Articles and Tax Tips

By Steven D. Mercatante Esq.

 
Compliance with IRS rules and regulations can seem never ending and even more difficult the more you learn. Fringe benefit related issues are no exception. Few issues have generated greater reporting questions than those revolving around when a worker uses cell phones for work; i.e. when is worker use of a cell phone reportable income? This article takes a practical approach to introducing accounts payable professionals to the exceptional reporting issues posed by employer provided cell phones. First, we will review the law as it exists today, then lay out some simple ways of complying with the law and finally, close with a look ahead to possible forthcoming changes in the law.
 
The Historical Approach to Fringe Benefit Reporting
 
First, where does the law stand today? To understand that we must look briefly at some history. Early in the 1980’s the IRS first made an in depth effort at addressing the reporting issues posed by fringe benefit payments by amending IRC §61. As amended §61 sets forth the basic rule that any fringe benefit provided in connection with the performance of services is includible income (as part of §61’s larger description of gross income). Shortly thereafter however the IRS recognized the need for further clarification and created §132 for the purpose of addressing regularly used employer provided fringe benefits that were frequently questioned as to whether they were covered by the code. These fringe benefits, known as “working condition fringe benefits” include all sorts of benefits such as: qualified transportation fringes, qualified retirement planning services, working condition fringes, de minimis fringes, qualified employee discounts and many more. The scope of §132 is really quite expansive and it would be wise for you to review all of the exceptions from compensation covered therein. Also note the basic definition of a working condition fringe benefit; property or services provided to an employee to the extent that, if the employee paid the expense, it would be deductible under IRC §§ 162 or 167. Included in this list of working condition fringe benefits are cell phones.
 
Fringe Benefits and Cell Phones
 
When it comes to cell phones §132 allows an employee to exclude from gross income an employer provided cell phone provided it is for business purposes. Before we further delve into how to go about excluding cell phone usage from income it is important to note that cell phones fall into a category of personal property known to the IRS as “listed property.” According to the IRS; “listed property includes items obtained for use in a business but designated by the Internal Revenue Code as lending themselves easily to personal use.” Examples include computers, cars and cell phones. Because items categorized as listed property can so easily cross over from business to personal use and back the IRS has strict substantiation requirements for cell phone use (in order to meet the requirements for the exclusion provided by §132).  In exploring these substantiation requirements we can get a better feel for the steps you will follow to make sure you stay in compliance with the Internal Revenue Code.
 
How to approach Fringe Benefits
 
The tax treatment of fringe benefits is a highly fact and circumstance analysis requiring you to think actively through each situation you may be confronted with. The key to staying in compliance is... 

By Steven D. Mercatante Esq.
 
Imagine if there was a tool available to help information reporters document their payees, respond efficiently to IRS B-Notices and proposed penalty notices, simplify and improve filing procedures, cut down on corrections, confirm compliance activities were performed and did all of this for free. Believe it or not, there is just such a tool; a tool which is actually an IRS program! Moreover, this very program is easy to sign up for and even easier to use.
 
For approximately six years now third party reporters from across the United States have been using the free IRS TIN Matching Program to lower their costs, improve their reporting efficiency and dramatically reduce both B-Notices and proposed penalty notices. If you are not currently using the TIN Matching Program this article can help you understand what it is and why it is among the easiest to use and best options available to help meet your information reporting requirements. First, we will explore what the TIN Matching program is and is not, debunking many myths that have built up around the program. Second, we will examine some of the pitfalls that can trip up would be first time users as well as how to avoid such missteps on the road to full tax reporting compliance.
 
What is the IRS TIN Match Program?
 
The IRS TIN Matching Program is an internet-based program allowing payers to verify if a payee’s name and TIN matches with what the IRS has on its records. Among other things, this program offers a great opportunity to gather correct information before submitting returns to the IRS. Although the TIN Match Program is an IRS program, it is not part of other IRS Programs, such as the B-Notice program. Thus, the information submitted to the IRS TIN Match program will in no way generate an increased likelihood of more undesirable and costly interactions with the IRS. Remember, the IRS wants you to use the program because the IRS relies heavily on the accuracy of the information third party reporters provide to match that information with individual returns and generate the maximum amount of revenue owed to the IRS each year. Thus, the IRS has a strong incentive to make sure you are using the program free of any fear of audit, penalty notice or B-notice.
 
