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Third Quarter Tax Developments
In the third quarter of 2011, there have been a few developments in the tax world that could affect your 2011 income taxes. Please see below for a summary of these and contact us if you have any questions.
Voluntary Classifications Settlement Program: This program was created by the IRS to assist taxpayers who may have misclassified employees as independent contractors. There are three requirements to be eligible for the program:
- The taxpayer must have been consistent in the misclassification,
- Must have filed the appropriate 1099s for the past three years,
- And cannot currently be under any kind of audit, either by the IRS or the Department of Labor.
If the taxpayer meets the above requirements, they may apply for VCSP. Once accepted, they must agree to treat the workers (or group of workers) as employees from then on. Although, instead of having to pay ALL previous employment tax or penalties that would be due if the worker(s) had been treated as employees from the start, they will receive the following breaks:
- Must pay 10% of the employment tax liability that would be due on the wages paid to the employee(s) for the past year.
- Will NOT be liable for interest or penalties associated with that tax liability.
- Will also NOT be subject to a worker classification audit for prior years.
- Will agree to extend the period of limitations on assessment of employment taxes for three years beginning after the closing agreement under VSCP.
Cell Phones Provided by Employer No Longer Taxable When Used for Personal Use: New guidance provided by the IRS states that personal use of a cell phone provided by a company for business reasons will no longer be considered income for the employee. Also, it is no longer necessary to keep record of business/personal usage of that phone. Lastly, in most cases, if an employer reimburses an employee for business use of their personal cell phone, it will not be taxed as income either.
Per-Diem Rates Increased for Business Travel After 9/30: When an employee travels for business purposes, the employer may choose to reimburse the employee using per-diem rates instead of reimbursing employee’s actual expenses. Per-diem rates do vary depending on the area the employee is traveling in. Employers are allowed to use simplified per-diems which include “high-cost” and “low-cost” areas. The high-cost rate has been increased $9 to $242 and the low-cost has been increased by $3 to $163.
How to Elect Zero Estate Tax for Estates of People Who Died in 2010: Those who choose to elect the zero estate tax for 2010 decedents must file a form 8939: Allocation of Increase in Basis for Property Acquired From a Decedent. It is an informational return that reports the executor’s decision to elect the zero tax as well as information about the property acquired and to allocate Basis Increase some of that acquired property. Those who are choosing this election should take note that the beneficiaries are limited to the decedents’ basis.
Deadlines for Filing a Portability Election for People Who Died in 2011: If you are the executor of an estate of your spouse who died in 2011, it may be time for you to file a Form 706 (Estate Tax Return) in order to elect to have the unused estate and gift tax exclusion amount passed on to you. These returns will be due 9 months after the date of death in 2011. If the estate is not required to file the Estate Tax Return, but you with to elect the portability of the unused exclusions, you still must file the form. If you do NOT want the exclusion passed on, and must file the form 706, please see the specific directions on form 706 to avoid having the election made.
Disclosure of Foreign Financial Assets: Starting March 18, 2010, each tax year, people who hold a “specified foreign financial asset must disclose it using form 8938 which will attach to their federal tax return. The total assets must be valued at more than $50,000. Items that qualify as a “specified foreign financial asset” are:
- Depository or custodial accounts held in a foreign financial institution
- Stocks or Securities issued by a foreign entity
- Any contract held for investment that is issued by or has a foreign party involved
- Any other interest in a foreign entity
Innocent Spouse Relief Filing Period Eliminated: When a couple files Married Filing Jointly, one spouse may be responsible for debt that can be taken from the joint refund. In this situation, the “innocent” spouse, or the spouse not responsible for the debt can file form 8857 (Innocent Spouse Relief) in order to receive refunds for their portion of the return. There used to be a two year limitation on filing this form. There is no longer a limit on filing.
Supreme Court Will Rule on Whether Basis Overstatements Can Trigger a Six-Year Limitations Period: The IRS has stated that an overstatement of basis that results in an understatement of income of 25% or more will result in a six-year limitation period. Some courts have decided not to uphold this ruling by the IRS, so the supreme court will now be making the final decision.
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