Social Security Wage Base Will Increase 7.3% in 2017

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October 18, 2016

The Social Security Administration (SSA) announced that the maximum amount of annual earnings subject to Social Security taxes will increase to $127,200 in 2017, a 7.3% increase from the current $118,500 ceiling. This represents the largest single-year percentage increase since the wage base increased from $32,400 to $35,700 in 1983, an increase of 10.2%. SSA explained that the increase is due to the rise in average income and it estimates that the increase will affect roughly 12 million workers. Other cost-of-living increases released by SSA can be found here.

IRS Releases Final Regulations Imposing Country-by-Country Reporting

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June 30, 2016

As part of its effort to combat tax base erosion and international profit shifting, the IRS finalized regulations requiring country-by-country (CbC) reporting by U.S. persons that are the ultimate parent entity of a multinational enterprise (MNE) group with revenue of $850 million or more in the preceding accounting year. The final regulations, set forth in Treasury Regulation § 1.6038-4, require these U.S. persons to file annual reports containing information on a CbC basis of a MNE group’s income, taxes paid, and certain indicators of the location of economic activity. The preamble to the final regulations notes that comments expressed general support for implementing CbC reporting in the United States. The new reporting requirements are imposed on all parent entities with taxable years beginning on or after June 30, 2016. The final regulations will require reporting on new Form 8975, the “Country by Country Report,” which the IRS is currently developing.

In a prior post, we addressed ABA comments on the proposed regulations, and the final regulations address several of those comments.

  • The ABA noted the hardships that would arise from a mid-2016 effective date due to the need to submit reports to foreign tax authorities for 2016 and problems for calendar year-end U.S. MNEs with an accounting year that begins before the publication date of the final regulations and extends into 2017. In the preamble to the final regulations, the IRS notes that it will work to avoid duplicate reporting in 2016 and will release separate, forthcoming guidance to address accounting years beginning before the final regulations’ publication date and extending into 2017.
  • The ABA noted a need for clarification of the “tax jurisdiction of residency” for purposes of determining territorial income, so the final regulations state that a country with a purely territorial tax regime can be a tax jurisdiction of residence and clarify the meaning of “fiscal autonomy” for purposes of determining whether a non-country jurisdiction is a tax jurisdiction.
  • The ABA requested clarification on the treatment of partnerships under the $850,000 reporting threshold, and the final regulations provide that distributions from a partnership to a partner are not included in the partner’s revenue.
  • The ABA requested tie-breaker rules for residency determinations, and the proposed regulations declined to issue such a rule but noted that Form 8975 may provide guidance.
  • The ABA requested greater flexibility with respect to the time and manner of filing CbC reports, but the IRS rejected this request (though the preamble to the final regulations states that Form 8975 may prescribe an alternative time and manner for filing).

We will provide an update upon the release of Form 8975 that discusses the form itself and any important additions it makes to the final regulations.

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

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April 28, 2016

On April 27, 2016, the IRS issued transitional penalty relief to colleges and universities under Announcement 2016-17 with respect to new reporting requirements implemented as part of the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). Prior to the PATH Act, eligible educational institutions were required to report annually on Form 1098-T either (i) the aggregate amount of payments received for qualified tuition and related expenses, or (ii) the aggregate amount billed for such tuition and expenses. Section 212 of the PATH Act eliminates the option to report payments billed, meaning that colleges and universities must report the amount of payments received each year on a prospective basis.

If a college or university fails to properly file correct or timely tuition information with the IRS or furnish a proper written statement to the recipient, reporting penalties will apply under sections 6721 and 6722. Numerous eligible educational institutions notified the IRS that the law change would require computer software reprogramming that could not be completed prior to the 2016 deadlines for furnishing Forms 1098-T, which would trigger widespread penalties. Accordingly, Announcement 2016-17 permits eligible educational institutions to report the aggregate amount billed on all 2016 Forms 1098-T, effectively providing one year of transitional relief.

IRS Updates Guidelines for Substitute Wage Forms

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March 29, 2016

The IRS released Revenue Procedure 2016-20 to update IRS and Social Security Administration guidelines for employers issuing substitute Forms W-2c, Corrected Wage and Tax Statements, and W-3c, Transmittal of Corrected Wage and Tax Statements. These guidelines assist employers with filing electronically; filing “red-ink” and “black-and-white” versions of Copy A of Form W-2c; and furnishing substitute privately printed versions of Copies B, C, and 2 of Form W-2c to employees. The guidance also provides rules regarding retention of both information and copies.

