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1/24/2012In Short:
Payments by an employer to a prospective employee to visit the new city before accepting employment are not taxable. But payments to either new hires, or current employees trying to decide whether to accept a transfer, generally are taxable unless the primary purpose of the trip is a business meeting unrelated to the transfer. In the latter case, travel expenses to the new location, and meals and lodging for the period necessary to do business, are not taxable, but extra days necessary for get-acquainted tours or househunting are taxable.
The Full Story:
Today’s tax quote: “The first 9 pages of the Internal Revenue Code define income; the remaining 1,100 pages spin the web of exceptions and preferences.” Warren G. Magnuson
Those 9 pages notwithstanding, whether a payment is income is a question not always that easy to come to grips with.
For example, one of the most common tax questions asked by employers has to do with the taxability of payments to workers for visits to a new work location prior to moving.
Employers often pay or reimburse the expenses of prospective employees, newly hired employees, or current employees traveling to the employer’s place of business, including the costs of transportation, meals, and lodging. The activities in which such individuals participate while visiting the employer often include a "get-acquainted tour" of homes in the area. Depending on the circumstances, the costs of these trips may be taxable to the employee, and subject to withholding, payroll taxes, and inclusion on the W-2.
Generally, the taxability turns on whether the worker is a prospective employee, or a current employee.
The payment or reimbursement generally should not constitute taxable income to a prospective employee or wages subject to withholding by the prospective employer, as long as the employer agrees to bear the costs of the trip before the individual accepts employment with the employer. See Rev. Rul. 63-77, 1963-1 C.B. 177, in which the IRS reached this conclusion in the case of prospective employees’ travel expenses incurred in interviewing at the prospective employer’s home office. Therefore, neither a Form W-2 nor a Form 1099 is necessary.
According to the IRS, "the payments in question are not remuneration for services rendered or to be rendered in an employment relationship." The same conclusion should apply where the primary purpose of the trip is the prospective employee’s attending the get-acquainted tour, since Code §82 only requires inclusion in gross income of moving expense payments or reimbursements "in connection with the performance of services." Reg. §1.82-1(a)(5).
If, however, the employer’s agreement to pay or reimburse the expenses is contingent upon the prospective employee’s ultimately being employed by the employer, the payment or reimbursement would constitute consideration for services to be rendered, even though the individual is not an employee at the time the expenses are incurred. Rev. Rul. 66-41, 1966-1 C.B. 233. For this reason, the payment or reimbursement under such an agreement should be treated in the same manner as in the case where the expenses are incurred after the individual becomes an employee, discussed below.
It is common for a newly-hired employee to visit the new city after he or she has already agreed to become an employee. Or a current employee may visit a new city for a get-acquainted tour or househunting before he or she agrees to accept a transfer.
If the individual is an employee (i.e., has agreed to work for the employer, regardless of whether the individual actually has begun performing services for the employer, or is already working for the employer at another job location) at the time the expenses are incurred, the proper tax treatment of the payment or reimbursement depends upon the characterization of the expenses. If the expenses are characterized as moving expenses, the payment or reimbursement will constitute gross income to the employee under Code §82 and the employer will be obligated to withhold income and employment taxes. Househunting, for example, is a common nondeductible moving expense.
If, on the other hand, the expenses are characterized as expenses incurred by the employee in carrying on the employer’s business (and assuming the employee’s "tax home" has not yet changed to the new place of employment), the payment or reimbursement will not be includable in the employee's income or subject to withholding by the employer provided that the accountable plan rules of Section 62 are met. But the employee must be doing business in the new city, not just visiting to look it over or check out the housing market.
Where the purpose of the trip includes both providing the employee with a get-acquainted tour (generally a taxable moving expense) and the employee conducting the employer’s business, "fixed" expenses should be characterized according to the predominant purpose of the trip and "incremental" expenses should be characterized according to their specific purpose. For example, if the primary purpose of the trip is the employee’s participation in a bona fide business meeting of the employer, the transportation expenses and the meals and lodging expenses necessary for the employee’s attendance at the meeting should be characterized as expenses in carrying on the employer’s business. If the employee remains an additional day in order to take part in the get-acquainted tour, any additional meals and lodging expenses should be characterized as moving expenses.
Travel, meals and lodging expenses for a spouse or family to accompany the employee clearly are taxable, even if the primary purpose of the trip for the employee is business. Moreover, the presence of the spouse/family may make it more difficult to characterize the purpose of the employee’s trip as business.
The primary purpose of the trip must be determined based on all facts and circumstances, and the relative time spent on the two activities is an important factor in making this determination. Reg. §1.162-2(b)(2). The longer the non-business portion of the trip, the more difficult it is to argue convincingly that the primary purpose of the trip was business, and that difficulty increases with the presence of family.
Consequently, the bottom line is that company payments for most visits to a new city by a new hire, or a current employee considering relocation, will be taxable wages requiring withholding. Companies have sometimes argued that a get-acquainted trip for a such workers is not taxable because it is akin to a recruiting expense. Unfortunately, neither the IRS nor the tax law sees it that way. Its one of those perplexing questions not answered by the tax code’s first 9 pages.
Posted by Peter K. Scott 1/19/2012
In Short:
IRS has been successful in obtaining records of transfers of real property between family members for less than full consideration from 16 states, most recently California. Such transfers are reportable gifts, and IRS is auditing the transferors to determine if gift tax is due, and demand that gift tax returns be filed. This IRS program again illustrates that using a Quit Claim deed from a family member to transfer ownership to a transferee when company policy requires that the transferee own the home to qualify for a home purchase program is inadvisable. A purchase can be made from anyone and still qualify for the tax benefits of a qualifying home purchase program under Rev. Rul. 2005-74.
