Payroll Tax Cut Extended to the End of 2012 and Revised Form 941

/in , /by

On February 23, 2012, the Internal Revenue Service released revised Form 941 enabling employers to properly report the newly-extended payroll tax cut benefiting nearly 160 million workers.

The IRS needed to revise Form 941 due to the Middle Class Tax Relief and Job Creation Act of 2012 (enacted on February 22, 2012). Under the new law, the social security tax cut was continued until the end of 2012. This means that employees will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2 percent, which is two percentage points less than the 6.2 percent rate in effect prior to 2011. This reduced rate, originally in effect for all of 2011, was extended through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011 (enacted in December of 2011).

The new law also repeals the two-percent recapture tax included in the December legislation that effectively capped at $18,350 the amount of wages eligible for the payroll tax cut. As a result, the now repealed recapture tax does not apply.

Self-employed individuals will also benefit from a comparable rate reduction in the social security portion of the self-employment tax from 12.4 percent to 10.4 percent.

For the tax year 2012, the social security tax applies to the first $110,100 of wages and net self-employment income received by an individual.

Revised Form 941 Will Need to Be Filed By Employers

The revised Form 941 is already available and will have to be filed by employers for every quarter of 2012. Failure to file Form 941 may lead to significant penalties.

Contact Sherayzen Law Office to Deal With Form 941 Penalties

If you are facing Form 941 penalties, contact Sherayzen Law Office NOW. Our experienced tax firm will rigorously and skillfully represent your interests in the IRS negotiations with respect to any Form 941 penalties.

Form W-2 Penalties

/in , /by

A W-2 is required to be filed by every employer who is engaged in a trade or business paying remuneration (including noncash payments) of $600 or more for a year in which services are performed by an employee.  A W-2 must be filed for each employee for whom income, Social Security, or Medicare tax was withheld, or income tax would have been withheld if the employee had claimed no more than one withholding allowance (or had not claimed exemption from withholding on Form W-4, Employee’s Withholding Allowance Certificate).

This article will explain some of the various penalties that may apply for failure to comply with IRS rules and regulations for Form W-2.  Use of a third-party payroll service provider or reporting agent usually will not exonerate employers from ensuring that the form is properly and timely filed.

Failure to File Correct Information Returns by the Due Date

A penalty may apply under IRC Section 6721 (failure to file correct information returns) if an employer does any of the following: fails to file timely, fails to include all information required to be shown on Form W-2, includes incorrect information on Form W-2, files paper forms when e-filing is required, reports an incorrect TIN, fails to report a TIN, or fails to file paper Forms W-2 that are machine readable.  An employer may show reasonable cause in order to prevent the imposition of the penalty.

The amount of the penalty is based upon when the employer files the correct Form W-2:

1)  For forms correctly filed within 30 days (by March 30 if the due date is February 28), the penalty is $30 per form; the maximum penalty is $250,000 per year ($75,000 for small businesses).

2)  For forms correctly filed more than 30 days after the due date but by August 1, 2013, the penalty is $60 per form; the maximum penalty is $500,000 per year ($200,000 for small businesses).

3)  For forms filed after August 1, 2013, or for required Forms W-2 that have not been filed; the penalty is $100 per Form W-2; the maximum penalty is $1,500,000 per year ($500,000 for small businesses).

4)  If an employer does not file corrections, and does not meet any of the exceptions to the penalty (explained below), the penalty is $100 per information return; the maximum penalty is $1,500,000 per year.

Exceptions to the Penalty for Failure to File Correct Information Returns

Depending upon the circumstances, the penalty may not apply if an employer can demonstrate that any failure was due to reasonable cause, and not due to willful neglect. In general, a filer must be able to show that the failure was either due to an event beyond its control, or due to substantial mitigating factors; additionally, an employer must show that proper steps were taken to avoid the failure and that it acted responsibly.

The IRS or SSA may also not consider an inconsequential error or omission to be a failure to include correct information.  Errors or omissions concerning the following items, however, are never considered to be inconsequential: A TIN, a payee’s surname, and any money amounts.

