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In a 28 November 2017 Legal
Memorandum issued to one of its field offices, the IRS Office of Chief Counsel
addressed the tax treatment of fees a company paid to a large CPA firm to
prepare U.S., state, and foreign tax returns for its expatriate employees under
a typical equalization program. See
The costs incurred included
expenses to prepare U.S. returns, state tax returns, and foreign tax returns,
as well as making the tax calculations necessary to equalize taxes and pay any
necessary equalization payments, responding to inquiries from foreign taxing
authorities, and assisting the company’s payroll tax department. The company included amounts for federal and
state return preparation in the income of employees but did not include foreign
tax return preparation or any of the costs for equalization. In calculating the inclusion amounts, it
relied on survey data as to the cost of simple returns.
On examination, the IRS agents
determined that the entire amount invoiced to the company for each employee was
taxable. It reasoned that the proper
amount was not an average for simple returns but was the amount each employee
would have had to pay for the actual services provided. That amount approximated the entire amount
the company paid the CPA firm for each employee. However, the agents excluded from that
calculation amounts attributable to the tax equalization services and other
The Office of Chief Counsel
concluded that there was no basis to exclude any of the tax preparation costs
from the incomes of employees, and that both domestic and foreign tax
preparation was taxable. Those amounts
were held subject to FICA and federal income tax withholding. With respect to the value of those services,
it was agreed that the proper measure was the amount the employees would have
had to pay for such services independently. However, it also agreed that since there was insufficient data from
which to determine those amounts, the best measure of the value was the amounts
paid by the employer. It recognized that
those amounts were no doubt lower than the employee could have obtained
independently, but nevertheless were the most supportable under the facts
available. Finally, the memorandum supports
the conclusion that fees for equalization services are not taxable.
The new memorandum answers several
questions regarding the taxation of benefits provided to expatriate employees
that have not been explicitly addressed previously by the IRS. Worldwide ERC® member companies will need to
take the conclusions into account in conducting their expatriate programs.
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