation coverage or plan providing excepted benefits), Medicare Part A, Medicaid, the Children’s Health Insurance Program, and certain other government sponsored health insurance programs.  An employer shall provide this written statement at the request of any employee once the advance payment program is established.  This statement is not required if the taxpayer simply seeks the credit without advance payment.

Employer Coverage Reporting on Form W-2.  The bill would require reporting of offers of coverage by employers on the Form W-2 beginning with the 2020 tax year.  Employers would be required to report each month in which the employee is eligible for other specified coverage in connection with employment.  This requirement would likely demand a substantial revision to the current Form W-2, which is already crowded with information.  The Form W-2 reporting requirement appears to be intended to replace the reporting rules under Section 6056 based on a statement in the Ways and Means Committee summary.

Although the budget reconciliation rules limit Congress’s ability to repeal the current coverage reporting rules, the Ways and Means Committee states that Treasury can stop enforcing any reporting not required for tax purposes.  Given the elimination of penalties for individuals who fail to maintain minimum essential coverage and ALEs that fail to offer coverage, this statement may serve as a green light to undo many of the Form 1095-B and 1095-C reporting requirements once the ACA’s premium tax credits are eliminated and Form W-2 reporting is in place in 2020.

Reasonable Cause Waiver.  The bill would make these new information returns and written statements subject to the standard information reporting penalties under Code section 6721 (penalties for late, incomplete, or incorrect filing with IRS) and Code section 6722 (penalties for late, incomplete, or incorrect statements furnished to payees).  The bill also extends the reasonable cause waiver under Code section 6724 to information reporting penalties with respect to the new health insurance coverage credit returns, so that the IRS may waive such penalties if the failure is “due to reasonable cause and not to willful neglect.”

Transitional Reporting Rules for Premium Tax Credits in 2018 and 2019

The Ways & Means bill would allow the ACA’s premium tax credits to be used for off-Exchange qualified health plans in 2018 and 2019 before eliminating the credits in 2020.  The premium tax credit is a refundable, income-based credit that helps eligible individuals and families pay premiums for coverage under a “qualified health plan,” which, under current law, only includes plans sold on ACA Exchanges, and does not include catastrophic-only health plans.  The bill, however, would expand the definition of qualified health plan to include off-Exchange and catastrophic-only health insurance plans that otherwise meet the requirements for a qualified health plan, so that these types of plans would also be eligible for the premium tax credit.  Advance payment of the credit is only available for coverage enrolled in through an Exchange.

To aid in the administration of the expanded credit, the bill would amend Code section 6055(b) to require providers of minimum essential coverage to report certain information related to premium tax credits for off-Exchange qualified health plans.  Because employer-sponsored coverage does not qualify for the credit, employers sponsoring self-insured plans generally would not be required to report additional information on the Form 1095-C beyond that already required under Code sections 6055 and 6056.  Health insurance issuers who provide coverage eligible for the credit would be required to report annually to the IRS: (a) a statement that the plan is a qualified health plan (determined without regard to whether the plan is offered on an Exchange); (b) the premiums paid for the coverage; (c) the months during which this coverage was provided to the individual; (d) the adjusted monthly premium for the applicable second lowest cost silver plan for each month of coverage; and (e) any other information as Treasury may prescribe.  These new reporting requirements would apply only in 2018 and 2019, before the premium tax credit is scrapped and replaced by the health insurance coverage credit in 2020.

Repeal of Additional Medicare Tax

The bill would also repeal the additional Medicare tax under Code section 3101(b)(2), beginning in 2018.  This 0.9% tax is imposed on an employee’s wages in excess of a certain threshold (e.g., $200,000 for single filers and $250,000 for joint filers).  Under current law, employers are required to withhold and remit additional Medicare taxes when it pays wages to an employee over $200,000.  The additional Medicare tax has complicated the process for correcting employment tax errors because unlike other FICA taxes (and more like income tax withholding) the additional Medicare tax is paid on the employee’s individual income tax return.  As a result, the employer cannot make changes to the amount of additional Medicare tax reported after the end of the calendar year.  The elimination of the additional Medicare tax will likely be welcomed by employers and employees affected by it.  In addition, the bill would also repeal the net investment income tax that expanded the Medicare portion of FICA taxes to non-wage income for individuals with incomes in excess of certain thresholds.