Revenue Procedure 2016-20 supersedes Revenue Procedure 2014-56, and several changes have been made. Although most of these changes are minor, one important change is the updated address for SSA inquiries about substitute black-and-white Forms W-2c Copy A and W-3c Copy A, which is now:

Social Security Administration Direction Operations Center
Attn: Substitute Black-and-White Copy A Forms, Room 341
1150 E. Mountain Drive
Wilkes-Barre, PA 18702-7997

IRS Tax Study Intended to Guide Future Audits Nears Completion

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March 25, 2016

The IRS expects to soon conclude its study of 6,000 audits that was aimed at identifying problem industries that show a history of noncompliance with certain tax and reporting rules, including worker classification, the accountable plan rules, and the fringe benefit rules. At an American Payroll Association conference on March 21, John Tuzynski, the IRS’s director of Technical Services in Exam, said that the results will likely be published in early 2017.

The results should help the IRS focus its increasingly limited resources on industries and issues that produce the most violations, as the IRS plans to use them to inform examination decisions. Currently, the IRS is relying on the results of a study conducted in the mid-1980s, so the new data provides a much-needed update and, depending on the results, could result in a significant shift in decision-making with respect to examinations and compliance programs. Although decisions are currently made based largely on anecdotal evidence, the IRS seeks to become more calculated going forward and target the industries proven to produce significant rates of noncompliance.

It is no secret that the IRS expends a disproportionate amount of its enforcement resources auditing the same large businesses year after year while largely ignoring small and mid-size businesses on the theory that audits of larger taxpayers result in larger assessments. The practical problem with this approach is the development of a lack of evenness with respect to compliance, which suggests unfairness in the enforcement process. Perhaps the research program undertaken by the Service with respect to these 6,000 audits, which began approximately seven years ago, will result in a more even distribution of enforcement resources and a more broad-based focus on compliance from all taxpayers rather than pursuing past practices in a wooden fashion.

Canadian Government Expresses Support for FATCA Despite Concerns

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March 22, 2016

Canadian politicians have been at odds over enforcement of the United States-Canada Intergovernmental Agreement (IGA), an agreement providing for the exchange of FATCA-related information, as some assert that the information exchange obligations arising from the IGA violate privacy rights of Canadian citizens.  However, recently elected Liberal Party leaders, who previously voiced these concerns regarding the IGA, now support its enforcement and insist that all FATCA-related information exchanges will fully comply with Canadian privacy rights.

One Canadian organization has gone so far as to challenge the constitutionality of the IGA, asserting that it violated the Canadian Charter of Rights and Freedoms, but the Federal Court of Canada upheld the IGA, leading to the first transfer of FATCA-related information in September 2015.  However, Democratic Party leaders in the Canadian Parliament have not backed down, as evidenced by one member requesting discussion of the IGA among the Standing Committee on Access to Information, Privacy and Ethics.  Although these efforts may cast some doubt on the future of enforcement efforts in Canada, the new government’s support and insistence on privacy compliance suggest that enforcement of the IGA will, for now, continue uninterrupted.

New Zealand Releases Guidance Explaining Application of FATCA to Trusts

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March 10, 2016

The New Zealand Inland Revenue issued guidance notes explaining the application of FATCA to New Zealand trusts that maintain or hold financial accounts.  The nearly 40-page document explains cases where trusts should be treated as financial institutions, as well as the due diligence and reporting obligations of Reporting New Zealand Financial Institution “investment entity” trusts.  The guidance notes address four different types of trusts: unit trusts, family trusts, trading trusts, and charitable trusts.  Solicitors’ trust accounts will be addressed separately in upcoming guidance.  If the trust is deemed a Reporting New Zealand Financial Institution, then it must register with the IRS and will have FATCA reporting and due diligence obligations.

IRS Signals Intent to Scrutinize Foreign Payments

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March 10, 2016

The IRS intends to more closely scrutinize payments made to foreign corporations, as indicated by its creation of a new international LB&I “practice unit,” which will provide guidance for IRS auditors.  With respect to foreign corporations, auditors are instructed to focus significantly on whether FDAP income is paid to foreign corporations, and if it is, whether 30% withholding should apply under Chapter 3. Though the practice unit does not issue official pronouncements of law, its guidance to the field can provide taxpayers with valuable insights into issues of importance to the IRS.  Further, guidance issued by the new unit can help to educate taxpayers on the process auditors will use to analyze transactions.  The development of this new practice unit highlights the IRS’s focus on compliance with respect to outbound payments of U.S.-source income.  Taxpayers should ensure that they carefully consider the character and source of payments to determine whether withholding might apply under either Chapter 3 or Chapter 4 (FATCA) of the Code.  Failure to withhold as required subjects withholding agents to secondary liability for amounts that should have been withheld.