House and Senate lawmakers have started their August recess, leaving pending tax legislation for after Labor Day. In past years, September has been a busy month for tax legislation and this year is likely to be the same. Before leaving Capitol Hill, lawmakers took actions in several areas related to tax reform.

House and Senate lawmakers have started their August recess, leaving pending tax legislation for after Labor Day. In past years, September has been a busy month for tax legislation and this year is likely to be the same. Before leaving Capitol Hill, lawmakers took actions in several areas related to tax reform.

House action

In the House, the  Budget Committee approved along party lines a fiscal year (FY) 2018 budget resolution. The resolution calls for:

• Simplifying the tax code to promote fairness for American families and businesses;
• Lowering tax rates for individuals and consolidating the seven tax brackets into fewer brackets;
• Repealing the alternative minimum tax (AMT); and
• Reducing the corporate tax rate.

The budget resolution does not set out specific tax changes or include legislative language. Rather, according to GOP leaders in the House, the budget resolution will serve as the vehicle for tax legislation at a future date.  House Budget Committee Chair Diane Black, R-Tennessee, predicted that tax reform will be "deficit neutral" and will "reduce tax rates and simplify the tax code." Budget Committee Ranking Member John Yarmuth, D-Kentucky, said that the resolution "adopts the worst extremes of the President's proposals by cutting taxes for millionaires and billionaires at the expense of everyone else."

Administration discussions

Since May, White House and Treasury Department officials have been meeting with business leaders, representatives of business and taxpayer groups, and other stakeholders in "listening sessions" about changes to the tax code. In July, Treasury Secretary Steven Mnuchin, after meeting with representatives from the agriculture sector, predicted that tax reform "would be done this year." Mnuchin said that "tax reform is one of our most important areas of focus.”

Bipartisan bills

Meanwhile, some stand-along tax bills have either passed committee or have been introduced. In July, the House Ways and Means Committee approved bipartisan legislation to overhaul the IRS's forfeiture authority. The Clyde-Hirsch-Sowers RESPECT Bill (HR 1843) was sponsored by Ways and Means Tax Policy Subcommittee Chair Peter Roskam, R-Illinois, and Democratic Caucus Chair Joe Crowley, D-New York. The RESPECT Act generally prohibits the IRS from seizing funds relating to a structuring transaction unless the  property to be seized is from an illegal source.

In the Senate, the Senate Finance Committee may take up a bipartisan bill to encourage retirement savings by enhancing growth of S corporations owned by employee stock ownership plans (ESOPs). The Promotion and Expansion of Private Employee Ownership Bill was introduced by Sen. Ben Cardin, D-Maryland, and Sen. Pat Roberts, R-Kansas. The lawmakers explained that their bill would amend the tax code to eliminate barriers that business owners face in establishing or expanding S corporation ESOPs. Similar bipartisan legislation is pending in the House.

Other pending tax bills include:

• HR 3068, which would enhance the research tax credit for domestic manufacturers.
• HR 3126, which would provide a tax credit to individuals for legal expenses paid  to establish guardianship of a family member with disabilities.
• HR 3138, which would generally treat Native American governments in the same manner as state governments for certain federal tax purposes.

Treasury tax position

The Treasury Department's top tax professional is the assistant secretary for tax policy. That position has been vacant since January 20. In July, the Senate Finance Committee unanimously approved President Trump’s nomination of David Kautter to serve as Treasury assistant secretary for tax policy. "This position is particularly important in the current environment as the administration is engaging with Congress on comprehensive tax reform," SFC Chair Orrin Hatch, R-Utah, said. Ranking member Ron Wyden, D-Oregon, said "it’s my hope that Mr. Kautter can help to bring Democrats and Republicans together." Kautter has worked at several major accounting firms over the past 30 years.

Please contact our office if you have any questions about tax legislation.

The IRS remains focused on an issue that doesn’t seem to be going away: the misclassification of workers as independent contractors rather than employees. Recently, the IRS issued still another fact sheet “reminding” employers about the importance of correctly classifying workers for purposes of federal employment taxes (FS-2017-9). Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. They are lifted of these obligations entirely for independent contractors, with usually the only IRS-related responsibility being information reporting on amounts of $600 or more paid to a contractor.