What to Expect Next

The fate of the legislation is uncertain, and it will likely undergo substantive changes before House Republicans move the bill to the floor.  A key issue that House Republicans are reportedly debating is how to structure the health insurance coverage tax credit.  Additionally, the decision to eliminate the cap on tax breaks for employer-provided health insurance that was included in the draft language leaked in late February may mean that the legislative proposal will need to be amended to include another funding source.  However these issues are resolved, the legislation makes it clear that a health insurance reporting regime is likely to survive Republicans’ ACA repeal-and-replace efforts.  We will continue to monitor further developments on the proposal and its impact on the information reporting regime for health insurance coverage.

42 Months Sentence Upheld For Business Owner’s Second Employment Tax Violation

A taxpayer who willfully failed to remit federal employment taxes while in the process of pleading guilty to a nearly identical crime could not escape his above-the-guidelines sentence of 42 months’ imprisonment, the D.C. Circuit recently held.  In United States v. Jackson, the taxpayer committed bankruptcy fraud in 2002 by diverting $373,000 from the company he ran to another one of his businesses, instead of remitting the federal tax withholdings from the wages of the company’s employees.  For this crime, the district court imposed five years’ probation rather than imprisonment.  But the taxpayer did not learn his lesson.  While pleading guilty to this crime and before being sentenced in 2006, the taxpayer, from 2005 through 2009, failed to pay almost $600,000 in federal employment taxes that his other business had withheld from employee wages.  He instead used this money to pay for jewelry, clothing, furniture, and rent.  Caught again, the taxpayer pleaded guilty, this time to willful failure of paying federal employment taxes in violation of Code § 7202, which carries a fine up to $10,000 and up to five years’ imprisonment.

The Department of Justice (DOJ) signed a plea agreement with the taxpayer recommending a U.S. Sentencing Guidelines range of 27 to 33 months.  This agreement was not, however, binding on the district court.  At sentencing, DOJ emphasized that the taxpayer was being sentenced for stealing employment taxes a second time.  Accordingly, the district court imposed 42 months’ imprisonment—9 months more than the top recommended range in the plea agreement.  On appeal, the D.C. Circuit affirmed, reasoning that the taxpayer’s repeat offenses not only demonstrated willful violation of the law, but also proved that a lenient sentence was not sufficient to deter him from committing similar crimes in the future.

As we noted in a prior post, DOJ has been ramping up criminal prosecutions of employment tax violations.  In Jackson, DOJ appears to have prosecuted the case very aggressively by recommending a sentencing range that functioned as an anchor, and then pushing for a harsher sentence.  The district court and the D.C. Circuit ultimately agreed, which reflects not only the seriousness and audacity of the taxpayer’s repeat offenses, but also the principle that using employment taxes held in trust for the government constitutes theft.  This principle is especially noteworthy for businesses that use trust fund taxes to pay other creditors when in dire financial straits, as this practice may now lead to not only civil liability, but also criminal prosecution for those making the decision to divert the funds.  Employers are well served to recognize that trust fund taxes are not their money.

First Friday FATCA Update

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March 3, 2017

Recently, the Treasury released the Model 1B Intergovernmental Agreement (IGA) entered into between the United States and Ukraine. The IRS released the Competent Authority Agreements (CAAs) implementing the IGAs between the United States and the following treaty partners:

  • Antigua and Barbuda (Model 1B IGA signed on August 31, 2016);
  • Vietnam (Model 1B IGA signed on April 1, 2016).

Under FATCA, IGAs come in two forms: Model 1 or Model 2.  Under a Model 1 IGA, the foreign treaty partner agrees to collect information of U.S. accountholders in foreign financial institutions (FFIs) operating within its jurisdiction and transmit the information to the IRS.  Model 1 IGAs are drafted as either reciprocal (Model 1A) agreements or nonreciprocal (Model 1B) agreements.  By contrast, Model 2 IGAs are issued in only a nonreciprocal format and require FFIs to report information directly to the IRS.

A CAA is a bilateral agreement between the United States and the treaty partner to clarify or interpret treaty provisions.  A CAA implementing an IGA typically establishes and prescribes the rules and procedures necessary to implement certain provisions in the IGA and the Tax Information Exchange Agreement, if applicable.  Specific topics include registration of the treaty partner’s financial institutions, time and manner of exchange of information, remediation and enforcement, confidentiality and data safeguards, and cost allocation.  Generally, a CAA becomes operative on the later of (1) the date the IGA enters into force, or (2) the date the CAA is signed by the competent authorities of the United States and the treaty partner.

The Treasury Department website publishes IGAs, and the IRS publishes their implementing CAAs.