Articles and Tax Tips
By Steven D. Mercatante Esq.
IRS Publication 78 is a wonderful tool capable of helping you to identify who truly is exempt from reporting. We all know of various categories of individuals and entities exempt from reporting; however, one of the trickier categories or exempt payees remains charities. This is where IRS Publication 78 offers significant help. The following article will briefly describe how IRS Publication 78 can help you document your payee’s charitable status and what you should do if your payee fails to show up in Publication 78 but still claims charitable status.
By Steven D. Mercatante Esq.
Take note: the Social Security Administration (SSA) has discontinued Form SSA-7028, ostensibly because the SSA legal team determined SSA-7028 lacked the ability to qualify as proper third party notification. Such a huge change leaves many unanswered questions for those of you processing IRS B-Notices or looking forward to the Fall B-Notice season. The following article will first summarize Form SSA-7028’s role in the processing a B-Notice (a notice that the name/TIN combination submitted on an information return has failed to match either IRS or SSA records) and then explain what the IRS has done before finishing with a look at what guidance can be expected in the near future.
First, a summary of B-Notice processing basics.
IRS Form 972-CG (also known as “The Proposed Penalty Notice”) is one of the more serious communications you can receive from the IRS. It demands a response. What is more, a response indicating an ignorance of the law can cost you big time. That said, arguing your way out of a proposed penalty is entirely possible; provided you know what you are doing and can back up your words with significant documentation. Although the summer months are often regarded as a down time in the information-reporting world the reality is that the Proposed Penalty Notice lurks in the dog days of summer. If you do not know how to handle the Form 972-CG when your organization receives one it can bite you for years to come.
In this article we focus on the Proposed Penalty Notice – what it is, how to recognize one when you receive it and how you should respond. First, let’s clarify what the Form 972-CG is and what it is not.
By Steven D. Mercatante Esq.
In the first two parts of this article series we have learned what the United States Treasury Department’s Office of Foreign Assets and Control (OFAC) is, what its goals are and how you can stay compliant. In this final article in our three-part series on OFAC we will provide some guidance in case, having set up your compliance program, you have discovered that your organization has accidently failed to comply with the OFAC rules and actually set up an account with a SDN.
What if I have accidently set up an account with an SDN?
Before you react to a discovery you may have set up an account with an SDN you need to confirm whether this is the case. Treasury refers to this process as taking the appropriate “due diligence” steps to ascertain whether you have a valid OFAC match. You should be familiar with the term due diligence already; it is what you do in any number of situations regarding obtaining and verifying the correct name and TIN of your non-OFAC related payees. The government expects you to act as a reasonably prudent person and then document what it is you have done to meet the specifications of the law. If you are still unsure as to how a reasonably prudent person acts from the perspective of the Treasury Department or IRS, we recommend you review the reasonable cause regulations under Internal Revenue Code §6724.
In an OFAC context, you will perform your due diligence and act reasonably by first...
By Steven D. Mercatante Esq.
In Part One of this series on the Treasury Department’s Office of Foreign Assets and Control, OFAC, you learned what OFAC is and what it’s focus is upon. In this second part of our series we will examine how you can comply with the rules promulgated by OFAC and avoid any painful sanctions for noncompliance. Finally, in the third article in this series, we will provide some guidance in case you discover you may have been inadvertently working with a prohibited entity or individual.
How to comply with OFAC
There are a number of possible steps to help bring your organization into compliance with the OFAC regulations. First...
By Steven D. Mercatante Esq.
The United States Treasury Department’s Office of Foreign Assets and Control (OFAC) is used to oversee transactions between U.S. entities and foreign persons or entities, administer embargoes, and promulgate regulations and restrictions applicable to many different payees. The Treasury Department uses OFAC to inform you as to whom you can and cannot do business with and whom to avoid making payments. Accordingly, you need to research the OFAC list – if for no other reason than avoiding the negative consequences that can follow from a failure to know the law.
OFAC penalties are among the most severe an organization can incur; violators of the OFAC rules are exposed to both criminal and civil penalties. Regardless, many payers do not even know what OFAC is no less how to comply with the OFAC rules. Thus, it is not only necessary for information reporting payers to educate themselves but also establish whom to avoid in terms of doing business. Only then can you ready yourself to act appropriately if you find out the payee is on the OFAC list.
This article series will provide some common sense guidance to help you avoid running afoul of the OFAC rules. In our first article, we will describe exactly what OFAC is and what it is seeking to accomplish. In the second part of our series on OFAC, we will walk you through some recommended steps you will need to follow in order to avoid sanctions under the OFAC rules. In our third and final article in this series, we will provide some guidance in case you discover you may have been inadvertently working with a prohibited entity or individual.
By Steven D. Mercatante, Esq.
In past articles we have examined a variety of mistakes often made in processing IRS Form 972-CG; otherwise known as the “Proposed Penalty Notice”. In this final part of our introductory Proposed Penalty Notice processing basics series we will explore the most important weapon in your arsenal if you receive a Form 972-CG - the waiver request letter. If you receive a Form 972-CG in the mail the proper response is to write a waiver request letter and request that any Form 1099 penalties be abated to zero. Before you start writing your letter however, please note when you received your proposed penalty notice. The date of receipt is important because you MUST make sure you send your waiver request letter, with supporting documentation, to the IRS within 45 calendar days.
Ok, now that you know your deadline, it is time to begin collecting supporting documents and writing your letter. The waiver request letter’s purpose is to prove to the IRS that you know the law and follow the law; thus, your proposed penalty should be abated. The best means for you to prove your knowledge and compliance with the law is...
By Steven D. Mercatante, Esq.
Once you know what to look for in regards to identifying the Form 972-CG “Proposed Penalty Notice” its time to zero in on what you need to know to process a response to the IRS. In addition, for your future compliance needs you will also want to get started on putting in place the policies and procedures necessary to help you efficiently process and respond to this particularly dreaded form of communication from the IRS. Both goals can be met through understanding why you may receive a Form 972-CG and how you should initially respond to any potential penalty notice no matter how inconsequential it may seem.
There are three simple reasons the IRS may send you a Proposed Penalty Notice:
• You did not file on time
• You did not file electronically if you needed to because you submitted over 249 of the same type of 1099
• You filed, but with incorrect information:
Name/TIN mismatch
or
No TIN
Ok, that was simple; now let’s look at a real world situation and one tremendous mistake recipients of the Form 972-CG often make – this example will go a long way toward helping you set up your Proposed Penalty Notice processing procedures. Assume it is the end of August or perhaps some time shortly thereafter and your organization has received a Proposed Penalty Notice. You carefully open the envelope, expecting to see some horrific fine; instead, you are confronted with a relatively inconsequential amount of money. No problem you think, why go through the trouble of fighting this amount, after all, by the time you and your team put together an effective waiver request letter (we will get to what this is shortly) the cost in time and money would be greater than just paying the stupid fine. After consulting with management, you get the green light and pay the penalty. Although this scenario happens thousands of times each year all across the country, you must not make the same mistake…
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?