Achieving the Goal of Compliance with the Government Tax Laws

Achieving the Goal of Compliance with the Government Tax Laws

How to Achieve the Goal Athlete Program: Schedule Practice Diet / Sleep Finance Officer Identify and Prioritize Issues Plan: Win Local Establish an Win Regional Win National Action Plan Goal: Win Olympics! Tax Compliance! 5

Key Topics Correction of Errors IRS Audits Government Autos/Vehicles ACA / Opt-Out Arrangements Flexible Spending Account Issues 457(b) Deferred Comp Plans Accrued Leave Programs Proposed Tax Law Changes 6

Components of the Tax Law Internal Revenue Code (Law of the Land) IRS Interpretations - Regulations, Revenue Rulings & Private Letter Rulings (PLRs) Court Cases Court Can Rule in Favor of IRS or the Taxpayer IRC Sec. 61 - All Income Taxable, Except Statutory Exclusions Doctrine of Constructive Receipt Economic Substance Doctrine 7

Correction of Errors (Page 7) Form 941-X Statute of Limitations Correcting Overpayments Employee Consents for Refunds Misclassified Workers Overpaid Wages Should the Agency Correct Errors Going Forward? 8

IRS Employment Tax Audits (PAGE 11) How Are Agencies Selected for Audit? Media Attention Special IRS Compliance Projects Target List Random Selection Whistleblowers 9

Key Issues (Page 13) Form 1099 Compliance Form W-9 TIN Matching Program Employee v. Independent Contractor Contract City Attorneys Exempt Form W-4 Information Document Requests (IDRs) 10

How to Handle Audit (Page 14) Establish Trust; Fully Cooperate Respond Quickly to Document Requests IRS Agents Have Subpoena Powers Answer Questions Openly and Honestly However, Do Not Volunteer Information About Plans Not Under Examination Accept Assessment If IRS Is Right. 11

Challenging the IRS (Page 14) Dispute Proposed Assessments Where the Agency Has a Sound Tax Position Should the Statute of Limitations Be Extended? Fast Track Settlement Program IRS Office of Appeals Tax Court 12

Form 1099 Reporting (Page 234) Form 1099-MISC Form 1099-C (Cancellation of Debt) Form 1099-G (Taxable Grants) Form 1099-INT (Interest Payments) Form 1099-K (Payment Card Transactions) Form 1099-S (Real Estate Transactions) Form W-9 (Back-Up Withholding / TIN Matching Program) Reporting Lawsuits, Judgments & Settlements.

Employee vs. Independent Contractor (Page 22) Facts and Circumstances Three-Part, Common Law Test Right to Control and Direct Work of the Individual (the Method, Manner and Means) 14

Checklist (Page 24) Is Worker an Independent Contractor? Written Agreement? Separate Identifiable Business? Is Worker Part-Time? Is Worker an Employee? Employment Agreement? Under Direct Supervision and Control? Is Worker Full Time?

Contract City Attorneys (Page 35 ) Independent Contractor or Employee? Public Official Under State Laws Not an Appointed Public Official Under Federal Income Tax Law What Is Section 530 Relief? Contractual Arrangements with City Attorneys. 16

Expense Reimbursement Plans (Page 43) Accountable Plans Substantiation Documentation Return of Excess Advances 17

Expense Reimbursement Plans (Pages 45-47) General Per Diem Rates for 2017-2018 Rates for Meals and Incidental Expenses (M&IE) Rates for High-Low Method Reasonable Hours Standard 18

Automobile Fringe Benefits (Page 50) Personal vs. Business Travel Annual Lease Value $1.50 Per Commute Cents Per Mile Substantiation/ Documentation 19

Personal Use (Page 54) Commuting Travel From a Residence to One or More Regular Work Locations is Personal Use. Business Travel : Travel Between Two Places of Business If Travel Has a Business Purpose, It Is Business Travel. Travel from a Residence to a Temporary Work Location (and Back) Is Not Taxable, Regardless of the Distance Traveled. New Development (Page 55) 20

$3.00 Per Day (Page 58) Control Employees (2017 Wages Equal or Exceed $151,700) Are Not Eligible Gross Wages, Form W-2, Box 1 Plus: Employee Elective Deferrals Cafeteria Plan Contributions Transportation Fringe Benefits 457 Plan Contributions 403(b) Annuity Contributions 21

Cents Per Mile Method (Page 60) Cents Per Mile Method May Be Used If Vehicle Value Is $15,900 or Less If Placed Into Use in 2017 Pickup Truck or Van Value Must Be $17,700 or Less If Placed Into Use in 2017 Definition of a Truck or Van 22