The Full Story:
Today’s tax quote: “[W]e tax generosity within families—even as we encourage people to deduct gifts to strangers.” Allan Reynolds
A recent decision of the U.S. District Court for the Eastern District of California granted the Internal Revenue Service permission to serve a summons on the California State Board of Equalization demanding the names of residents who transferred real property to members of their family for little or no money during the years 2005 to 2010. See, In the Matter of the Tax Liabilities of John Does, No. 2:10-mc-00130. The opinion sheds some light on an ongoing effort by the IRS to identify taxpayers who have made gifts to members of their families without properly reporting them on the Form 709 gift tax return.
For at least two years, the IRS has been engaged in seeking this sort of data nationwide. It has already received information about intra-family property transfers from county or state officials in 15 other states (Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington, and Wisconsin. Generally, IRS is seeking this information from offices where deeds are recorded, and transfer taxes or recording fees paid, because in most states property transfers without consideration are exempted from transfer, excise, or stamp taxes and can be easily identified. Why is IRS looking for these transfers?
Under federal law, the transfer of property with less than full consideration is a gift. There is an annual exclusion of $13,000 for gifts to each donee during the year. But gifts over than amount must be reported on a gift tax return. Although there is also a lifetime unified credit that currently excludes from gift tax the first $5 million of lifetime gifts over the annual exclusion, that credit was only $1 million during the years the IRS is looking at. Although the unified credit would shield gifts under that amount from immediate gift tax, it also reduces the amount that may be passed free of the estate tax when the donor eventually dies. That is, reported gifts over the annual exclusion are aggregated over a lifetime, and even if they don’t cumulatively exceed the lifetime credit, they will effectively increase the potential estate tax. Consequently, from the IRS point of view it is important that gift tax returns be filed even if no gift tax is due.
The IRS is convinced that many intra-family transfers of property go unreported, and its ongoing initiative described above is designed to obtain information about those unreported gifts.
There is no penalty for failing to file a gift tax return unless tax is actually due, because the applicable penalties for failing to file, failing to pay, negligence, accuracy, etc, are all calculated as a percentage of the amount of tax underpayment. However, if gift tax is in fact due, the penalties can be substantial. Moreover, if no return is filed, the statute of limitations on assessment never runs, so that the IRS is free to audit the taxpayer forever.
According to IRS statistics presented to the California court, at least 50%, and up to 90%, of individuals who make property transfers to relatives for less than full consideration fail to file gift tax returns. Information obtained from the other states listed above has thus far led to examinations of 658 taxpayers, of whom 238 should have filed gift tax returns but did not do so, and 20 owed substantial tax liabilities.
This IRS program is relevant to a question that sometimes arises in relocation programs. Many relocation home sale policies specify that the home in the departure area must be owned by the transferee in order to qualify for a buyout program, whether that is a guaranteed buyout, or an Amended Value or BVO program. Companies sometimes ask whether, in instances where the home is owned by someone else (usually a parent or sibling) the problem of ownership can be addressed by simply having the record owner make a Quit Claim deed in favor of the transferee.
However, providing a quit claim deed would constitute a reportable gift by the owner who executes the deed unless the transferee pays full value for the interest in the home. As discussed above, a gift tax return should be filed, which may have undesirable tax consequences. For this and other reasons, Worldwide ERC® has counseled that such deeds should not be used to correct ownership. This topic is discussed at some length in the Worldwide ERC® Tax & Legal MasterSource under the topic “Employee Not the Owner,” and in a Mobility LawBlog post on September 12, 2011. A purchase that is not from the transferee still qualifies for all the tax benefits of the IRS position on relocation home sales, and avoids the gift tax and other unfavorable consequences of trying to shift ownership.
The new IRS program makes the undesirability of using the Quit Claim deed even clearer; intra-family transfers for less than adequate consideration are in the line of fire, and may have very unfortunate tax consequences when discovered.
Posted by Peter K. Scott
The Consumer Financial Protection Bureau was created as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-103, H.R. 4173) which was signed into law on July 21, 2010. The CFPB has broad jurisdiction and authority over various fair lending and consumer protection laws as addressed in the Mortgage Reform and Anti-Predatory Lending Act provision of the Dodd-Frank bill. The CFPB also has authority over non-bank entities which provide financial services including all mortgage-related businesses such as lenders and brokers.
Until the appointment of Cordray, the agency had little authority to actually oversee lending practices and non-bank lending entities. Congressional Republicans had blocked the appointment of Cordray in an effort to gain leverage for greater congressional oversight of it. Senate Republicans had forced the Senate to stay in pro forma session during the current congressional break to prevent the President from making any recession appointments. However, in a surprise move, the President appointed Cordray as well as three members of the National Labor Relations Board citing that the Senate is for all purposes in recess.
The appointment of Cordray angered Congressional Republicans and business groups opposed to his installment until changes were made to the CFPB. Several organizations had threatened to sue to block the appointment. However, many of those organizations including the U.S. Chamber of Commerce have eased off after receiving assurances from Cordray that he will ensure that the agency is transparent and focuses on unscrupulous businesses who undercut the responsible ones.
