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2011 Legislative Updates » 2011 Federal Legislative Updates

FEDERAL

Forms and Publications

Emancipation Day is a legal holiday in the District of Columbia, and will be observed on Friday, April 15^th, which means that the filing deadline for all federal tax forms, payments, and employment tax deposits required to be filed or completed on or before April 15, 2011 will actually fall on Monday, April 18, 2011. This applies only to federal returns, since most states do not observe Emancipation Day as a legal holiday.

During their February 4^th Payroll Industry Teleconference, the IRS announced that Forms 940 and 941-X will be revised for 2011. The new 940 should be available by the end of February, and the final version of the new 941-X will be available in April. The update to these forms was necessitated by a number of legislative changes, including the expiration of HIRE Act credits and the reduction in employees’ SS tax contributions from 6.2% to 4.2%.

The IRS has released Form 1099-MISC for 2011. For more information, visit: http://www.irs.gov/.

W-2c Forms Required Where the Only W-2 Change is HIRE Act Exempt Wages and Tips (Box 12 Code CC). In this case, the employer must follow regular procedures for correcting the W-2, but the employee does not have to file an amended personal income tax return. If the employer has not yet filed the W-2 information with the SSA, the employer can give the employee a corrected W-2 and make sure the correction is made on the file sent to the SSA. If the employer has already sent the W-2 file to the SSA, the employer has to then provide the appropriate copies of Form W-2c to both the employee and the SSA with the original and corrected Box 12, Code CC amounts. Also, the description of Code CC must appear on the back of any W-2 provided to the employee with an entry of Code CC in Box 12. (Source: American Payroll Association’s “Payroll Currently,” Feb. 4, 2011).

IRS has Issued Updated Form W-4 Instructions for Nonresident Aliens for 2011. Notice 1392, Supplemental Form W-4 Instructions for Nonresident Aliens has been revised to omit references to the Making Work Pay Credit which expired on December 31^st, 2010. (Source: American Payroll Association’s “Payroll Currently,” Feb. 4, 2011). For more information, visit: http://www.irs.gov/.

IRS Releases 2011 Pub 15-A, Employer’s Supplemental Tax Guide. Pub. 15-A, which is a supplement to Circular E, has been released by the IRS. This includes information on the social security and Medicare tax for 2011, the Making Work Pay credit, advance payment of earned income credit (EIC), federal tax deposits made by electronic funds transfer, FUTA tax rate, COBRA premium assistance extension, aggregate Forms 940 and 941 filers, furnishing Forms W-2 to employees electronically, electronic submission of Forms W-4, and employers can choose to file Forms 941 instead of Form 944. (Source: American Payroll Association’s “Payroll Currently,” Feb. 4, 2011). For more information, visit: http://www.irs.gov/.

IRS Issues Revised Form W-9. (Source: American Payroll Association’s “Payroll Currently,” Feb. 4, 2011). For more information, visit: http://www.irs.gov/.

IRS Releases updated Publication on Backup Withholding, Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s). This update was effective January 28^th, 2011, and all publications downloaded prior to that have an incorrect rate. According to the American Payroll Association, there is an inaccuracy in Part 1,”Introduction,” of the revised version, and on account of extended income tax withholding rates for two years under the Tax Relief Act of 2010 (enacted December 17^th), the backup withholding rate of 28% will NOT in fact increase to 31% as stated in Publication 1281. (Source: American Payroll Association’s “Payroll Currently,” Feb. 4, 2011). For more information, visit http://www.irs.gov/.

U.S. Citizenship and Immigration Services Issues Updated version of Publication M-274, I-9 Handbook for Employers. (Source: American Payroll Association’s “Payroll Currently,” Feb. 4, 2011). For more information, visit http://www.uscis.gov/files/form/m-274.pdf.

Remember to claim first quarter 2010 HIRE Act adjustments as 2010 Q2 adjustments on Form 941-X rather than claiming it as a first quarter adjustment. If you claim the first quarter adjustment, it will be rejected by the IRS. (Source: National Association of Certified Public Bookkeepers’ Payroll Tax Update, Feb. 18, 2011).

IRS releases Forms W-2 and W-3 for 2011 featuring new check boxes and box codes. UPDATE- due to scanning issues with the new Form W-3, it has been revised again. Please be sure to use only the most recent revision made available on February 18, 2011, as the originally updated Form will not scan. For more information, visit http://www.irs.gov/.