Intentional Disregard of Filing Requirements

A penalty of at least $250 per form, with no maximum penalty, will apply in cases in which any failure to file a correct Form W-2 is due to intentional disregard of the filing of correct information requirements.

Failure to Furnish Correct Payee Statements

Under IRC Section 6672 (Failure to furnish correct payee statements), a penalty may apply if an employer fails to provide correct payee statements (Forms W-2) to employees, and is unable to show reasonable cause.  The penalty may apply for any of the following:  An employer fails to provide the statement by January 31, 2013, fails to include all information required to be shown on the statement, or includes incorrect information on the statement.

The amount of the penalty is based on when the employer furnishes the correct payee statement. This additional penalty is applied in the same manner, and with the same amounts, as the penalty for failure to file correct information returns by the due date under IRC Section 6721 (explained above).

Exceptions to the Penalty for Failure to Furnish Correct Payee Statements

A  employer may be able to demonstrate reasonable cause to prevent the imposition of this penalty.  Also, inconsequential errors or omissions are not considered to be a failure to include correct information.   The following items are not considered to be inconsequential errors or omissions: Dollar amounts, a significant item in a payee’s address, and the appropriate form for the information provided, (such as whether the form provided constitutes an acceptable substitute for the official IRS form).

Intentional Disregard of Payee Statement Requirements

A penalty of $250 per W-2 will apply, with no maximum penalty, for any failure to provide a correct payee statement (Form W-2) to an employee due to intentional disregard of the requirements to furnish a correct payee statement.

Civil Damages for Fraudulent Filing of Forms W-2

If an employer willfully files a fraudulent Form W-2 for payments that are claimed to be made to another person, that person may be able to sue for damages.  The IRS estimates this may cost $5,000, or more.

Contact Sherayzen Law Office for Legal Help With Form W-2 Penalties

If you an employer facing Form W-2, Form W-3, Form 941, Form 940 and other employment-tax penalties, contact Sherayzen Law Office for professional legal IRS representation.  Our experienced tax firm will vigorously represent your interests, creatively explore various defense theories, prepare any necessary tax forms and strive to secure the best resolution possible under the facts of your case.

IRS Classification of Foreign Entities: “Per Se” Foreign Corporations

/in , /by

For the U.S. tax compliance purposes, it is very important to properly classify foreign business entities, because there are special IRS requirements associated with ownership of foreign business entities. For instance, a list of various tax forms is tied to particular classification (for example, certain U.S. taxpayers are required to file Form 5471 with respect to foreign corporations; a similar requirement (form 8865) would apply to certain filers with respect to a foreign partnership) and esoteric tax reporting requirements may need to be disclosed on your personal tax returns (such as subpart F income in case of Controlled Foreign Corporation).

The process of a foreign entity classification can be very complex.  In this article, however, I would like to discuss a shortcut available in certain situations  –“per se foreign corporations”. This term means the IRS decided to treat certain business entities as a foreign corporation irrespective of the taxpayer’s position.  For practical purposes, this means that, if your entity is on the list of the “per se corporations”, then it is a foreign corporation, there is no need to explore the issue further and “check-the-box” rules will not apply

Where to Look For the IRS List of Per Se Corporations

Once you are able to determine that you are dealing with a foreign entity and this entity is a business entity, you should check with the Treasury Regulation to see if this business entity is part of the long list of entities that the IRS considers as foreign corporations.  The list is detailed in Treas. Reg. §301.7701-2(b)(8).

List of Per Se Corporations

Treas. Reg. §301.7701-2(b)(8) classifies the following foreign entities as corporations (keep in mind that this may not be the most up-to-date list and you will need to check with the relevant updates of this regulation):

American Samoa, Corporation

Argentina, Sociedad Anonima

Australia, Public Limited Company

Austria, Aktiengesellschaft

Barbados, Limited Company

Belgium, Societe Anonyme

Belize, Public Limited Company

Bolivia, Sociedad Anonima

Brazil, Sociedade Anonima

Bulgaria, Aktsionerno Druzhestvo.