Special Exemptions (Pages 62-67) What Is the Physical Design of the Vehicle? What Does It Look Like? Clearly-Marked Police, Fire and Public Safety Officer Vehicles Unmarked Fire Vehicles Special Rules for Pick-up Trucks Special Circumstances for Utility Workers 23

Workers Compensation(Page 75) California Workers Compensation Act A Statute in the Nature of Workers Compensation Act Can Be Created Cannot Exclude Payments Based On: - Age - Length of Service - Prior Contributions 2017 Tax Court Case (Page 76) 29

Affordable Care Act (Page 83)

Play or Pay Mandate (Page 87) Effective Date : January 1, 2016 Large Employers (50 or More FTEs) Must Offer Their Full-Time Employees and Dependents a Health Plan with Minimum Essential Coverage (MEC) that Is Affordable and Has Minimum Value ( Play ). Otherwise, the Employer Is Subject to a Monthly Assessment ( Pay ). An FTE s Required Contribution to the Health Plan Is Considered Affordable if the Contribution Does Not Exceed 9.69% (for 2017) of Household Income. An Employee s Health Coverage Has Minimum Value if the Employer Pays 60% or More of the Cost of Covered Claims, and the Plan Provides Substantial Coverage for Inpatient Hospital and Physician Services. 31

ALE Status of Related Entities (Page 91) Primary Government Entities May Have Formed Related Entities or Control Related Entities. All Related Entities Need to Be Combined for Purposes of Determining the Over 50 ALE Status. Each Entity that Has a Separate EIN Would Generally Need to File Form 1095-C for their Full-Time Employees. 32

Household Income (Page 93) A Full-Time Employee s Required Contribution to a Health Plan is Considered Affordable If it Does Not Exceed 9.69% (for 2017) of Household Income. The IRS Has Established Three Safe Harbor Methods for Determining Household Income: Form W-2 Wages Method Rate of Pay Method Federal Poverty Level Method

Cash-Out Arrangements Where Employer Flex Credits Are Available to Employees for Health Benefits, But Benefits Are Not Conditioned on a Waiver of Coverage (Page 94) Where Employers Offer Additional Compensation In Exchange for Employees Declining Health Coverage (Cash-In-Lieu Benefits)(Pages 95-97) Flores v. City of San Gabriel Case (Page 97)

Forms 1094-C (Page 99) Form 1094-C (Transmittal Form for Forms 1095-C) Qualifying Offer Method Simplified Reporting Allowed 98% Offer Method Simplified Reporting Allowed 35

Forms 1095-C (Pages 100-103) Line 14 - Offers of Coverage - Code Series 1 Conditional Offers of Spousal Coverage Line 15 - Employee s Required Contribution Line 16 Code Series 2 Post-Employment or COBRA Coverage Special Issues for Elected Officials 36

Health Reimbursement Plans Group Health Plans (Page 105) Cannot Place Annual Limits on Essential Health Benefits, and Must Provide Free Preventive Care Medical Care Reimbursement Plans that: Have Annual Limits or Do Not Provide Free Preventive Care, and Are Not Integrated with the Group Health Plan Are Subject to Excise Taxes. 37

Health Reimbursement Plans (Page 105) ACA Market Reforms Do Not Apply to Retiree Only Plans that Had Fewer Than Two Current Employees On First Day of Plan Year. 2017 Development: Small Employers May Set Up HRA that Is Not Subject to ACA Penalties 38

Health Reimbursement Plans (Page 107) To Prevent ACA Penalties: Convert Medical Care Reimbursement Arrangements to ACA-Compliant Plans Eliminate the Non-Compliant Plan(s) and Increase the Taxable Salaries of Employees to Purchase Individual Insurance Policies. 39

ACCIDENT AND HEALTH PLANS (PAGE 109) Employer-Provided Coverage Is Nontaxable Medical Reimbursements Nontaxable under Qualified Plan Cash Rewards to Encourage Participation in Wellness Programs Any Taxable Benefits for Retired or Former Employees Are Generally Reported on Form W-2, Not Form 1099-MISC. (Page 110) Fixed-Indemnity Health Plans (Page 111) 40

Employee Contributions (Page 114) Mandatory Contributions Are Pre-Tax Voluntary Contributions Are After-Tax, Unless the Premiums are Paid through a Section 125 Cafeteria Plan. Example: Voluntary Deductions for a Specific Disease, such as Cancer Coverage, Are After-Tax (Unless Offered Through a Cafeteria Plan). 41