The IRS remains focused on an issue that doesn’t seem to be going away: the misclassification of workers as independent contractors rather than employees. Recently, the IRS issued still another fact sheet “reminding” employers about the importance of correctly classifying workers for purposes of federal employment taxes (FS-2017-9). Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. They are lifted of these obligations entirely for independent contractors, with usually the only IRS-related responsibility being information reporting on amounts of $600 or more paid to a contractor.

Weighing the factors

Whether a worker is an employee or an independent contractor depends on a number of considerations that fall into three categories: behavioral control, financial control and the type of relationship between the worker and the service recipient. Within these categories, the IRS has identified 20 factors that can be used to determine whether an individual is an independent contractor or effectively an "employee."  

The determination of independent contractor versus employee status is based on all of the facts and circumstances surrounding the relationship. None of the identified factors is determinative. In addition, not all factors are present in all employee or independent contractor relationships. Frequently, the relationship of a worker is clear cut using these factors; but sometimes a worker can fall into a gray area.

The Form SS-8 route

An employer who is unsure of how to classify its workers can file a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. There is no fee for requesting a worker classification determination. Because worker classification has become such a “hot” audit trigger, many employers opt for the Form SS-8 route, particularly because penalties on top of back employment taxes can result from a classification misstep.

Other relief

After emphasizing in its latest Fact Sheet that employee misclassification as independent contractors exposes the employer to employment tax liability, the IRS also highlighted two ways to escape or ameliorate liability, even for an after-the-fact classification: “Section 530 relief” and relief under the Voluntary Classification Settlement Program.

Section 530 relief: An employer that has a reasonable basis for classifying its workers as independent contractors may be entitled to special relief under section 530 of the Revenue Act of 1978. "Section 530 relief" protects taxpayers who have consistently treated workers as independent contractors and have a reasonable basis for doing so. The rule covers workers who are common law employees, but it does not cover certain third-party-arranged technical service workers.

A reasonable basis for classification for purposes of Section 530 relief generally includes an employer's treatment of the individual based on any of the following:

• judicial precedent, published rulings, technical advice to the employer or a letter ruling to the employer;
• a past examination of the taxpayer by the IRS in which there was no assessment attributable to the treatment for employment tax purposes of individuals holding positions substantially similar to the position held by this individual; or
• long-standing recognized practice of a significant segment of the industry in which the individual was engaged.

Voluntary Classification Settlement Program.  Entry into the Voluntary Classification Settlement Program (VSCP) can provide an opportunity to reclassify workers as employees for future tax periods, with partial relief from federal employment taxes. Under the program, the employer:

• Agrees to prospectively treat the class of workers as employees for future tax periods;
• Will pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year, determined under reduced rates;
• Will not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years; and
• Will not be liable for any interest or penalties on the liability.

Under the VCSP, an employer may reclassify some or all of their workers. Once reclassified, all workers in the same class must be treated as employees for employment tax purposes.

Worker initiative

The IRS also makes it clear in its latest Fact Sheet on employee misclassification that action on its part may take place not only based on an employer-based initiative; workers can also have indirect input on whether an audit will take place. “Workers who believe an employer improperly classified them as independent contractors may use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report the employee’s share of uncollected social security and Medicare taxes,” the IRS Fact Sheet concludes.

If you have any concerns surrounding possible worker misclassification within your business, please feel free to contact this office for a more targeted discussion.

A recent Tax Court decision and pending tax reform proposals have intersected in highlighting how stock sales can be timed for maximum tax advantage. The taxpayer in the recent case (Turan, TC Memo. 2017-141) failed to convince the Tax Court that he timely made an election with his broker to use the last-in-first-out (LIFO) method to set his cost-per-share cost basis for determining capital gains and losses on his stock trades on shares of the same company. As a result, he was required to calculate the capital gain or loss on his stock trades using the firm’s first-in-first-out (FIFO) “default” method, which, in his case, yielded a significant increase in tax liability for the year.