Since Cordray has been installed as director, the CFPB has been focusing its attention on the practices of automobile dealerships that provide direct lending to customers. But the agency continues to work on the Real Estate Settlement Procedures Act (RESPA) regulation and the new Truth in Lending mortgage disclosure form and other mortgage lending changes required under the Dodd-Frank Act. 1/11/2012Today’s tax quote: “[American tax laws] are constantly changing as our elected representatives seek new ways to ensure that whatever tax advice we receive is incorrect.” Dave Barry
Congress and tax law changes notwithstanding, in the spirit of getting it right here are Worldwide ERC’s annual tax season filing tips for transferees.
Here are several items deductible as moving expenses that are sometimes overlooked:
- Tips to the moving van driver or helpers.
- Mileage for driving second or third cars to the new location (in addition to the first car). The deduction for 2011 is 19 cents per mile from January 1 to June 30, and 23.5 cents per mile thereafter. (The deduction will decrease to 23 cents per mile for 2012).
- Lodging expenses in the departure location for one night after the household goods are packed, and one night in the new location on the day of arrival.
- Moving household goods from a location other than your main home, up to what it would have cost to move them from the main home
- Storage of household goods for up to 30 days, including the cost of moving the goods into and out of storage. Note that the costs for moving the goods into and out of storage remain deductible even if the goods are in storage more than 30 days.
- Expenses not reimbursed by your employer, such as extra crating, shipment of unusual items, tips to van line staff, etc.
And remember: You don’t have to itemize to deduct moving expenses.
- If the seller of your new house agreed to pay part of your mortgage points instead of reducing the sales price, IRS says you can deduct those points, even though the seller paid them.
- If you ever refinanced your mortgage, don’t forget to deduct the entire remaining balance of points paid on the refinancing in the year you sell your home.
- If your new job is for a different employer, and you earned more than $106,800 in 2011, you may have had too much deducted as contributions to Social Security. You can take a credit for the excess over $4,485.60 on line 69 of your Form 1040 tax return. (Note that this amount is lower than in past years because the employee share of Social Security tax was reduced from 6.2% to 4.2% for all of 2011).
- If you moved to one of the states with state and local sales taxes but no general income tax (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, or Wyoming) you may benefit from an itemized deduction for state sales taxes. The deduction was reauthorized by Congress for 2010 and 2011 at the end of 2010.
- If you paid a premium for mortgage insurance, you may be entitled to an itemized deduction as mortgage interest for the portion of the premium allocable to 2011. No deduction is available, however, if your adjusted gross income is more than $110,000.
- If you claimed a homebuyer credit on your purchase of a home in 2008 through 2010, and you sold your home or stopped using it as your principal residence when your were transferred in 2011, you may have to repay on the 2011 return the entire credit taken. See IRS Form 5405 and its Instructions for details. Repayment is always required for credits taken in 2008. However, for credits claimed in 2009 and 2010 note that if you sold the home and did not have a gain, none of the credit must be repaid. In calculating gain, remember to subtract from the sale proceeds all purchase closing costs, and any improvements you made to the home during the time you owned it.
This year’s return will be due on Tuesday, April 17, 2011, because the normal due date of April 15 is a Sunday, and April 16 is a holiday (Emancipation Day) in the District of Columbia.
Posted by Peter K. Scott 12/29/2011
In Short:
Starting on January 1, 2012, the European Union (EU) will impose a carbon tax on international flights that originate or end within countries that are part of the European Union as well as Iceland and Norway. U.S. and Canadian airlines tried to block the tax in court on grounds that it violates international aviation treaties and intrudes on national sovereignty. On December 21, the European Court of Justice ruled against the U.S. and Canadian airlines and further paved the way for the law to take effect at the beginning of the year. While much of the attention has been on the airlines and the increased cost likely to be passed on to passengers, the tax would also apply to air cargo carriers and impact the cost of shipping freight and packages.
The Full Story:
In 2008, the European Union adopted the carbon tax on air transport as part of the aviation directive to its Emissions Trading System (ETS). The ETS utilizes the “cap and trade” principle as the framework for EU policies to combat climate change and reduce greenhouse gases. The intent of the tax is to force airlines and other air carriers to purchase more efficient aircraft that use less fuel and thus emit less carbon dioxide.
Airlines and air carriers will be allocated free allowances based on historical carbon dioxide emissions that can then be redeemed to offset future emissions. The base line for acceptable emissions is reduced in future years. Those airlines and air carriers exceeding emission levels can purchase allowances from other airlines and carriers which have credits, or will be fined the tax. Exempt from the law are those commercial air transport operators that have 2 flights or less per day, emit less than 10,000 tons of carbon dioxide a year or use small aircraft of less than 5,700 kilograms. Also exempt are aircraft used for state, military, rescue, emergency or training purposes.
Airlines for America, the trade organization for U.S. airlines, initiated the lawsuit in 2009 against the carbon tax. China, India and other countries with airlines and air cargo carriers with flights to and from Europe also strongly oppose the tax. Since the ruling by the European Court of Justice in London, the U.S. State Department and other foreign governments have denounced the decision to uphold the tax. Airlines for America is reviewing its legal options and the China Air Transport Association has previously stated that it plans to bring legal action in another European court against the carbon tax.
It is expected that the U.S., Canada, China, India and Russia will continue to put strong pressure on the EU to alter or eliminate the aviation carbon tax. Here in the U.S., we will likely see renewed support in Congress for U.S. air carriers on the issue. In July, Congressman John Mica (R-FL) introduced the European Union Emissions Trading Scheme Prohibition Act (H.R. 2594) with Senator John Thune (R-SD) introducing the Senate companion bill (S. 1956) on December 7. H.R. 2594 and S. 1956 would prohibit U.S. air carriers from participating in the Emissions Trading System and paying the carbon tax. While the legislation if passed would be a directive from the U.S. Congress, it is uncertain what influence it would have on the EU.