IRS Issues 2011 Form W-4 (Source: American Payroll Association’s “Payroll Currently,” Jan. 7, 2011). For more information, visit http://www.irs.gov/.

IRS Releases 2011 Circular E (Source: American Payroll Association’s “Payroll Currently,” Jan. 7, 2011). For more information, visit http://www.irs.gov/.

IRS Releases Form 940 for Tax Year 2010 (Source: American Payroll Association’s “Payroll Currently,” Jan. 7, 2011). For more information, visit http://www.irs.gov/.

IRS Issues 2011 Publication 15-B, Employer’s Tax Guide to Fringe Benefits (Source: American Payroll Association’s “Payroll Currently,” Jan. 7, 2011). For more information, visit http://www.irs.gov/.

IRS updates electronic filing procedure for Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips, effective February 28, 2011 and thereafter. For more information, visit http://www.irs.gov/.

In its Payroll Industry Teleconference on February 4^th, the IRS reminded employers to only use 12 pt. Courier font and black ink when they submit Forms 941 and 940, so as to avoid delays. IRS scanning equipment will not recognize other font types or sizes, or blue or gray ink.

IRS publishes 2010 federal income tax withholding tables- IRS will allow implementation delay for income and Social Security tax withholding changes. For more information, refer to http://www.irs.gov/.

IRS issues transportation, adoption, MSA, and other inflation adjustments for 2011. See http://www.irs.gov/ for more information.

To reduce costs, the IRS is no longer mailing the following forms and publications. They can now be accessed through the SSA website at www.ssa.gov/employer.

Form 941, Employer’s Quarterly Federal Tax Return

Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return

Form 943, Employer’s Annual Federal Return for Agricultural Employees

Form 944, Employer’s Annual Federal Tax Return

Form 945, Annual Return of Withheld Federal Income Tax

Form 720, Quarterly Federal Excise Tax Return

Form 730, Monthly Tax Return for Wagers

Form 2290, Heavy Highway Vehicle Use Tax Return

Form 5500, Annual Return/Report of Employee Benefit Plan

Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips

Form 8160-T, Tax Product Availability for Exempt Organization Filers

Form 11-C, Occupational Tax and Registration Return for Wagering

Form CT-1, Employer’s Annual Railroad Retirement Tax Return

Publication 51, (Circular A) Agricultural Employer’s Tax Guide

Publication 80, (Circular SS) Federal Tax Guide for Employers in the U.S Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands

Publication 179, (Circular PR) Guía Contributiva Federal para Patronos Puertorriqueños

Package 1120-H, U.S. Income Tax Return for Homeowners Associations

Revisions to Form 941 for 2011 include the following sections:

Visit www.irs.gov for details on the updates.

Social Security and Medicare tax for 2011

Section 3121(q) Notice and Demand—tax due on unreported tips

Qualified employer's social security tax exemption expired

COBRA premium assistance credit

Advance payment of earned income credit (EIC)

Federal tax deposits must be made by electronic funds transfer

IRS Reissues 2011 Form W-3, Transmittal of Wage and Tax Statements. If you downloaded the form before February 17, 2011, note that the checkboxes in Box b, “Kind of Payer” and “Kind of Employer,” have been adjusted for proper scanning by the Social Security Administration. Previous versions of the form are not acceptable for use and will be rejected. Download the updated form at www.irs.gov.

The Federal Office of Child Support Enforcement (OCSE) has been working with representatives from government agencies and employers to develop a standard response form for state requests for verification of employment. To view a letter from OCSE and a link to the new form, visit http://www.acf.hhs.gov/programs/cse/pol/DCL/2011/dcl-11-04.htm.

IRS issues new HIRE Retention Credit Form, Form 5884-B, to calculate the HIRE credit. The form requires employers to enter each potentially eligible worker’s social security number, the date the worker began employment, and the worker’s wages for the first and second 26 consecutive-week blocks of employment. The data will be used to confirm whether the 80% requirement has been met, and to determine the amount of the credit, which will then be transferred to the employer’s business income tax return. (Source: American Payroll Association). Get the new form at www.irs.gov.

IRS Issues updated instructions for Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G. Refer to General Instructions for Certain Information Returns (Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G), available at www.irs.gov.