A recent Tax Court decision and pending tax reform proposals have intersected in highlighting how stock sales can be timed for maximum tax advantage. The taxpayer in the recent case (Turan, TC Memo. 2017-141) failed to convince the Tax Court that he timely made an election with his broker to use the last-in-first-out (LIFO) method to set his cost-per-share cost basis for determining capital gains and losses on his stock trades on shares of the same company. As a result, he was required to calculate the capital gain or loss on his stock trades using the firm’s first-in-first-out (FIFO) “default” method, which, in his case, yielded a significant increase in tax liability for the year.

Timing stock trades to maximize the tax advantage of long- and short-term capital gains and losses has always made sense, particularly as a year-end planning technique. This year, tax reform may make such strategies considerably more lucrative. If tax rates are suddenly set lower, either retroactively for this year or, more probably, starting January 1, 2018, managing stock basis becomes more significant. As a result, investors should consider carefully whether they may be better off tax-wise to give their brokers specific instructions in certain cases not to use the default FIFO method when selling certain holdings of the same company purchased at different times.

General FIFO rule

If a taxpayer purchases identical shares of stock at different prices or on different dates and then sells only part of the stock, the basis and holding period of the shares sold are determined on a FIFO basis unless the specific shares sold are adequately identified. The date of acquisition for purposes of the FIFO rule is determined by reference to the holding period of the securities for capital gain or loss purposes, including any prior holding period that has been tacked on.

Comment. Securities in a margin or other account with a broker are considered sold in the order in which they were purchased, not the order in which they were placed in the account. The FIFO rule is applied by allocating the earliest lots acquired to the securities sold rather than to the securities removed from the brokerage account but still owned.

Alternate identification

When the securities to be sold are specifically identifiable, FIFO does not apply for purposes of allocating basis. The identity of securities sold or otherwise transferred generally is determined by the certificates actually delivered to the transferee.

Planning Tip: Thus, taxpayers who have records showing the cost and holding period of securities represented by separate certificates can control the amount of gain or loss realized by selecting the certificates to be transferred.

A standing order or instruction to a broker is treated as adequate identification. The instructions need not be in writing. Sufficient instruction to a broker or other agent of the particular securities to be sold or transferred does not require designation by certificate number; any designation that specifically identifies the securities to be transferred is adequate. Orders to sell the highest priced shares, shares with the highest cost basis, or the shares purchased at a certain price or on a specific date have been ruled acceptable.

Broker reporting

A broker is required to report the customer’s basis in securities sold, classifying the gain as short or long term. Identification of the securities is made at the time of sale, transfer, delivery, or distribution. Clarifying instructions before the sale takes place, or immediately thereafter, is important since a broker is obligated to report to the IRS on Form 1099-B. Once the report is sent to the IRS, changing basis is more likely to raise a red flag with the IRS.

Please contact this office if you need to discuss a strategy of tax selling that is more specific to your portfolio and Congress’s plans for tax reform.

Country-by-Country (CbC) reporting is part of a larger initiative by the Organisation for Economic Cooperation and Development (OECD) known as the Base Erosion and Profit Shifting (BEPS) project. CbC reporting generally impacts large multi-national businesses. Because CbC is part of BEPS it is important to be familiar with the core concepts.

Country-by-Country (CbC) reporting is part of a larger initiative by the  Organisation for Economic Cooperation and Development (OECD) known as the Base Erosion and Profit Shifting (BEPS) project. CbC reporting generally impacts large multi-national businesses. Because CbC is part of BEPS it is important to be familiar with the core concepts.

BEPS

The BEPS project is designed to curb tax avoidance. "No single rule or provision is the root cause of base erosion," the OECD has explained. "It is the interplay among different rules that generate base erosion and profit shifting: domestic laws and rules, international standards, and the lack of data and information."

As part of BEPS, the OECD recommended that jurisdictions adopt CbC reporting by multinational groups to report their business activity for each country where they operate. The U.S. has signed on.

IRS regulations

The IRS issued regulations last year. The "ultimate parent entity" of a multinational entity (MNE) generally must file a CbC report with the IRS. The MNE group must include at least one business entity organized in, or be a tax resident of, a jurisdiction outside the U.S., and must have revenues of $850 million or more for its preceding annual accounting period. 