The only pre-requisite for using the TIN Match program is that your organization must have filed 1099’s within one of the two most recent tax years. When you register your organization’s name and EIN the IRS will check for your organization’s EIN in its files. In addition to checking on your organization’s 1099 filing history you will also want to make sure your organization files at least one of the following Forms 1099: 1099-MISC, INT, DIV, B, OID or PATR. Incidentally, these are the forms where there may be backup withholding required and this is one of the greatest reasons to use the program. Why, you might ask? Well, it is simple. The name and the TIN entered by the payer (and provided by the payee) on the year-end 1099 must match the information in the IRS “master” TIN file. IF there is a mismatch, the B-Notice process may begin. This process will require the payer to do a tremendous amount of work to determine if the backup withholding process needs to begin. There are many potential pitfalls when processing B-Notices; it is in your best interest to get things correct before the B-Notice process begins. The TIN Match program is perhaps the best method for avoiding such B-Notices.
 
Because the TIN Match program is online (found at the IRS website under e-services) there are online tutorials to help figure out how to use the program. We highly recommend you visit e-services and play with the program features to gain further understanding into the program’s technical details. Once you are registered for the program, there are two ways to enter data. One, there is an “Online” or “Interactive” process whereby you long onto the IRS TIN Matching Program Web Page and process up to 25 individual requests. The second method for entering data is known as the “Batch” or “Bulk processing” method whereby you will send a computer file with up to 100,000 records. Response times to these methods of entry are stunningly quick; being virtually instantaneous under the “Interactive” method and within twenty-four hours when using the “Bulk processing” method.
 
The Biggest Hurdle: Initial Registration
 
Before you can enter and verify payee information, you will have to register. Be careful here, not just anybody can initially register. Your organization’s “principal” must register first. Who is that?
  

By Steven D. Mercatante Esq. 

Two questions above all others demand an answer any time a Form 1099 filer sets up a new vendor account:
1.) Who is my payee?
2.) What is the payment for?
 
This article focuses on question number one: Who is my payee? Incidentally, you have to be able to answer both questions to determine if you have a reportable payment and payee. Moreover, if you determine you are dealing with a Non U.S. Person you also have to answer the critical question of where; meaning where was the service performed. So that is it; know your who, what and where and you will be all set in terms of becoming compliant with IRS mandates and rules. Unfortunately, the devil is in the details and those details trip up far too many filers.
 
To answer the question who, including whether and how to report a payment to a particular payee, you must know that payee’s status. Are they a U.S. person or a Nonresident Alien? The answer to this question is critical as the reporting and withholding requirements are different for each type of payee. First, let us start with the U.S. Person.
 
U.S. Persons: Who are they?
The definition of a U.S. person is simple. U.S. persons include U.S. citizens, entities incorporated or registered within the United States, and resident aliens. If we are discussing a resident alien then we are discussing a person who has achieved their residency status in one of two ways: they obtain immigration documents, such as a green card, or they are present in the United States for a sufficient number of days that, for tax purposes, they become residents. Tax residency status is much easier to achieve than immigration residency status.
 
Unlike most countries, the United States taxes its citizens and residents on their worldwide income. Therefore, even if you were to move to Italy, spend the rest of your life working in France for an Italian company, earning your salary in Euros, you would still be subject to U.S. tax laws if you maintained your citizenship or U.S. residency status. Thus, just because you are paying a person who is located in another country does not mean that the payment is exempt from reporting. If you have any reason to know that your payee is a U.S. person living abroad, the Form 1099 rules will apply. This still begs the question: how do you know whether you are paying a U.S. person or a nonresident alien? The answer is simple.
 

Is my Payee a U.S. Person or a Nonresident Alien?

If you are paying a person (including entity) located in the United States, you may presume them to be a U.S. person, unless you have reason to know or suspect otherwise. This means gathering documentation is critical to your compliance policy.
 
Therefore, the best step you can take is to request your payee complete a Form W-9 (or appropriate substitute). Completion of a Form W-9 by a payee provides you with documentation that your payee is a U.S. person, as the form includes language indicating this status. Remember, reportable payments to U.S. persons are reported on one of the Forms 1099.
 
However, the rule for reporting payments made to nonresident aliens is different: payments of U.S. source income to a nonresident alien are reportable on the Form 1042-S and subject to 30% withholding. To get to that point however, you must be able to identify your payee as a nonresident alien and your payment as a payment of U.S. source income. The W-9 is still your best tool but you may need to bring one of the Forms W-8 into play if you think you are dealing with a non-resident alien. Bringing the Forms W-8 into play leads to that third question we mentioned at the start of this article.
 
Remember earlier in the article where we mentioned you need to know the who, what and where? What the where referred to is exactly that situation when you think you may be dealing with a non-resident alien. What the where means is in reference to the source of the income. The actual question you are asking yourself is: where is the source of the income? If the income can be sourced to the U.S. then you may have a reportable payment to your non-resident alien individual. Nevertheless, what is U.S. source income?