Canada, Corporation and Company

Chile, Sociedad Anonima

People’s Republic of China, Gufen Youxian Gongsi

Republic of China (Taiwan), Ku-fen Yu-hsien Kung-szu

Colombia, Sociedad Anonima

Costa Rica, Sociedad Anonima

Cyprus, Public Limited Company

Czech Republic, Akciova Spolecnost

Denmark, Aktieselskab

Ecuador, Sociedad Anonima or Compania Anonima

Egypt, Sharikat Al-Mossahamah

El Salvador, Sociedad Anonima

Estonia, Aktsiaselts

European Economic Area/European Union, Societas Europaea

Finland, Julkinen Osakeyhtio/Publikt Aktiebolag

France, Societe Anonyme

Germany, Aktiengesellschaft

Greece, Anonymos Etairia

Guam, Corporation

Guatemala, Sociedad Anonima

Guyana, Public Limited Company

Honduras, Sociedad Anonima

Hong Kong, Public Limited Company

Hungary, Reszvenytarsasag

Iceland, Hlutafelag

India, Public Limited Company

Indonesia, Perseroan Terbuka

Ireland, Public Limited Company

Israel, Public Limited Company

Italy, Societa per Azioni

Jamaica, Public Limited Company

Japan, Kabushiki Kaisha

Kazakstan, Ashyk Aktsionerlik Kogham

Republic of Korea, Chusik Hoesa

Latvia, Akciju Sabiedriba

Liberia, Corporation

Liechtenstein, Aktiengesellschaft

Lithuania, Akcine Bendroves

Luxembourg, Societe Anonyme

Malaysia, Berhad

Malta, Public Limited Company

Mexico, Sociedad Anonima

Morocco, Societe Anonyme

Netherlands, Naamloze Vennootschap

New Zealand, Limited Company

Nicaragua, Compania Anonima

Nigeria, Public Limited Company

Northern Mariana Islands, Corporation

Norway, Allment Aksjeselskap

Pakistan, Public Limited Company

Panama, Sociedad Anonima

Paraguay, Sociedad Anonima

Peru, Sociedad Anonima

Philippines, Stock Corporation

Poland, Spolka Akcyjna

Portugal, Sociedade Anonima

Puerto Rico, Corporation

Romania, Societate pe Actiuni

Russia, Otkrytoye Aktsionernoy Obshchestvo

Saudi Arabia, Sharikat Al-Mossahamah

Singapore, Public Limited Company

Slovak Republic, Akciova Spolocnost

Slovenia, Delniska Druzba

South Africa, Public Limited Company

Spain, Sociedad Anonima

Surinam, Naamloze Vennootschap

Sweden, Publika Aktiebolag

Switzerland, Aktiengesellschaft

Thailand, Borisat Chamkad (Mahachon)

Trinidad and Tobago, Limited Company

Tunisia, Societe Anonyme

Turkey, Anonim Sirket

Ukraine, Aktsionerne Tovaristvo Vidkritogo Tipu

United Kingdom, Public Limited Company

United States Virgin Islands, Corporation

Uruguay, Sociedad Anonima

Venezuela, Sociedad Anonima or Compania Anonima

 

Exceptions, Inclusions and Complications With Respect To the List of Per Se Foreign Corporations

In addition to the list of entities above, the regulations also provide various inclusions, exceptions, and complications.  For example, a Nova Scotia Unlimited Liability Company (or any other company or corporation all of whose owners have unlimited liability pursuant to federal or provincial law) will not be treated as a corporation. The same applies to Sendirian Berhad of Malaysia and some companies in India.

On the other hand, the IRS regards the whole family of “Sociedad Anonima” entities are considered corporations, disregarding their variable capital provisions (such as, “Sociedad Anonima de Capital Variable”).