IRS issues guidance on health care reform reporting for employers with 250 or more employees. The IRS has issued interim Q&A-format guidelines on information reporting to employees of employer-sponsored health coverage as required under Code Sec. 6051(a)(14). Form W-2, Wage and Tax Statement, is the form used by the employer to inform employees of the cost of their health care coverage. The guidance generally applies to year 2012 Forms W-2; however, employers may also rely on these rules if they voluntarily choose to report the coverage for tax year 2011 Forms W-2. By IRS Notice 2010-69, IRB 2010-44, 576, issued in October 2010, the reporting requirement is optional for all employers for the 2011 Forms W-2.

Relief from the reporting requirements is permitted for employers who file fewer than 250 Forms W-2; therefore, these employers will not be required to report employer-sponsored health coverage on 2012 Forms W-2 if the number for 2011 is less than 250 Forms W-2.

The Treasury Department and the IRS request comments on any of the interim guidance. Comments may also be addressed with respect to how the burden of compliance may be reduced and other issues that employers may face in the reporting requirements. Comments are particularly requested from employers contributing to multi-employer plans, employers who filed fewer than 250 Forms W-2 for the prior year, and employers that sponsor self-insured plans not subject to federal continuation coverage requirements. See IRS News Release IR-2011-31, March 29, 2011; IRS Notice 2011-28, March 29, 2011; http://www.irs.ustreas.gov/newsroom/index.html.

IRS issues finalized guidance on e-filing and hardship waivers. The IRS has issued guidance for tax return preparers on requests for waiver of the electronic filing requirement due to undue hardship. The waiver request procedures, like the electronic filing requirement, apply only to "specified tax return preparers." See IRS Notice 2010-85, I.R.B. 2010-51, 877 of December 2, 2010.

Exemptions for e-filing requirement. The IRS has provided administrative exemptions to the electronic filing requirement, under Code Sec. 6011(e)(3) and corresponding regulations, for certain classes of specified tax return preparers. They include: exempt preparers (preparer members of certain religious groups; foreign preparers without Social Security numbers; and certain preparers ineligible for IRS e-file); exempt individual income tax returns due to preparer's technological difficulties (rejected returns; forms or schedules not supported by the preparer's software package; and other technological difficulties); and exempt individual income tax returns due to IRS e-file limitations (returns currently not accepted and required documentation not accepted electronically.)

These exemptions are intended to be applicable retroactively as of January 1, 2011, to tax return preparers who reasonably expect to file or, if a member of a firm whose firm's members in the aggregate reasonably expect to file, 100 or more individual income tax returns in calendar year 2011. They will be applicable starting in 2012 to tax return preparers who reasonably expect to file or, if a member of a firm whose firm's members in the aggregate reasonably expect to file, 11 or more individual income tax returns in 2012 and subsequent calendar years.

Exemptions are automatic and do not have to be requested but preparers will be required to show entitlement to exemption upon request by the IRS. Form 8948, Preparer Explanation for Not Filing Electronically, was created to explain why an individual tax return that was able to be filed electronically was filed in a paper format.

IRS seeks comments on Health Coverage Tax Credit (HCTC) program forms. The IRS is soliciting comments concerning Form 13865, HCTC Paper Check Request and Form 13929, HCTC Administrative Change Form. These forms are used to help manage the HCTC program. Health plan administrators will use these forms to submit requests of changes to their account information, waivers from the Federal requirement that mandates all payments to be made via Electronic Funds Transfer (EFT), and to provide the required registration information into the HCTC program.

Written comments should be received on or before May 31, 2011 to be assured of consideration, and should be directed to Yvette Lawrence, Internal Revenue Service, room 6129, 1111 Constitution Avenue NW., Washington, DC 20224. (FR 76 18,301, April 1, 2011.)

IRS Updates Specifications for Printing Form 941, Schedule B, and Schedule R. Rev. Proc. 2011-39 (Pub. 4436)

IRS Releases Revised Schedules B and D (Form 941). Schedule B, Report of Tax Liability for Semiweekly Schedule Depositions, and Schedule D Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations.

IRS Issues Revised Pub. 1586 on Missing and Incorrect Name/TINs.

Pub. 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs.

IRS Issues draft of 2012 Form W-2. Draft includes codes for employers to use to report the cost of coverage under an employer-sponsored group plan. The amounts reportable are not taxable and the new reporting requirement is intended to be informational only.

IRS Issues Revised Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund.

IRS Releases August-Applicable Federal Interest Rates. August 2011 short-term, mid-term, and long-term applicable federal interest rates have been issued by the IRS. The rates are used in calculating golden parachute payments and loans made to employees by employers. (Rev. Rul. 2011-16, I.RB. 2011-32, August 8, 2011).