Despite legal and legislative efforts, a vast majority of airlines and air carriers have applied for the free allowances and spokespeople for airline trade groups have noted that their organizations and members will reluctantly comply with the ruling.
Impact on Worldwide ERC Members:
Aviation industry experts believe that the airlines will pass along the tax directly to passengers and customers. It is unclear whether airlines and air cargo carriers will be proactive in determining the anticipated cost of the tax and pass the tax along sooner rather than later. Airlines opposing the tax have stated it will cost the aviation industry $23.8 billion over the next eight years. The EU has calculated the cost per passenger to be $15.70 for a one-way trans-Atlantic flight. So while many of the details are still up in the air, Worldwide ERC members can expect airfare and shipments by air to and from Europe to increase in the near future unless the EU unexpectedly caves to foreign pressure.
Posted by Tristan North
12/24/2011
In Short:
On December 22, 2011, Congress finally passed a payroll tax cut for the first two months of 2012, under which the employee share of FICA will be 4.2%, rather than 6.2%, through February 29. The bill also establishes a temporary Social Security taxable wage base of $18,450 for that period. However, employers will simply tax all wages during that period at 4.2%, and workers who make more than that during the period will have to make an extra income tax payment of 2% of the excess over $18,450 with their 2012 income tax returns, unless the payroll tax cut is further extended. The cut, unfortunately, is paid for by increasing the loan guarantee fees charged to lenders by Fannie Mae, Freddie Mac, and the FHA, which will increase the monthly costs of home loans for borrowers.
The Full Story:
Fractious House Republicans on December 22, 2011, finally agreed to a temporary two-month extension of a cut in the employee share of Social Security tax from 6.2% to 4.2% through February 29, and the resulting bill (H.R. 3765) was signed into law by the President on December 23, providing a nice Christmas present for American taxpayers but complicating the task of payroll tax administrators in 2012. The two-month extension, which was a bipartisan compromise reached in the Senate after Democrats and Republicans had utterly failed to agree on how to pay for the full-year extension both wanted, had been held up by refusal of House Republicans to go along.
The IRS promptly issued a brief explanation of the payroll tax cut provisions, which can be found at http://www.irs.gov/newsroom/article/0,,id=251650,00.html?portlet=108.
The bill also extends unemployment benefits for two months, and for those same two months prevents a 27% cut in Medicare reimbursement rates for doctors that has been scheduled to go into effect for several years but has repeatedly been extended by Congress.
The impasse with the House did, however, result in a change to the way the temporary payroll tax cut is administered that will shift some of the burden from payroll administrators to workers themselves. Under the original Senate compromise, the cut was implemented by establishing a separate wage base of $18,450 for the first two months of the year (that is, 1/6 of the full year $110,100 wage base for 2012). But wages paid in those two months that exceeded the $18,450 limit would have been taxed at the full 6.2%, creating a programming nightmare for payroll administrators. The higher tax on wages over the temporary limit is necessary, however, in order to properly tax higher income workers (including those who receive taxable bonuses early in the year) who otherwise would reach the $110,100 wage limit having paid tax only at 4.2% on some of it that should have been taxed at 6.2% if the payroll tax cut is not eventually extended for the full year.
To understand this problem, assume a worker whose salary is $20,000 per month, and who also receives a bonus of $50,000 in January. Without the adjustment in the Senate plan, the worker would pay Social Security tax of about $3,780 during the first two months of the year ($90,000 in wages times 4.2%). But the worker would also have satisfied $90,000 of the $110,100 wage base limit. If the payroll tax cut was not further extended, the worker would end up paying 6.2% on only about $20,000 in wages (or about $1,240, for a total FICA tax in 2012 of about $5,020), having met virtually all of the wage base limit by end of March. In contrast, workers who were at or below the two-month $18,450 limit would have paid tax at 6.2% on a far greater share of their wages during the remainder of the year. For example, a worker who made exactly $18,450 during the first two months and $110,100 for the year would owe about $6,457.
But the mechanism in the Senate plan would have been quite burdensome for payroll departments and providers to administer, and required considerable re-programming that would ultimately prove to be unnecessary if the full-year payroll tax cut is eventually enacted. As a result the final legislation was changed to create a new “recapture” provision that will be effective if the payroll tax cut is not extended beyond February.
Under this provision, the employee share of FICA tax will be 4.2% for the first two months of the year, regardless of the level of income. Payroll tax administrators will not have to collect tax at two different rates for those workers who exceed the two-month wage base of $18,450. However, if the payroll tax cut is not extended beyond February, workers who earned more than $18,450 during the first two months will owe an additional income tax payment of 2% of the amount of wages received during that period in excess of $18,450. That payment will make up for the underpayment of FICA tax explained above, and will be due with the worker’s 2012 income tax return. It is not subject to reduction by any credits or deductions.
Of course, it is expected that Congress will eventually figure out a way to pay for a full-year payroll tax reduction, so this provision may never take effect. In the meantime, however, it does lessen the burden on payroll administrators.
The tax and other breaks in the new law, unfortunately, are paid for by increasing the guarantee fees charged to mortgage lenders by Freddie Mac, Fannie Mae, and the FHA by one tenth of one percent. That will raise about $33 billion, but will result in higher monthly mortgage costs for homebuyers or refinancing homeowners starting January 1, 2012. The fees, which are generally passed on to borrowers by lenders, will increase the cost of a $200,000 mortgage by about $17 per month. This is not good news for a housing market already in continuing distress, or for Worldwide ERC members seeking to relocate homeowners.
