New Jersey and Pennsylvania Will Maintain Tax Reciprocal Agreement

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November 23, 2016

New Jersey Governor Chris Christie, who promised in September to revoke New Jersey’s 40-year-old tax reciprocal agreement with Pennsylvania, announced through a November 22 statement that he would continue the agreement.  Governor Christie had said he would eliminate the State of New Jersey and the Commonwealth of Pennsylvania Reciprocal Personal Income Tax Agreement unless the New Jersey legislature took steps to reduce public employee health insurance costs.

The stated impetus for scrapping the agreement was to make up for a budget deficit: cancelling the agreement was estimated to produce $180 million in revenue for New Jersey. Under the agreement, New Jersey and Pennsylvania residents who work in the other state are only required to file a tax return in their state of residence.  Pennsylvania residents working in New Jersey must file Form NJ-165, Employee’s Certificate of Nonresidence in New Jersey, and New Jersey residents working in Pennsylvania must file Form REV-419EX, Employee’s Nonwithholding Application Certificate, with their employers to avoid having New Jersey taxes withheld from compensation.

Without the agreement, residents of Pennsylvania and New Jersey who work in the other state would need to file two tax returns and claim a credit against taxes owed in their state of residence for taxes paid in their state of employment. Because Pennsylvania imposes a 3.07% flat tax and New Jersey imposes a graduated tax that is capped at 8.97%, New Jersey would greatly benefit from taxing the income of Pennsylvania residents working in New Jersey.  However, cancelling the agreement would have hurt many lower-income New Jersey residents who work in Pennsylvania (Philadelphia, in particular), as they would be forced to pay Pennsylvania’s 3.07% flat tax, instead of the lower New Jersey graduated rate.

However, Governor Christie stated that the agreement could continue due to the $200 million in savings caused by a public worker union-backed health care bill that was signed into law on November 21 (S2749).  The new legislation saves money by adjusting the process through which public workers receive their prescriptions.  Several major corporations that operate in New Jersey, including Subaru of America and Campbell Soup Co., have already praised the decision to maintain the agreement.

Change to Sentencing Guidelines Reflects DOJ’s Increased Employment Tax Enforcement Efforts

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November 21, 2016

Pursuant to amendments to the U.S. Sentencing Commission Guidelines Manual (Sentencing Guidelines), the background commentary to the Sentencing Guidelines no longer refers to violations of Code section 7202 as “infrequently prosecuted.” These amendments were passed by the Federal Sentencing Commission on May 5, 2016 and effective November 1, 2016.  Code section 7202 provides that any person who willfully fails to collect or truthfully account for and pay taxes when required shall be guilty of a felony and subject to a fine up to $10,000 and up to five years’ imprisonment. Defense attorneys had been using the “infrequently prosecuted” language to argue for more lenient sentences for Code section 7202 violations, and the Justice Department, citing the increase in prosecutions of Code section 7202 violations, had recommended that the language be removed because it is no longer true. For additional information on the change, please refer to our prior post.

According to Caroline Ciraolo, principal deputy assistant attorney general at the Justice Department’s Tax Division, the Tax Division was responsible for pushing the change through. Employment tax enforcement has been a top priority for the Tax Division in recent years, and Ciraolo noted that it should remain a priority even after she resigns when Obama leaves office.

IRS Extends Deadline for Furnishing ACA Statements to Individuals And Good-Faith Transition Relief

Today, the IRS in Notice 2016-70 extended the deadline for certain 2016 information reporting requirements under the Affordable Care Act (ACA), as employers and other coverage providers prepare for their second year of ACA reporting.   Specifically, providers of minimum essential coverage under Code section 6055 and applicable large employers under Code section 6056 will have until March 2, 2017—not January 31, 2017—to furnish to individuals the 2016 Form 1095-B (Health Coverage) and the 2016 Form 1095-C (Employer-Provided Health Insurance Offer and Coverage).  Because this extended deadline is available, the normal automatic and permissive 30-day extensions of time for furnishing ACA forms will not apply on top of the extended deadline.  Additionally, the Notice extended good-faith transition relief from penalties under Code sections 6721 and 6722 to 2016 ACA information reporting.

Filers should note that, unlike Notice 2016-4, which extended the deadlines for both furnishing to individual taxpayers and filing with the IRS the 2015 ACA forms, Notice 2016-70 did not extend the deadline for filing with the IRS the 2016 Forms 1094-B, 1095-B, 1094-C, and 1095-C—and this deadline remains to be February 28, 2017 (or March 31, 2017, if filing electronically).  Filers may apply for automatic extensions for filing ACA forms by submitting a Form 8809 and seek additional permissive extensions.  Late filers should still furnish and file ACA forms as soon as possible because the IRS will take into account this timing when determining whether to abate penalties for reasonable cause.