Special form

The IRS is developing a special form for CbC reporting. This is Form  8975, Country-by-Country Report. Currently, Form 8975 is in draft form.

Form 8975 is to be used to report a U.S. multinational entity (MNE) group’s income, taxes paid, and other indicators of economic activity on a country-by-country basis. The reporting period covered by Form 8975 is the period of the ultimate parent’s annual applicable financial statement that ends with or within the parent’s tax year, or, if the parent does not prepare an annual applicable financial statement, the ultimate parent’s tax year.

The IRS generally will make the reports available to tax authorities. However, there will be limits on disclosure. The IRS has explained that the data captured by Form 8975 will be used for "high-level assessment of transfer pricing, and other base erosion and profit shifting tax risks, and for economic and statistical analysis." 

Filing period

Beginning on September 1, 2017, Form 8975 may be filed for a reporting period with the income tax return for the tax year of the ultimate parent of the U.S. MNE with or within which the reporting period ends. In Revenue Procedure 2017-23, the IRS allowed U.S. ultimate parents to file Form 8975 for periods beginning after January 1, 2016, and prior to the required reporting period. 

Other developments 

Recently, a group of lawmakers in Congress asked the Financial Accounting Standards Board (FASB) to look at country-by-country reporting. The lawmakers recommended that FASB "require multinational corporations to disclose their income, assets, number of employees, and taxes paid on an annual, country-by-country basis.”

If you have any questions about CbC reporting, please contact our office.

An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student's qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds.

An eligible taxpayer can deduct qualified interest on a qualified student loan for an eligible student's qualified educational expenses at an eligible institution. The amount of the deduction is limited, and it is phased out for taxpayers whose modified adjusted gross income (AGI) exceeds certain thresholds.

The maximum deduction allowed for educational loan interest is $2,500. This amount is not adjusted for inflation.  For tax years beginning in 2017, the $2,500 maximum deduction for interest paid on qualified education loans is reduced when modified adjusted gross income (AGI) exceeds $65,000 ($135,000 for joint returns), and is completely eliminated when modified AGI reaches $80,000 ($165,000 for joint returns).

Planning tip: Some taxpayers may choose to take out a home equity loan to pay off their student debt. Use of a home-equity loan of up to $100,000 principal is allowed for purposes other than home improvement or purchase. Interest up to that amount is fully deduction, as an itemized mortgage interest deduction.

Student loan interest is an “above-the-line” deduction; the taxpayer need not itemize. 

Eligible student. An eligible student for purposes of eligible debt is a student enrolled in a college degree, certificate or other program, including a program of study abroad approved for credit at an institution of higher learning where the student is enrolled, and leading to a recognized educational credential at an eligible educational institution. The student must also carry at least one half of the normal full-time workload for the course of study being pursued during at least one academic period beginning during the tax year.

Student loan interest is not deductible if a dependency exemption is allowed for the taxpayer on someone else's return. Thus, if parents take a dependency exemption for a student who is the only person legally obligated to pay interest on a qualified loan, neither the parents nor the student is entitled to deduct any interest paid by the student during the time he is claimed as a dependent. A student may deduct interest paid in years after the student has ceased to be a dependent. 

Legal obligation. The taxpayer claiming the deduction must be legally obligated to make the interest payments. Thus, a parent who had signed for the student loan and is liable personally for its payment may deduct interest paid on the loan.

If a third party who is not legally obligated makes an interest payment on behalf of a taxpayer who is legally obligated, the taxpayer is treated as receiving the payment from the third party and using it to pay the interest. For instance, if an employer makes an interest payment on behalf of the employee, and the payment is included in the employee's income as compensation, the employee can deduct the payment. Similarly, if a parent pays interest on behalf of a non-dependent borrower, the borrower may deduct the interest.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2017.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of August 2017.

August 2
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 26-28. 

August 4
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates July 29- Aug. 1. 

August 9
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates Aug. 2-4. 

August 10
Employees who work for tips. Employees who received $20 or more in tips during July must report them to their employer using Form 4070.