Posted by Peter K. Scott
12/20/2011
In Short:
Beginning with returns for 2011, U.S. taxpayers will have to report foreign financial accounts and other specified foreign assets on Form 8938 with their federal income tax return if those assets exceed an aggregate of $50,000 at the end of the year or $75,000 at any time during the year. New regulations and an IRS publication explain those rules, and relax the reporting thresholds to $200,000 at year end or $300,000 during the year for taxpayers who qualify as foreign residents for purposes of the section 911 foreign earned income exclusion ($400,000/$600,000 for married couples filing joint returns). This reporting is in addition to foreign bank account reports (the FBAR) required to be made to Treasury each June.
The Full Story:
Today’s tax quote: “Taxpayers who neglect paying tax on offshore income out of ignorance must be educated. Taxpayers who do it on purpose need to be scared.” Martin A. Sullivan
A new reporting provision to be implemented with returns for 2011 should provide both education for the ignorant, and fright for the purposely noncompliant.
The Internal Revenue Service and the Treasury Department issued Temporary and Proposed Regulations on December 14, 2011, to implement the requirement that taxpayers report certain foreign assets on their U.S. tax returns. At the same time, the IRS announced that it will soon issue Form 8938, “Statement of Specified Foreign Financial Assets,” to be filed with taxpayers’ 2011 tax returns, and provided an explanation of the new regulations that is quite helpful in understanding the requirements (and, presumably, will scare the pants off those still hiding their assets offshore). The IRS explanation is at http://www.irs.gov/businesses/corporations/article/0,,id=251219,00.html.
Under section 6038D of the Internal Revenue Code, added in 2010, individuals who are citizens or residents of the United States who own specified foreign assets (which include accounts in foreign financial institutions, stock of foreign issuers not held by a financial institution, and some others) must attach a statement to their U.S. tax return providing information about those assets if the aggregate value of the assets exceeds $50,000 at any time during the taxable year. This reporting is effective for assets held in 2011 and later years, and will affect, for example, U.S. employees who are assigned overseas by their employers and who establish bank accounts in the foreign country.
The new regulations provide guidance as to a number of issues under the statute, and also exercise authority given to the Treasury to provide appropriate rules, including the authority to increase the reporting threshold under appropriate circumstances.
Treasury has exercised its authority in a very welcome way in the regulations, providing higher threshold amounts for the required reporting in certain circumstances. Under the regulations, reporting is required if assets exceed $50,000 at the end of the year, or $75,000 at any time during the year. As a result, in most cases taxpayers whose assets don’t exceed $50,000 at the end of the year won’t have to report, unless they have knowledge that those assets exceeded $75,000 at some point during the year. There is also a special rule that will shield many expats from the requirement to report. If a U.S. individual is a resident of a foreign country for purposes of section 911 (the foreign earned income exclusion), then that individual does not have to file Form 8938 unless foreign assets exceed $200,000 at the end of the taxable year, or $300,000 at any time during the taxable year. If an individual who qualifies under section 911 is married and files a joint return, these numbers are increased to $400,000 and $600,000.
In determining the fair market value of assets, the regulations provide that a reasonable estimate of value during the year will suffice, and that individuals may rely on year-end financial account statements or other year-end values if they reasonably approximate the highest value during the year. In many cases those values will be expressed in terms of foreign currency. For reporting purposes, the values must be converted to dollars. However, the regulations provide that the taxpayer is not required to determine the currency conversion rate as of the date of the asset’s highest value during the year, but may use the year-end spot rate for currency conversion.
The regulations also explain how joint owners in general, and married couples in particular, divide and report jointly owned assets. For unmarried joint owners, each must include the full value of the asset in the Form 8938. Married couples filing a joint return file only one Form 8938, on which they report all of the specified foreign assets in which either has an interest, or which they own jointly. However, married couples filing separate returns must each file a separate Form 8938, each including all of the foreign assets the spouse owns separately as well as one-half of foreign assets that are owned jointly with the other spouse.
The regulations and the IRS explanation make clear that the rules concerning filing of Form 8938 are separate and distinct from the obligation to file a Form TD F 90-22.1, the foreign bank account report or “FBAR” with the Treasury Department by June 30 of each year. For example, the FBAR has a $10,000 reporting threshold, and applies to slightly different assets in some instances. However, there are welcome differences in the two reporting regimes. While the FBAR must be filed not only by persons who have a beneficial interest in foreign bank accounts, but by persons who have signature authority but no beneficial interest in such accounts, that rule does not apply to reporting under section 6038D. Moreover, the regulations make clear that neither accounts in U.S. branches of foreign institutions, nor foreign branches of U.S. institutions, need be reported on Form 8938, unlike the FBAR.
Unfortunately, if one does reach the asset threshold to require reporting, the reporting that is required is quite extensive. For accounts in foreign financial institutions, the taxpayer must report the name and address of the institution, the account number, the maximum value of the account during the year, whether the account was opened or closed during the year (or the date an asset other than a financial account was acquired or disposed of), the amount of any income, gain, loss, deduction, or credit recognized during the year with respect to the account or other financial asset along with the form or schedule or return on which it was reported, and the foreign currency exchange rate used and its source.
Sanctions for noncompliance with these rules are severe. If a taxpayer does not file Form 8938, and does not have reasonable cause for the failure, there is a $10,000 failure to file penalty. If the failure to file continues for 90 days after the taxpayer is notified of the failure by the IRS, there is an additional $10,000 penalty for every 30 days in which the failure continues, up to a maximum of $50,000. There is also a 40% penalty on any understatement of tax attributable to assets not disclosed on a Form 8938, and the statute of limitations for the year is extended until the taxpayer does provide the required information. If the taxpayer omits $5,000 or more from gross income attributable to foreign assets, the statute of limitations is extended to six years, whether or not the taxpayer met the threshold amount of specified foreign financial assets that would require reporting.