The regulations further clarify the scope of terms such as “public companies” and “limited companies”.  With regard to Cyprus, Hong Kong, and Jamaica, the term “Public Limited Company” includes any Limited Company that is not defined as a private company under the corporate laws of those jurisdictions.  In all other cases, where the term Public Limited Company is not defined, that term shall include any Limited Company defined as a public company under the corporate laws of the relevant jurisdiction.

Furthermore, with respect to limited companies, a Limited Company includes companies limited by shares and companies limited by guarantee.

What if the company is named in a different but means the same thing as in the usual name? The regulations specifically state that “different linguistic renderings of the name of an entity listed in paragraph (b)(8)(i) of this section shall be disregarded”.  Treas. Reg. §301.7701-2(b)(8)(v).  For example, an entity formed under the laws of Switzerland as a Societe Anonyme will be a corporation and treated in the same manner as an Aktiengesellschaft.

Finally, very important complications may arise where a business entity is formed under the laws of more than one jurisdiction.  Detailed complex rules will determine whether such an entity should be treated as a corporation for U.S. tax purposes, in some cases over-ruling the classification patterns described in this essay.  This is a topic for a future article, though.

Contact Sherayzen Law Office for Legal Help With Foreign Business Entity Classifications

Classification of a foreign business entity for U.S. tax purposes is a very complex process.  This article only describes one of many variations and it does NOT constitute legal advice; only an international tax attorney looking at the specific circumstances of your case may determine how your foreign business entity should be classified.

If you have a foreign business entity and you are not sure how you should classify it and what will be the U.S. tax compliance consequences of such classification, contact Sherayzen Law Office. Our experienced international tax firm will analyze your business entity in detail,  help you find the correct classification (or adopt a classification that is likely to withstand an IRS challenge), and identify the necessary IRS tax reporting requirements.

Will You be Subject to the AMT in the Tax Year 2012?

/in , /by

The Alternative Minimum Tax (AMT) is an additional tax that certain individuals must pay on top of their regular tax liability.  When the original “minimum tax” was enacted in 1969, its purpose was to limit the ability of high-income earners from paying little or no tax by using certain tax breaks.  Tax breaks that may trigger the AMT include various itemized deductions, accelerated depreciation, and incentive stock option benefits, among others.

Unfortunately, as many taxpayers have learned in the past few decades, the AMT can hit even middle-class individuals and those who do not take many tax breaks.  This problem is further exacerbated by the effects of inflation.

What about Tax Year 2012?

Congress has generally enacted a “fix” or “patch” to prevent non-high-earners from being subject to the AMT in past years.  Unfortunately, as it currently stands, Congress has not acted yet for the tax year 2012 Since this is an election year and the government is looking for more ways to increase revenues, there is doubt as to whether the Congress will actually adopt such a “fix”.  If it does not, tens of millions of additional taxpayers may face a much higher tax bill because of the AMT.  The Congressional Budget Office (CBO) has estimated that the average tax increase for such taxpayers will be $3,900, and some may pay over $8,000 in additional taxes.

If you believe you may be one of the many people subject to the AMT for tax year 2012, you may want to consult with an experienced tax attorney in order to minimize your potential tax liability.

Contract Sherayzen Law Office for AMT Tax Planning

If you believe that you are facing the AMT in the tax year 2012, contact Sherayzen Law Office.  Our experienced tax attorneys will analyze your situation and advise you on how shield yourself from over-taxation with proper tax planning pursuant to the Internal Revenue Code provisions.

Form 941 Penalties

/in , /by

In a previous article, we covered some of the basics of Form 941. In this article, we will explore some of the major penalties that may apply for failure to comply with the requirements of Form 941. These penalties may be severe and, in certain circumstances, may even lead to criminal charges.

Failure to File Penalty

The IRS may apply a failure to file penalty for any month, or part of a month, for which a required return is not filed (disregarding extensions). The penalty is 5% of the unpaid tax due on such return, with the maximum penalty typically 25% of the tax owed.