No Change in Third Quarter 2011 Interest Rates. The IRS announced interest rates will remain the same for Q3 beginning July 1, 2011. The rates are as follows: 4% for overpayments (3% in the case of a corporation); 4% for underpayments; 6% for large corporate underpayments; and 1.5% for a portion of a corporate overpayment exceeding $10,000. (IR-2011-53, May 16, 2011; Rev. Rul. 2011-12, I.R.B. No. 2011-26, June 27, 2011).

IRS Announces Revised Mileage Rates Effective July 1, 2011. Announcement 2011-40. Despite an earlier announcement that they would likely not increase mileage rates for 2011, on June 23rd in IR-2011-69 the IRS announced a 4.5 cent increase to both business and medical/relocation mileage rates effective for mileage incurred on and after July 1, 2011.

IRS releases Health Savings Account (HSA) inflation-adjusted limits for 2012. (Rev. Proc. 2011-32).

IRS to release Revised Form W-3c, Transmittal of Corrected Wage and Tax Statements in August.

SSA releases projected Social Security wage bases for calendar years 2012-2020. See 2011 Annual Trustees Report, pages 108-109.

IRS Revises Publication 15-B, Employer’s Tax Guide to Fringe Benefits. Visit www.irs.gov/formspubs.

Court Decisions and Legislation

Supreme Court upholds appeals court ruling, agrees with IRS, says medical residents can rightfully be considered “full time employees,” do not qualify for FICA student exception. The case was originally filed in the U.S. District Court by the Mayo Foundation for Medical Education and Research (known as the Mayo Clinic), and the University of Minnesota. (Source: American Payroll Association’s “Payroll Currently,” Feb. 4, 2011). The court decision can be read here: http://www.supremecourt.gov/opinions/10pdf/09-837.pdf.

U.S. District Court in Indiana rules most FedEx drivers in multistate class action are independent contractors. Drivers in 28 states brought suit and the court analyzed the evidence on a state by state basis against the various state statutes, and concluded that in most cases the FedEx drivers were not employees. The court did allow the cases of drivers in eight states to proceed. (Source: American Payroll Association’s “Payroll Currently,” Jan. 7, 2011).

On December 17^th, 2010, President Obama signed HR 4853 into law, otherwise known as the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The 2010 Tax Relief Act includes an extension of the Bush-era tax cuts for two years, estate tax relief, a two-year "patch" of the alternative minimum tax (AMT), a two percentage point cut in employee-paid payroll taxes and self-employment tax for 2011, new incentives to invest in machinery and equipment, an extension of unemployment benefits, and a host of retroactively resuscitated and extended tax breaks for individuals and businesses (including an extension of the R&D (Research & Development) Tax Credit through end of 2011, Work Opportunity Tax Credit (WOTC), Indian Tax Credit, and Empowerment Zone Tax Incentives- all extended for two years through end of 2011). The HIRE Act payroll tax exemption was not renewed. (Sources: Paradigm Partners, and Journal of Accountancy, Dec. 17, 2010).

President signs H.R. 4783 into law, the “Claims Resolution Act of 2010” providing funding for the settlement of Cobell v. Salazar and four water rights suits brought by Native American tribes, as well as for the Pigford II lawsuit brought by African-American farmers. The act included provisions for the integrity of unemployment compensation, through expansion of new hire reporting and the Treasury offset program. (Source: Whitehouse.gov, Dec. 8, 2010)

Repeal of newly-enacted expanded 1099-MISC reporting, before it went into effect. The Patient Protection and Affordable Care Act (PPACA), enacted March 23, 2010, contained a provision modifying and expanding reporting requirements for businesses. Originally set to go into effect in 2012, the provision has been hotly contested since it was enacted. On February 17, 2011, the Senate voted 87-8 approving S. 223, the FAA Air Transportation Modernization and Safety Improvement Act, which included an amendment to repeal the expanded information reporting requirements under the PPACA “as if they had never been enacted.” On March 3, 2011, the House voted 314-112 to pass H.R. 4, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, which would repeal the expanded Form 1099-MISC reporting requirement. It also repeals an expansion of the broader 1099 reporting requirements to include landlords, which was enacted under a small business law (Pub. L. No. 111-240). On April 14^th, President Obama signed H.R.4. into law.