These new rules are yet another indication of the extreme seriousness with which the U.S. government is pursuing taxpayers who hide assets overseas to avoid U.S. tax responsibilities. In recent years the IRS has summonsed information from credit card companies about cards issued by foreign institutions, vigorously pursued information from Swiss banking authorities about Swiss bank accounts, conducted two separate programs providing limited amnesty for taxpayers who come forward to admit their past transgressions, begun numerous audits of taxpayers identified as having foreign assets, expanded the reporting required under the FBAR, and implemented two new reporting regimes. One, the Foreign Account Tax Compliance Act, requires foreign financial institutions to register with the IRS and report to the IRS accounts maintained by U.S. taxpayers. The other is section 6038D, under which the new Form 8938 will be required.
Worldwide ERC member companies with employees assigned overseas should become familiar with these requirements and make sure that those employees are made aware of the filing requirements for both the FBAR and the Form 8938. Generally, ignorance of these requirements will no longer be tolerated by the tax authorities.
Posted by Peter K. Scott 12/16/2011
In Short:
The Internal Revenue Service has provided new standard mileage rates for use of automobiles for business, charity, medical or moving in 2012. The business rate of 55.5 cents per mile is unchanged from the rate that has been in effect since July 1, 2011. The medical and moving rate of 23 cents per mile is 0.5 cents lower than the previous rate.
The Full Story:
On December 9, 2011, the IRS released its annual optional standard mileage rates that may be used in computing automobile deductions. See IR-2011-116 (http://www.irs.gov/newsroom/article/0,,id=250882,00.html?portlet=107) and Notice 2012-01 (http://www.irs.gov/pub/irs-drop/n-12-01.pdf). The new rates, applicable for auto use after December 31, 2011, are 55.5 cents per mile for business use, 23 cents per mile for medical or moving use, and 14 cents per mile for charitable use. The business rate is unchanged from the rate that has been in effect since July 1, 2011, while the rate for medical and moving is decreased from 23.5 cents. The charitable rate of 14 cents per mile does not vary from year-to-year because it is fixed by statute. The rates are based on an annual study of fixed and variable costs of operating an automobile conducted for the IRS by an independent contractor. The rates for business and moving differ because the rate for business use includes fixed costs such as depreciation, which are not allowed as medical or moving deductions. Both rates include variable expenses such as fuel. Taxpayers are also allowed to deduct items such as parking and tolls in addition to the standard mileage rate.
Use of the standard deduction rates is optional; taxpayers are always free to determine their own actual costs of operating a vehicle. However, such costs must be substantiated through detailed records, while the use of the standard rates avoids any need to substantiate the underlying costs incurred, although taxpayers must still maintain records of the miles driven and the purpose of each trip.
Notice 2012-01 also provides amounts by which taxpayers using the standard business mileage rate must reduce the basis in their automobile for depreciation that is included in the standard mileage rate. Those amounts are 19 cents per mile for 2007, 21 cents per mile for 2008 and 2009, 23 cents per mile for 2010, 22 cents per mile for 2011, and 23 cents per mile for 2012. These and other issues relating to substantiation of automobile costs are explained in detail in Rev. Proc. 2010-51, http://www.irs.gov/pub/irs-drop/rp-10-51.pdf.
Some companies use mileage rates higher than the standard rates to reimburse business travelers or transferees. In such cases, the excess amounts are treated as taxable wages, and are subject to withholding and payroll taxes. Amounts up to the standard mileage rates are excluded from the income of the employee. An employee cannot deduct moving expenses using the business travel rate. See Adamson v. Commissioner, 32 T.C.M. 484 (1973).
Generally, the rates the IRS announces in December remain in effect during the entire following year, regardless of changes in underlying costs. However, in 2011 the IRS changed the rates in mid year due to a dramatic rise in fuel costs, the third time in six years in which it had done so. Currently gasoline costs have been relatively steady and the current mileage rates are likely to remain in effect for all of 2012.
Posted by Peter K. Scott 12/9/2011In short:
A bill to prohibit states from taxing most workers temporarily in the state until the worker performed services there for more than 30 days passed the House Judiciary Committee on November 17, 2011, and was sent to the full House for consideration. Under the bill, employers would also not have to withhold until the 30-day standard is met, although once a worker exceeds 30 days in a state withholding would apply from the first day there.
The Full Story:
Today’s tax quote: “The smart money bets against tax reform-always and everywhere. But every once in a while-usually a long while-the smart money is wrong.” Joseph J. Thorndike.
Although fundamental tax reform has so far eluded the current Congress, a smaller incremental step forward occurred recently in a bipartisan vote of the House Judiciary Committee.
H.R. 1864, the “Mobile Workforce State Income Tax Simplification Act,” was approved November 17, 2011, by the House Judiciary Committee, and sent on to the full House for consideration. This represents a substantial step forward for congressional and business advocates of legislation to provide uniform rules for state taxation of workers who are temporarily present in a state. The bill, which reintroduces legislation that Congressman Johnson of Georgia has sponsored for several years, and which is supported by the Council on State Taxation (COST) as a much-needed way of standardizing what is now a very confusing patchwork of conflicting state rules, has not previously moved this far in the legislative process. As passed by the Committee, the new law would be effective on January first of the second year beginning after enactment, which would give states and employers time to conform their systems to it.