The extended furnishing deadline means that some individual taxpayers will not have received a Form 1095-B or Form 1095-C by the time they are ready to file their 2016 tax return.  The Notice provides that these taxpayers need not wait to receive these forms before filing their returns.  Instead, taxpayers may rely on other information received from their employer or other coverage provider for filing purposes, including determining the taxpayers’ eligibility for the premium tax credit and confirming that they received minimum essential coverage.

Notice 2016-70 also extended the good-faith transition relief for 2016 returns.  Specifically, filers that can show that they made good-faith efforts to comply with the ACA reporting requirements for 2016 are not subject to penalties under Code sections 6721 (penalties for late, incomplete, or incorrect filing with IRS) and 6722 (penalties for late, incomplete, or incorrect furnishing of statement to individual taxpayers).  This relief would apply to missing and inaccurate TINs and dates of birth, and other information required on the ACA form.  It does not apply where a filer does not make a good-faith effort to comply with the regulations or where the filer failed to file or furnish by the applicable deadlines.

IRS Extends Transitional Relief for PATH Act’s Changes to Form 1098-T Reporting for Colleges and Universities

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November 17, 2016

In Announcement 2016-42, the IRS recently provided transitional penalty relief to certain colleges and universities with respect to new Form 1098-T reporting requirements under the Protecting Americans from Tax Hikes (PATH) Act of 2015.  Specifically, the IRS will not impose penalties under Code section 6721 or 6722 on an eligible educational institution with respect to Forms 1098-T required to be filed and furnished for the 2017 calendar year, if the institution reports the total amount billed for qualified tuition and related expenses instead of the total payments received, as required by section 212 of the PATH Act.  This transitional relief for 2017 reporting effectively extends the same transitional relief for 2016 reporting in Announcement 2016-17, released this spring (see prior coverage).  In both instances, the IRS provided transitional relief because numerous eligible educational institutions indicated that, despite their diligent efforts, they have not fully implemented accounting systems, software, and business practices necessary to satisfy the new reporting requirement.

Earlier this year, the IRS issued proposed regulations to reflect other changes made to the Form 1098-T reporting requirements by Congress as part of the Trade Preferences Extension Act of 2015 (TPEA) and the PATH Act (see prior coverage).

Earlier Deadline for Filing Forms W-2 and 1099-MISC Looms

The earlier filing deadline for the Form W-2 and a Form 1099-MISC that reports nonemployee compensation (Box 7) is fast approaching.  In prior years, electronic filers had until as late as March 31 to file copies of such forms with the IRS (or the Social Security Administration (SSA), in the case of Forms W-2).  Additionally, filers could request an automatic extension to push the deadline back another 30 days.  Many large filers requested automatic extensions in the normal course to provide extra time to clean up their filings and avoid penalties.  For 2016, however, Forms W-2 and Forms 1099-MISC reporting nonemployee compensation in Box 7 are required to be filed by January 31, 2017–the deadline for furnishing copies to recipients–regardless of whether they are filed electronically or on paper.

Section 201 of the Protecting Americans from Tax Hikes (PATH) Act, enacted last December, accelerated the filing deadlines to combat identity theft and fraudulent claims for refund.  In past years, the IRS often issued refunds to taxpayers well before filers were required to file copies of the Form W-2 with the SSA and copies of the Form 1099-MISC reporting nonemployee compensation with the IRS.  Because the IRS had to process certain tax returns and refund claims without having all of the third-party payor information, the process was susceptible to fraudulent returns claiming refunds.  The new January 31 deadline makes the payor information available to the IRS sooner, thus reducing the potential for fraud.  This change comes on top of temporary Treasury Regulations issued last year that eliminated the automatic 30-day extension for Forms W-2 and proposed Treasury Regulations that would eliminate the same extension for other information returns, including Forms 1099-MISC, when effective.  Because the proposed regulations are intended to take effect sometime after the filing of 2016 information returns, they will not affect the availability of the automatic 30-day extension for 2016 information returns.