House Bill proposes increase to cash minimum wage for tipped employees. H.R. 631 is the Working for Adequate Gains for Employment in Services (WAGES) Act. Introduced by Rep. Donna Edwards (D-Md.), the WAGES Act would increase the minimum federal cash wage for tipped employees from $2.13 to $3.75/hr 90 days after enactment. One year after the initial increase, it would increase again to $5.00/hr, and one year after that, the minimum cash wage would have to be at least 70% of the federal minimum wage rate, and at least $5.50/hr. The bill is currently being considered by the House Committee on Education and the Workforce. The full text of the proposed legislation can be viewed at http://www.opencongress.org/bill/112-h631/show.

Federal Courts: Fluctuating workweek (FWW) method used to calculate overtime pay in misclassification case. In 2008, a U.S. District Court in West Virginia found that horse race officials at a track operated by PNGI Charles Town Gaming, LLC, were administrative employees exempt from overtime provisions of the Fair Labor Standards Act (FLSA). The Fourth Circuit Court of Appeals reversed that decision, saying the race officials had been misclassified as exempt and sent the case back to the lower court to determine the overtime pay owed. After the lower court calculated the overtime due based on 50% of the race officials’ regular rate of pay for hours worked over 40 in a workweek, the officials appealed, saying that the calculation should have been based on 150% of their regular rate of pay. The Fourth Circuit Ct. of Appeals then affirmed the 50% calculation was correct. Desmond v. PNGI Charles Town Gaming, LLC; read more at http://pacer.ca4.uscourts.gov/opinion.pdf/092189.P.pdf.

Some courts have approved the use of the FWW method to calculate the overtime pay of employees improperly classified as exempt, but others have disallowed it. The U.S. Supreme Court recently declined to hear the appeal of a case involving use of the FWW method to compute overtime pay for an improperly classified employee [Urnikis-Negro v. American Family Property Svcs., No. 10-745 (U.S. Sup. Ct., 2-22-11)] The U.S. Dept. of Labor has issued a Wage-Hour opinion letter approving the use of the FWW method to calculate retroactive overtime pay owed to nonexempt salaried employees. Read more at http://www.dol.gov/whd/opinion/FLSA/2009/2009_01_16_24_FLSA.htm.

President Obama Signs Law Repealing Expanded 1099-MISC Reporting. Pub. L. No. 112-9, enacted on April 14, 2011, retroactively repeals the expanded Form 1099-MISC reporting requirements that were included in the Patient Protection and Affordable Care Act.

Grace v. Family Dollar Stores, Inc. Court Affirms Discount Store Manager Was FLSA-Exempt Executive.

Salazar-Martinez v. Fowler Brothers, Inc.; Sosa Teoba v. Trugreen Landcare, LLC. Court Says Employers Were Required to Reimburse Workers' Migration Expenses.

Supreme Court Rules 5-4 Employee Back-Pay Claims Against Wal-Mart Should Not Have Been Class-Certified. The plaintiffs had sued under Title VII alleging that women employees had been paid less than men in comparable positions and received fewer promotions to management. Written by Justice Scalia and joined by Chief Justice Roberts and Justices Kennedy, Thomas and Alito, the majority opinion held that the plaintiffs failed to meet the “commonality” requirement of FRCP Rule 23(a)(2). The four requirements of Rule 23(a) — numerosity, commonality, typicality, and adequate representation — effectively limit the class claims to those fairly encompassed by the named plaintiffs’ claims. Rule 23(a)(2) requires a party seeking class certification to prove that the class has common questions of law or fact. The claims presented must depend upon a common contention of such a nature that it is capable of classwide resolution, the Court explained.

Meal break donning/doffing was not compensable working time. Workers at a poultry-processing plant were entitled to pay for the time spent donning and doffing protective gear at the beginning and end of the workday, the Fourth Circuit Court of Appeals held. However, mid-shift donning and doffing of protective gear at the employees’ meal break was not compensable, the appeals court ruled, following a Fourth Circuit case that was issued after the lower court entered a judgment below in this case. The appeals court also affirmed the lower court’s imposing a two-year limitations period for backpay claims and its refusal to award liquidated damages, agreeing with the court below that the employer’s violations of the Fair Labor Standards Act (FLSA) were not willful and that the employer had acted in good faith.