Under the bill, a worker would continue to be fully taxable in his or her state of residence on all income, but would not be taxable in any other state unless the employee worked there for at least 30 days during the year. Consistent with that standard, the employer would not have to begin withholding in the temporary assignment state until the employee had worked there for 30 days.
Currently, employers face a different rule in every state. According to testimony submitted by COST at a hearing of the Subcommittee on Courts, Commercial and Administrative Law of the House Committee on the Judiciary held on May 25, 2011, more than half the states technically require withholding to begin on the first day an employee earns wages there, while others have either time periods before withholding must begin, or minimum wage amounts before withholding must begin, or some combination of both. Similarly, the rules for when an employee becomes taxable also vary from state to state, and are not always consistent with the rules requiring withholding.
H.R. 1864 would remedy that inconsistency by legislating a standard 30-day period both for taxability and withholding. There would be no income threshold. However, the 30-day limitation would not apply to entertainers, athletes, and other “public figures,” who generally are paid on a per event basis and would remain fully taxable in the state in which the income was earned. The legislation would define a “day” as any day on which the employee performs “more of the employee’s employment duties within such State than in any other State during the day,” but would allocate all of the services to the nonresident state on any day in which the employee performs duties in both a nonresident state and the state of residence. Consequently, if an employee who lives in Michigan worked in the morning in Illinois, and in the afternoon traveled to Iowa and worked there, both employer and employee would have to determine in which nonresident state (Illinois or Iowa) more of the employee’s duties occurred.
Another potential pitfall in the way the bill is constructed is that once the employee crossed the 30-day threshold, withholding would have to take place for all of the 30 days already worked there. A number of groups have testified that this rule will result in unfair cash-flow issues for employees, and should be changed to permit withholding adjustment over time, or to eliminate the retroactive withholding. However, the Judiciary Committee left that aspect of the bill intact.
Not surprisingly, the states have consistently opposed this legislation. Although analysis by COST suggests that the overall revenue loss to the states would be minimal, the legislation would shift revenue from some aggressive states (such as New York) to others, so that there would be winners and losers. Indeed, one of the two Judiciary Committee members to oppose the bill was Rep. Nadler (D. NY), who argued that the bill would cost New York an estimated $100 million annually in lost tax revenue. The states also object to the loss of control over their own tax systems, and to the some of the standards in the bill. For example, although the 30-day standard is an improvement over prior versions of the legislation that would have imposed a 60-day standard, the Multistate Tax Commission (MTC, which is a federation of the states’ tax officials) still thinks the 30-day threshold is too long. Opponents have also suggested that the bill may not pass Constitutional muster under the federal government’s authority to regulate interstate commerce.
In asking the Committee to defer action, MTC cited its own adoption in July of model legislation that is also aimed at standardization of tax treatment in the states. Under the model statute advocated by MTC, the employee would become taxable, and withholding would be required, once the employee had worked in a state for more than 20 days. Although MTC had previously argued for a monetary as well as days-worked standard (for example, an employee might become taxable once he or she had been working an aggregate of 20 days in a state, or earned $20,000 there), the model statute does not contain any minimum monetary standard. The model statute has been adopted so far only by North Dakota, but MTC argues that many more states will follow.
The states also object to the standard in the bill for how employers would determine whether an employee had become taxable in a state. H.R. 1864 provides that an employer is permitted to rely on an employee’s determination of time in a state unless the employer has actual knowledge of fraud by the employee, and is not required to use its own records for this purpose even if uses them for other purposes, except under limited circumstances in which it maintains a “time and attendance system that tracks where the employee performs duties on a daily basis.” Under the MTC model statute, the employer would be subject to penalty unless it met one of three standards that rely on actual records of the whereabouts of the employee.
There are also issues with the definition of a “day.” The MTC model statute treats a “day” as any part of a day in which the employee performs services in a state, without the necessity to determine whether more of those services were performed in that state during that day than in any other.
Unfortunately, model statutes do not have to be adopted by any state, and can also be modified by any state adopting them, so it is unlikely that true consistency would actually result from the effort, even if the Congress agreed in full with the standards in the model statute. As a result, the Judiciary Committee agreed in a bipartisan voice vote to proceed with a federal standard. That action was supported by letters from the American Institute of Certified Public Accountants (AICPA), and from a group of over 100 major corporations.
Despite state objections, the two sides seem to be getting somewhat closer together. Moreover, it is encouraging that the legislation has for the first time been approved by the House Judiciary Committee. Although similar legislation has been introduced several times previously, it has never been put to a vote in either the House or Senate. Worldwide ERC hopes this time around, it will receive more attention, since it would greatly simplify the task faced by ERC members trying to track and properly withhold on employees working in diverse locations.
Posted by Peter K. Scott In Short.
The housing market is still a mess, even though national inventory fell slightly in October. Prices also fell, of course, which combined with historically low interest rates led to this result. In response, federal agencies took two steps aimed at helping home sales. The first change was made by Freddie Mac which changed its onerous anti-fraud affidavit to a more realistic and less restrictive requirement. The second was the release by the GSEs of the implementation requirements of the HARP 2 program. But as helpful as these changes are to the general market, there are some areas that relocation administrators must watch out for.
The Full Story.
Home prices across the nation are now right back where they were at the beginning of 2003, and as home ownership soared to 70 percent in 2005, it could fall to 62 percent or less by 2015, according to the latest report from LPS (Lender Processing Services). Mortgage delinquencies continued to decline in October, but foreclosure inventories hit an all-time high in October of 4.29 percent, up 2.5 percent from the previous month.