Social security, Medicare, and withheld income tax. File Form 941 for the second quarter of 2017. This due date applies only if you deposited the tax for the quarter timely, properly, and in full. 

August 11
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 5-8. 

August 15
Social security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in July. Nonpayroll withholding: If the monthly deposit rule applies, deposit the tax for payments in July. 

August 16
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 9–11. 

August 18
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 12–15. 

August 23
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 16–18. 

August 25
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 19–22. 

August 30
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 23-25.

September 1
Employers. Semi-weekly depositors must deposit employment taxes for payroll dates August 26-29.

Before the fast-approaching new year, it’s important to take some time and reflect on year-end tax planning. The weeks pass quickly and the arrival of January 1, 2015 will close the doors to some tax planning strategies and opportunities. Fortunately, there is still time for a careful review of your year-end tax planning strategy.

Before the fast-approaching new year, it’s important to take some time and reflect on year-end tax planning. The weeks pass quickly and the arrival of January 1, 2015 will close the doors to some tax planning strategies and opportunities. Fortunately, there is still time for a careful review of your year-end tax planning strategy.

Traditional year-end planning techniques

For many individuals, a look at traditional year-end tax planning techniques is a good starting point. Spreading the recognition of certain income between 2014 and 2015 is one technique. Individuals need to take into account any possible changes in their income tax bracket. The individual income tax rates for 2014 are unchanged from 2013: 10, 15, 25, 28, 33, 35 and 39.6 percent. Each taxable income bracket is indexed for inflation. The starting points for the 39.6 percent bracket for 2014 are $406,750 for unmarried individuals; $457,600 for married couples filing a joint return and surviving spouses; $432,200 for heads of households; and $228,800 for married couples filing separate returns. For 2014, the top tax rate for qualified capital gains and qualified dividends is 20 percent.

For the second year, individuals also need to plan for potential net investment income (NII) tax liability. The NII tax applies to taxpayers with certain types of income and who fall within the thresholds for liability. Again, spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions are strategies to consider.

Tax extenders

Many individuals are surprised to learn that some very popular and widely-used tax incentives are temporary. If you claimed the higher education tuition deduction on your 2013 return, you cannot claim it in your 2014 return because the deduction expired after 2013. The same is true for the state and local sales tax deduction, the teachers’ classroom expense deduction, the Code Sec. 25C residential energy credit, transit benefits parity, and more. All of these tax breaks expired after 2013 and unless they are extended by Congress, you will not be able to claim them on your 2014 returns.

Businesses are also affected. A lengthy list of business-oriented tax breaks expired after 2013. They include the Work Opportunity Tax Credit (WOTC), research tax credit, Indian employment credit, employer wage credit for military reservists, special incentives for biodiesel and renewable fuels, tax credits for energy-efficient homes and appliances, and more.

The good news is that Congress is likely to extend these tax breaks, probably for two years, and make the extension retroactive to January 1, 2014. That means taxpayers can claim these incentives on their 2014 returns. One hurdle is when Congress will act. In past years, lawmakers waited until very late in the year, or even until the start of the new year, to vote on an extension of these incentives. Late extension puts extra pressure on the IRS to quickly reprogram its return processing systems. Most likely, the IRS will have to delay the start of the filing season. Our office will keep you posted of developments.

Retirement savings

In 2014, the Tax Court surprised many with its decision that a taxpayer could make only one nontaxable rollover contribution within each one-year period regardless of how many IRAs the taxpayer maintained (Bobrow, TC Memo. 2014-21). The one-year limitation is not specific to any single IRA maintained by a taxpayer, but instead applies to all IRAs maintained by the taxpayer. The IRS, in turn, announced that it would change its rules to reflect the court’s decision.

The key point to keep in mind is that the Bobrow decision affects only IRA-to-IRA rollovers. The decision does not limit trustee-to-trustee transfers.