Failure to Pay Penalty

The IRS may also apply a failure to pay penalty for any month, or part of a month, for which the tax due is paid late. This penalty is 0.5% per month of the amount of the tax. In certain circumstances, individual filers may be able to qualify for a reduced penalty of 0.25% per month, if an installment agreement is in effect. The maximum amount of the failure to pay penalty is also 25% of the tax owed.

Interaction between the Failure-to-File and Failure-to-Pay Penalties; Reasonable Cause Defense

If both of the above-mentioned penalties apply to a given month, then the failure to file penalty will be reduced by the amount of the failure to pay penalty. It is important to note that a “reasonable cause” defense is applicable to these penalties – i.e. if the employer’s attorney is able to demonstrate, in writing, that the failure to file or to pay was due to a reasonable cause, then such penalties will be abated by the IRS.

Interest

Interest may also be charged, in addition to any applicable penalties. Interest begins to accrue from the date due of the tax owed on any unpaid amount.

Penalty Rates for Amounts not Properly or Timely Deposited

In general, penalties may also apply if a filer does not make required timely deposits, or if the amounts deposited are less than required. If a filer is able to establish a reasonable cause defense and demonstrates that the failure to comply with the requirements was not due to willfully neglect, then the IRS will not impose the penalties. In certain other circumstances, the IRS may also agree to waive penalties.

For amounts that are not timely or properly deposited, the following penalty rates will apply:

2% – Deposits 1 to 5 days late.
5% – Deposits 6 to 15 days late.
10% – Deposits 16 or more days late.
10%- Amounts paid within 10 days of the date of the first IRS notice requesting the tax due.
10% – Deposits paid directly to the IRS, or paid with a tax return.
15% – Amounts unpaid more than 10 days after the date of the first IRS notice requesting the tax due, or the day on which an IRS
notice and demand for immediate payment was received by afiler, whichever is earlier.

Late deposit penalty amounts are calculated from the due date of the tax liability, and are determined using calendar days.

Trust Fund Penalty

If income, Social Security, or Medicare taxes that are required to be withheld are not withheld or paid, a filer may be personally liable for the Trust Fund Penalty. Important note: use of a third-party payroll service provider or other type of agent will not relieve a required filer of the responsibility of ensuring that deposits are timely and properly deposited, and that returns are filed.

The Trust Fund Penalty is the full amount of the unpaid trust fund tax. The penalty may be imposed on any person determined by the IRS to be responsible for collecting, accounting for, and paying over required taxes, and who acted willfully in not doing so, and the penalty may apply to individuals personally if such unpaid taxes cannot be collected from the employer or business directly.

Criminal Penalties

Those who fail to comply with the bank deposit requirements for the special trust account for the U.S. Government may also be charged with criminal penalties. We will cover the criminal penalties in more detail in future articles.

Averages Failure to Deposit (FTD) Penalty

The IRS may also assess an “averaged” failure to deposit (FTD) penalty of 2% to 10% for filers who are scheduled to make monthly deposits, and who do not properly complete Part 2 of Form 941 when a tax liability listed on Form 941, line 10, equals or exceeds $2,500. The IRS may also assess an “averaged” FTD penalty of 2% to 10% for scheduled semi-weekly depositors who show a tax liability on Form 941, line 10, equaling or exceeding $2,500, and who fail to complete Schedule B of Form 941, fail to attach a properly completed Schedule B of Form 941, or improperly complete Schedule B of Form 941.

The averaged FTD penalty is calculated by distributing a total tax liability listed on Form 941, line 10, equally throughout the tax period. As such, deposits and payments may not be counted as timely because the actual dates of tax liabilities may not be accurately determinable.

Contact Sherayzen Law Office for Legal Help With Negotiating Form 941 Penalties

If you are facing Form 941 penalties, contact Sherayzen Law Office NOW. While the exact options available to you will depend on your particular fact pattern, our experienced tax firm will rigorously represent your interests in IRS negotiations and strive to reduce such penalties, exploring all viable legal options.