HEALTH SAVINGS ACCOUNTS (HSAs) (PAGE 115) Can Be Established By All Americans Under 65 Used For High-Deductible Health Plans Can be Added to a Cafeteria Plan California Does Not Conform Expanded Use of HRAs Proposed Under Health Care Reform Bills 42

Other Health Care Arrangements (Pages 118 and 119) Exchange of Future Retiree Health Benefits for Higher Compensation (Page 118) Reimbursements of Health Insurance Premiums of Retired Employees, Generally Not Taxable If Employees: Provide Support for Insurance Premiums, and Do Not Have Option to Receive Cash In Lieu of Premium Reimbursement (Page 119). 43

Same-Sex Marriage Rules (Pages 120 and 121) 2013 U.S. Supreme Court Decisions in Windsor and Hollingsworth (Prop 8) 2015 U.S. Supreme Court Decision in Obergfell v. Hodges All Same-Sex Marriages Recognized for Federal Tax Purposes (But Not Registered Domestic Partners) Health Plan Contributions for Same-Sex Spouses Receive Favorable Tax Treatment Special California Rules. 44

Cafeteria Plans (Page 127) Choose Between Cash (or Other Taxable Benefit) and Qualified Nontaxable Benefits Cash Option Does Not Trigger Constructive Receipt 45

Special Rules Health FSAs Limits (Page 139): $2,600 for 2017 $2,650 for 2018 Health FSA Arrangements with Employer Flex Credits Could Be Subject to ACA Penalties (Pages 140 and 141)

Educational Assistance Programs (Page 145) Section 127 Educational Assistance Programs Job-Related Education Reimbursements. 47

Masters Programs (Pages 149 and 150) Many Favorable Tax Court Cases MBA Course Reimbursements Are Generally Excludable From Income, If: Employee Stays In the Same Job While Completing the MBA, MBA Is Taken Merely to Maintain and Improve Employee s Job Skills And Is Not Intended to Qualify the Employee for a New, Unrelated Position 48

Quick Reference Table (Page 152) Formal Written Plan Needed Employee Notification Required Dollar Limit on Reimbursements Nondiscrimination Rules Must Be Met Education Must Be Job-Related Covers Transportation Expenses 127 Plans Yes Yes Job-Related Reimbursements No No $5,250 None Yes No No No Yes Yes 49

Prizes and Awards (Page 153) General Rules Provided by 3 rd Party Prizes Funded by Employee Group Employee Achievement Awards 50

Working Condition Fringe Benefits (Page 156) Concept-Employee Is In a Trade or Business Substantiation Requirements Nontaxable to Employees 51

Employee Meals (Pages 157 to 164) Travel Away from Home Bona Fide, Business-Related Entertainment Local Conferences, Conventions and Meetings One-Day Training Courses Meals On Business Premises Occasional Meals for Overtime Work Meals at Government Events or Parties Meals for Law Enforcement Officers and Firefighters 52

Lodging Expenses (Page 165) Employer-Provided Lodging Employee Must Be Required to Accept Lodging as a Condition of Employment Lodging Must Be On the Business Premises of the Employer. 24-Hour On-Call Requirement Alternative Housing Cannot Be Available to the Employee 53

Cell Phones and Tablets (Pages 169 and 170) Agency Should Have Written Policy Requiring Employees to Have Cell Phones for Business Use. Cash Allowances, Stipends or Reimbursements Should Not Exceed Cell Phone or Tablet Cost, Including Amortization of Purchase Cost / Equipment Charge. 54

De Minimis Fringe Benefits (Page 174) Small Dollar Amount Occasional, Not Regular Bookkeeping: Unreasonable? Administratively Impractical? Gift Cards/Gift Certificates/Gift Coupons 55

Transportation Fringe Benefits (Page 173) Value of Commuter Highway Vehicles & Transit Passes: 2017- $255 2018 - $260 Value of Parking - $255/$260 New Development: Parking Carpools and Van Pools Smartcard Rules 56

457 Deferred Comp Plans Contribution Limit (Page 183) 2017 - $18,000 2018 - $18,500 Special Catch-Up Rules (Pages 184 to 186) Ineligible Plans (Page 188) 57

Accrued Leave Programs (Page 197) Generally Taxable When Paid Employee Elections to Cash Out Accrued Leave Time (Pages 200 to 203) 58

Leave Sharing Programs (Pages 205 and 206) Medical Emergency Leave Sharing Plan Presidentially- Declared Major Disaster Leave- Sharing Plan General Leave Sharing Plans (No Tax-Favored Treatment) 59