Affordable Care Act

Individuals who obtain health insurance through the Affordable Care Act Marketplace (and the federal government estimates they number seven million) have special tax planning considerations, especially if they are eligible for the Code Sec. 36B premium assistance tax credit. The credit is payable in advance to insurers and it appears that most taxpayers have elected this option. These individuals must reconcile the amount paid in advance with the amount of the actual credit computed when they file their tax returns. Changes in circumstances, such as an increase or decrease in income, marriage, birth or adoption of a child, and so on, may affect the amount of the actual credit.

Remember that the Affordable Care Act requires individuals to have minimum essential coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income tax return. Many individuals will qualify for an exemption if they are covered under employer-sponsored coverage. Individuals covered by Medicare also are exempt.

If you have any questions about year-end planning, please contact our office.

As January 1, 2015 draws closer, many employers are gearing up for the “employer mandate” under the Affordable Care Act. For 2015, there is special transition relief for mid-size employers. Small employers (employers with fewer than 50 full-time employees, including full-time equivalent employees) are always exempt from the employer mandate and related employer reporting.

As January 1, 2015 draws closer, many employers are gearing up for the “employer mandate” under the Affordable Care Act. For 2015, there is special transition relief for mid-size employers. Small employers (employers with fewer than 50 full-time employees, including full-time equivalent employees) are always exempt from the employer mandate and related employer reporting.

Employer mandate

Under Code Sec. 4980H, an applicable large employer must make a shared responsibility payment if either:

• The employer does not offer or offers coverage to less than 95 percent (70 percent in 2015) of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage and one or more full-time employee is certified to the employer as having received a Code Sec. 36B premium assistance tax credit or cost-sharing reduction (“Section 4980H(a) liability”); or
• The employer offers to all or at least 95 percent of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and one or more full-time employees is certified to the employer as having received a Code Sec. 36B premium assistance tax credit or cost-sharing reduction (“Section 4980H(b) liability”).

For purposes of the employer mandate shared responsibility provisions, an employee is a full-time employee for a calendar month if he or she averages at least 30 hours of service per week. Under final regulations issued by the IRS earlier this year, for purposes of determining full-time employee status, 130 hours of service in a calendar month is treated as the monthly equivalent of at least 30 hours of service per week.

The IRS has provided two methods for determining whether a worker is a full-time employee: the monthly measurement method and the look-back measurement method. The monthly measurement method allows an employer to determine each employee’s status by counting the employee’s hours of service for each month. The look-back measurement method allows employers to determine the status of an employee as a full-time employee during a future period, based upon the hours of service of the employee in a prior period.

In September 2014, the IRS clarified the look-back method in certain circumstances. The IRS described application of the look-back method where an employee moves from one measurement period to another (for example, an employee moves from an hourly position to which a 12-month measurement period applies to a salaried position to which a 6-month measurement period applies). The IRS also described situations where an employer changes the measurement method applicable to employees within a permissible category (for example, an employer changes the measurement period for all hourly employees for the next calendar year from a 6-month to a 12-month measurement period).

Transition relief for mid-size employers

Mid-size employers are exempt from the Code Sec. 4980H employer mandate for 2015 under special transition relief. Employers qualify as mid-size if they employ on average at least 50 full-time employees, including full-time equivalents, but fewer than 100 full-time employees, including full-time equivalents.

The IRS has placed some restrictions on this transition relief for mid-size employers. During the period beginning on February 9, 2014, and ending on December 31, 2014, the employer that reduces the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition is ineligible for the transition relief. A reduction in workforce size or overall hours of service for bona fide business reasons will not be considered to have been made in order to satisfy the workforce size condition, the IRS explained.

Information reporting

Code Sec. 6056 requires certain employers to report to the IRS information about the health insurance, if any, they offer to employees. The IRS has posted draft forms and instructions about Code Sec. 6056 reporting on its website: Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.

Information reporting encompasses (among other things):

• The employer’s name, address, and employer identification number;
• The calendar year for which information is being reported;
• A certification as to whether the employer offered to its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan;
• The number, address and Social Security/taxpayer identification number of all full-time employees;
• The number of full-time employees eligible for coverage under the employer’s plan; and
• The employee’s share of the lowest cost monthly premium for self-only coverage providing minimum value offered to that full-time employee.