Although the earlier deadline and elimination of automatic extensions address valid concerns, the new rules inevitably increase the risk of penalties for erroneous information returns under section 6721 of the Code.  Combined with the increased penalty rates adopted as part of the Trade Preferences Extension Act of 2015 (see prior coverage) and subsequent inflation adjustment, the new deadlines increase the risk of large penalties, particularly for large filers.  For example, many employers with large expatriate workforces use the first quarter of the year to perform tax equalization calculations and prepare tax returns for their overseas workers.  That process often results in adjustments to the Form W-2 that could previously be made before filing the forms with the SSA.  Now, those same adjustments may well result in penalties.  Although the filing of corrected Forms W-2 have not consistently attracted the automatic information reporting penalties that corrections of other information returns have historically attracted, the changes to the filing deadlines and the statutory penalty rates create cause for concern.

Given the earlier deadlines, filers should take steps now to prepare for the 2017 filing season.  For example, lining up outside vendors to prepare and print recipient copies of returns earlier in January will provide recipients with some time before the January 31 filing deadline to identify potential errors and request corrections.  Many filers have traditionally waited until late January to print and send recipient copies knowing that they had time to make corrections before the filing deadline.  That strategy is no longer prudent in the face of simultaneous IRS/SSA filing and recipient copy deadlines.  To that end, large filers should notify the departments making the payments of the earlier deadline, and instruct them to provide required information with sufficient lead time to allow for processing of the data to prepare information returns for review and timely filing.  Filers should consider setting deadlines for transmitting payment data internally early in January to allow for the earlier distribution of recipient copies.

In addition, filers of Forms 1099-MISC reporting nonemployee compensation in Box 7 should submit a Form 8809 requesting an automatic 30-day extension in January 2017 to extend the filing deadline until March 2.  This extension will provide some additional time to identify errors and make corrections before the returns are filed.  Filers who believe that a non-automatic 30-day extension is warranted for Forms W-2 should be forewarned that the IRS will only grant such an extension in extraordinary circumstances, such as a natural disaster or a fire that destroys the filer’s books and records.


Final Regulations Amend Section 6050P Regulations to Remove 36-Month Nonpayment Testing Period

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November 15, 2016

Last week, the IRS issued final regulations removing the 36-month nonpayment testing period from the regulations issued under section 6050P of the Code.  The final regulations adopted the proposed regulations issued in 2014 without significant changes.

Code section 6050P requires certain financial entities to file a Form 1099-C when it cancels (in whole or in part) debt of a debtor in the amount of $600 or more.  This obligation is generally triggered when an identifiable event, as defined in the regulations, occurs.  Unlike all of the other identifiable events, the expiration of the 36-month nonpayment period, which creates a rebuttable presumption that an “identifiable event” occurred that would trigger the obligation to report the cancellation of debt on Form 1099-C, does not necessarily reflect a discharge of the underlying debt.  The presumption of discharge could be rebutted if the creditor showed that it had undertaken significant bona fide collection activity in the calendar year during which the 36-month period expired or if the facts and circumstances existing as of the January 31 following such calendar year indicated the debt had not been discharged.

As a result of the final regulations, entities required to report under Section 6050P will no longer need to file Form 1099-C reporting cancellation of debt because of the expiration of the 36-month nonpayment period and the lack of bona fide collection activity.  The IRS removed the rule because it often caused significant confusion.  Although a creditor could be obligated to file a Form 1099-C as a result of the rule, the creditor may not have actually discharged the debt.  Nonetheless, the rule may lead a debtor to conclude that the debt has actually been discharged because he or she received a Form 1099-C and the rule may create confusion among creditors regarding whether they may legally continue to pursue the debt following issuance of the Form 1099-C.  (For examples, see FDIC v. Cashion (holding that the issuance of Form 1099-C does not discharge the underlying debt) and Franklin Credit Mgmt. Corp. v. Nicholas (holding that Form 1099-C is a writing that serves as prima facie evidence that a debt has been discharged).)  Furthermore, issuing a Form 1099-C may cause the IRS to initiate collection action against the debtor for failing to report income from the cancellation of debt reported on Form 1099-C even though the creditor has not actually discharged the debt.  To alleviate confusion and simplify tax administration, the IRS eliminated the 36-month nonpayment testing period, thus limiting identifiable events to the defined events that coincide with an actual cancellation of debt.

First Friday FATCA Update

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November 4, 2016

Recently, the Treasury released the Model 1A Intergovernmental Agreement (IGA) entered into between the United States and Guyana.  The IRS also released the Competent Authority Agreement (CAA) implementing the Model 1B IGA between the United States and Kuwait entered into on April 29, 2015.

Since our last monthly FATCA update, we have also addressed one other recent FATCA development:

  • Rep. Edward R. Royce (R-Calif.) recently introduced in the House of Representatives a bill that would exempt premiums paid on non-cash-value property and casualty insurance from coverage under FATCA (see previous coverage).

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.