Pension Contributions (Page 208) Employer Contributions - Not Taxable Employer s Pick-up of Employee Contributions Not Subject To Income Tax Withholding, With Valid Section 414(h)(2) Election. Contributions Designated as Employee Contributions but Pick-Up by the Employer May Be Paid by Either the Employer or Employee. 60

Employee Payment of Employer Pension Contributions (Page 210) Assumes CalPERS Classic Safety Employee 2016 Contributions, As Required Under Existing Contract with CalPERS: Employer Contribution 22% Employee Contribution 8% (EPMC) Total Pension % 30% In 2017, Employee Agrees to Pay 8% Employee Contribution, plus 2% of the Employer Contribution (Total of 10%) 61

How Do You Make the 2% Pre-Tax? (Page 211) Adopt (or Update) MOU, Requiring Employees to Pay the 8 % and 2%. Amend Section 414(h)(2) Resolution or Ordinance, Designating the 2% as an Employee Contribution, and that it Will Be Picked-Up by the Employer (for Payroll Tax Purposes). Deduct the 8% and 2% from the Employee s Paycheck. 62

Pay Raises that Offset Pension Salary Deductions (Page 216) How Will the IRS View the Economic Substance of this Arrangement? Should the Pay Raise and Payroll Deduction Be Viewed as Two Separate Transactions? Conservative Approach: Employee Pension Deduction Should Be Subject to Social Security (If Any) and Medicare Taxes.

Pension Rate Stabilization Program (Page 216) 2015 PLR Approved Tax Treatment of New Rate Stabilization Program Features of Program: Used to Pre-Fund Pension Costs Local Agency Retains Control of Trust Assets and Investment Decisions Trust Assets = Rainy Day Fund OBEB Debts Can Be Pre-Funded.

Reporting of Compensation Supplemental Wage Payments (Page 219) Form W-2 (Page 221) 65

Form W-4 Reporting (PAGE 231) Not Required to Police Form W-4s IRS Monitors Exemptions through the Use of Lock-In Letters Can Reject Invalid W-4s Special Problem with Exempt Elections Different California Rules (Page 232) Possible Policy to Curb Excessive Form W-4 Submittals (Page 233) 66

Social Security and Medicare (Page 246) Section 218 Agreements Employees Hired On or After April 1, 1986 (Subject to Medicare) Employees Not Covered By a Public Retirement System 67

FICA (Page 248) Social Security Wage Base - $127,200 for 2017, Increasing to $128,700 in 2018. Employee Wages in Excess of $200,000 Are Subject to an Additional.9%. Employers Are Not Required to Match. Applies Regardless of Employee s Filing Status, Income of Spouse or Income from Other Employer(s). Medicare Wages Include Noncash Compensation. Special Rules for Former Employees Who Receive Group-Term Life Insurance in Excess of $50,000. 68

Action Items? Does City Use a Contract City Attorney? - Get Legal Opinion that Independent Contractor Is Long-Standing Practice - Pass Resolution that City Is Relying On Section 530 Relief Does Your Agency Need to Adopt a Reasonable Hours Standard for Reimbursing Lodging and Per Diem? Is Your Agency Properly Taxing the Use of Vehicles and Pick-Up Trucks that Are Not Clearly Marked and/or Not Properly 69 Equipped?

Action Items? Does the Agency Offer Employer Flex Credits that May Reduce the 2017 Employee Required Contribution? Does the Agency Wish to Adopt an Eligible Opt-Out Arrangement? Does the Agency Need to Eliminate or Alter Medical Care Reimbursement Arrangements (HRAs) that May Cause ACA Penalties? 70

Action Items? Does the Agency Need to Amend its Cafeteria Plan Agreement so that Total Employee Benefits Do Not Exceed ACA-Allowed Limits? Do Agreements with Firefighters and Other Employees Using Employer- Provided Housing Meet the IRS Requirements? 71

Action Items? Is My Agency Properly Computing the 457 Catch-Up Calculations? Do Employee Leave Sharing Programs Need to Be Implemented or Updated? If Classic Employees Have Negotiated to Pay a Portion of the Employer s Pension Contribution, Has the Section 414(h)(2) Resolution Been Updated? 72

Action Items? Has My Agency Considered Revising Its Transmittal Letter to New (and Existing) Vendors, Requiring that Lines 1 and 2 of Form W-9 Include the Exact Name(s) that the Vendor Uses In Filing Its Federal Income Tax Returns? 73