In October, according to the CoreLogic HPI, home prices were down 1.3 percent compared to September sales, the third consecutive monthly decline, and were down 3.9 percent year over year. Removing distressed properties from the statistics, house prices were down only 0.5 percent in October year over year. Some good news is that twenty metropolitan areas showed positive monthly gains in prices, but since 2006 the aggregate average loss in all home prices is 32 percent. The October home price index showed that the states with the largest price appreciation were West Virginia (4.8 percent), South Dakota (3.1 percent), New York (3 percent), Washington, D.C. (2.4 percent) and Alaska (2.1 percent).
CoreLogic predicts home prices will be flat through 2013, and calculated that 22.1 percent of all residential mortgages were in a negative equity position at the end of September.
Short sales are likely to continue to be an integral part of residential real estate sales until the market and the economy pick up, as they provide a less costly means of recouping at least part of the original mortgage investment when compared with foreclosure. They are also subject to fraud and similar schemes that reduce the mortgagee’s recovery on the sale of the distressed property. One method developed to try to root out such fraud was the “arm’s length” affidavit introduced by Freddie Mac earlier this year which required the buyer and seller, as well as the real estate agents and the settlement company to promise to indemnify the GSE for its losses in the event that fraud was involved in the short sale process. Unfortunately, the original affidavit made the agents and settlement service providers actual guarantors of the process. NAR and the American Land Title Association (ALTA) petitioned the agency to review the affidavit so that it would more clearly reflect Freddie Mac’s intended purpose. The agency complied and the new affidavit will be required on January 1st, but can and should be used now.
The new affidavit is a reminder that short sales in the relocation process, especially in departure sale (transferring employee to employer of relocation management company) must be accompanied by full disclosure of all of the details of the relocation transaction. This is especially true because the second sale in a relocation transaction can appear as a non-arm’s length sale – just the thing that Freddie Mac and other lenders are trying to discourage.
HARP 2 is a liberalized revision of the Home Affordable Refinance Program that was introduced in 2009, and it was designed to help homeowners with mortgages owned by Fannie Mae or Freddie Mac. The program let borrowers refinance at up to 125 percent of their homes' current values. That 125 percent loan-to-value limit has been eliminated under HARP 2. The new guidelines include:
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Eligible are borrowers whose mortgages are owned by Fannie Mae or Freddie Mac, and who got their loans before May 2009.
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Extended through 2013.
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No loan-to-value (LTV) cap for borrowers who now have fixed-rate mortgages.
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For borrowers with ARMs, LTV cap remains at 105 percent.
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Qualifications require that borrowers have paid on time for the last six months and have no more than one 30-day late payment in the last 12 months.
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Fees have been reduced. Under HARP 2, lender fees are reduced to zero percent on loans for 20 years or fewer, and 0.75 percent for mortgages for more than 20 years and for ARMs.
The program began December 1st, and it is too early to assess its success. Because it applies only to refinancing, it will likely have little direct impact on relocation transactions, but may be a useful tool for employees renting their properties. | Edit in Browser | /_layouts/images/icxddoc.gif | /Blogs/MobilityLawBlog/_layouts/formserver.aspx?XsnLocation={ItemUrl}&OpenIn=Browser | 0x0 | 0x1 | FileType | xsn | 255 | | Edit in Browser | /_layouts/images/icxddoc.gif | /Blogs/MobilityLawBlog/_layouts/formserver.aspx?XmlLocation={ItemUrl}&OpenIn=Browser | 0x0 | 0x1 | ProgId | InfoPath.Document | 255 | | Edit in Browser | /_layouts/images/icxddoc.gif | /Blogs/MobilityLawBlog/_layouts/formserver.aspx?XmlLocation={ItemUrl}&OpenIn=Browser | 0x0 | 0x1 | ProgId | InfoPath.Document.2 | 255 | | Edit in Browser | /_layouts/images/icxddoc.gif | /Blogs/MobilityLawBlog/_layouts/formserver.aspx?XmlLocation={ItemUrl}&OpenIn=Browser | 0x0 | 0x1 | ProgId | InfoPath.Document.3 | 255 | | Edit in Browser | /_layouts/images/icxddoc.gif | /Blogs/MobilityLawBlog/_layouts/formserver.aspx?XmlLocation={ItemUrl}&OpenIn=Browser | 0x0 | 0x1 | ProgId | InfoPath.Document.4 | 255 | | View in Web Browser | /_layouts/images/ichtmxls.gif | /Blogs/MobilityLawBlog/_layouts/xlviewer.aspx?listguid={ListId}&itemid={ItemId}&DefaultItemOpen=1 | 0x0 | 0x1 | FileType | xlsx | 255 | | View in Web Browser | /_layouts/images/ichtmxls.gif | /Blogs/MobilityLawBlog/_layouts/xlviewer.aspx?listguid={ListId}&itemid={ItemId}&DefaultItemOpen=1 | 0x0 | 0x1 | FileType | xlsb | 255 | | Snapshot in Excel | /_layouts/images/ewr134.gif | /Blogs/MobilityLawBlog/_layouts/xlviewer.aspx?listguid={ListId}&itemid={ItemId}&Snapshot=1 | 0x0 | 0x1 | FileType | xlsx | 256 | | Snapshot in Excel | /_layouts/images/ewr134.gif | /Blogs/MobilityLawBlog/_layouts/xlviewer.aspx?listguid={ListId}&itemid={ItemId}&Snapshot=1 | 0x0 | 0x1 | FileType | xlsb | 256 |
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