Code Sec. 6056 reporting for 2015 is mandatory. Although mid-size employers may be exempt from the employer mandate, they are not exempt from Code Sec. 6056 reporting for 2015. The IRS is requiring all Code Sec. 6056 information returns to be filed no later than February 28 (March 31 if filed electronically) of the year immediately following the calendar year to which the return relates.

Please contact our office if you have any questions about preparing for the employer mandate and Code Sec. 6056 reporting.

As the 2015 filing season approaches, IRS Commissioner John Koskinen is bracing taxpayers for more reductions in customer service unless the agency receives more funding. According to Koskinen, the IRS is facing its biggest challenge in recent years. Koskinen, who spoke at the annual conference of the National Society of Accountants in August, also predicted that taxpayers will have to wait until after the November elections to learn the fate of many popular but expired tax incentives.

As the 2015 filing season approaches, IRS Commissioner John Koskinen is bracing taxpayers for more reductions in customer service unless the agency receives more funding. According to Koskinen, the IRS is facing its biggest challenge in recent years. Koskinen, who spoke at the annual conference of the National Society of Accountants in August, also predicted that taxpayers will have to wait until after the November elections to learn the fate of many popular but expired tax incentives.

Budget pressures

The IRS has experienced budgetary pressures since 2010. The Budget Control Act of 2011 (BCA) imposed across-the-board spending cuts on many federal agencies, including the IRS. Some funding was restored last year. Looking ahead, the House has voted to cut the IRS's budget by $341 million for Fiscal Year (FY) 2015. The Senate has proposed to increase the IRS's budget by $240 million. Even with the proposed increase, IRS officials have said that the agency's budget would still be seven percent below funding levels for FY 2010.

The funding cuts have drawn criticism from senior IRS officials. "Funding reductions have significantly hampered the IRS's ability to carry out its mission," National Taxpayer Advocate Nina Olson told Congress. Olson warned that "underfunding of the IRS poses one of the greatest long-term risks to tax administration today."

Koskinen echoed Olson's concerns. "Congress is starving our revenue-generating operation. If voluntary compliance with the tax code drops by 1 percent, it costs the U.S. government $30 billion per year," he explained. "The IRS annual budget is only $11 billion per year.

Customer service

For many taxpayers, the most visible impact of the budget cuts has been reductions in customer service. Koskinen said that the IRS has cut 5,200 call center employees because of lack of funding. Wait times to speak with the IRS will increase, he predicted. During the 2014 filing season, the IRS's level of customer service was around 72 percent. The level of customer service for the 2015 filing season could fall to as low as 50 percent without adequate funding, Koskinen cautioned.

Koskinen acknowledged that the funding cuts have fueled efficiencies in the agency's operations. The agency has reduced hiring, offered buyouts to long-time employees, and cut travel and training costs. "We are becoming more efficient but there is a limit," he said. "Eventually the effects will show up. We are no longer going to pretend that cutting funding makes no difference."

Tax extenders

Unless extended, a host of expired tax incentives will be unavailable to taxpayers when they file their 2014 returns. These include widely-used incentives, such as the state and local sales tax deduction, the higher education tuition deduction, and transit benefits parity. Businesses also would be impacted, with failure to renew popular incentives, including the research tax credit and the Work Opportunity Tax Credit.

Legislation to extend many of these incentives will likely not be passed by Congress until after the November elections, Koskinen predicted. "Congress needs to understand that the later these are passed and the more complicated they are, the more challenging it is for taxpayers to file accurate returns on time." Koskinen added that the IRS will be challenged to reprogram its return processing systems for renewal of the tax extenders. As a result, the start of the 2015 filing season could be delayed, he said.

Identity theft

Koskinen lauded the agency's work to curb tax-related indentity theft. This initiative is a high-profile one. The IRS has worked with other federal agencies and state and local governments to discover and prosecute identity thieves. The IRS has also upgraded its return processing systems to uncover fraudulent returns and has assigned special identity protection numbers to victims of identity theft. "We rejected 5.7 million suspicious returns last year that may have been tied to identity theft," he said.

To learn more information or for updates, please contact our offices.