The facts at hand “amply demonstrate” that the donning and doffing of work gear was necessary to employees’ principal work of chicken processing, the appeals court found. Both legal requirements and overriding concerns of safety and sanitation mandate this conclusion. Further, the activities primarily benefit the employer. Although donning of protective gear benefits the employees by protecting them from workplace hazards, the district court found these activities primarily benefited the employer in that they protected products from contamination, kept workers’ compensation payments down, kept missed work time to a minimum, and shielded the company from pain and suffering payments. (Perez v Mountaire Farms, Inc, 4thCir, 161 LC )

Another case addressing employee times spent donning/doffing PPE is (Martinez v Cargill Meat Solutions Corp, DNeb). Because the personal protective equipment (PPE) worn by workers at a beef-processing plant constitutes “clothes” within the meaning of the FLSA, the time spent by the workers in the pre- and post-shift donning and doffing of the equipment was properly excluded by their employer from their paid workday pursuant to the terms of their collective bargaining agreement, a federal district court in Nebraska ruled. Summary judgment was not appropriate, however, on the issue of whether the walking and waiting time that followed the donning of the required PPE and preceded the doffing of that PPE was compensable, the court concluded.

Applebee’s Case: District court gives deference to DOL’s interpretation of tip credit. In a significant ruling for the restaurant industry, in which advocates for both services and restaurant employers weighed in, a district court properly granted deference to the DOL’s interpretation of the FLSA’s tip credit provision and its 20-percent work test as contained in the agency’s Field Operations Handbook, the Eighth Circuit ruled. In this collective action brought by Applebee’s servers and bartenders challenging the restaurant chain’s use of the tip credit when a substantial part of their shift time was spent performing nontipped duties, the appeals court concluded on an interlocutory appeal that the lower court properly denied summary judgment to the employer. The appeals court rejected Applebee’s contention that the field handbook provision was inconsistent with the relevant statutes and the related regulations, which do not specifically place a temporal limitation on the tipped employees’ related nontipped duties.

Employees still may be paid the tipped wage rate for performing general preparation and maintenance duties, so long as those duties consume no more than 20 percent of the employees' working time, the appeals court pointed out. Still in dispute here, however, was which specific duties were subject to the 20-percent limit. That issue was beyond the scope of the interlocutory appeal; it was for the district court to determine what duties comprised the tip-producing part of the server or bartender’s tipped occupation. (Fast v Applebee's Int’l, Inc, 8thCir, 161 LC.)

Wang v. Chinese Daily News: Reporters not exempt from overtime as professional employees. Newspaper reporters for the Chinese Daily News were not exempt from overtime as professional employees, affirmed the Ninth Circuit in a class action suit alleging violations of federal and state wage and hour laws. Further, a federal district court did not abuse its discretion in finding that monetary relief claims did not predominate in the case for purposes of class certification of the state law claims under Rule 23(b)(2) and that there were substantial claims for injunctive relief, ruled the appeals court.

IRS Memorandum Number 20111702 affirms grant payments to non-NRSA fellows were subject to FICA. Amounts paid to certain non-National Research Service Award (NRSA) fellows under non-NRSA research grants were compensation and, therefore, they were wages subject to Federal Insurance Contributions Act (FICA) taxes. Chief Counsel Advice (CCA) Letter Ruling 200944027, issued in July 2009, discussed the similarities and differences between NRSA training grants and non-NRSA research grants. The CCA concluded that amounts paid to post-doctoral fellows under the non-NRSA grants were subject to FICA. The IRS reaffirms its conclusion.

The taxpayer protested the fact that the IRS disallowed refund claims filed with respect to payments made to some non-NRSA fellows. The IRS issued general comments along with a more detailed explanation of its view with regard to compensation of certain non-NRSA fellows. The IRS noted that the taxpayer followed its own employment policies, which authorize the taxpayer to provide non-NRSA fellows with remuneration packets that were consistent with the existence of an employer-employee relationship.

President, associate attorneys and law clerk were employees of S-Corp, not independent contractors. Donald G. Cave, A Professional Law Corp v. Commissioner of Internal Revenue, T.C. Memo. 2011-48. The president, associate attorneys and law clerk of an S corp doing business as a law firm were employees and not independent contractors, the Tax Court has held. The court rejected the S corp’s claim that the individuals enjoyed sufficient control over their work to be treated as independent contractors.

The IRS is in the middle of a three-year national research program on employment tax compliance, Steven Packer, CPA, manager, tax accounting group, Duane Morris, LLP, Philadelphia, told CCH. "The IRS is being very aggressive looking at employee versus independent contractor status," he noted. Among other things, the IRS is looking at the fringe benefits, employee reimbursements, compensation arrangements; all of which impact employee or independent contractor status, Packer explained.

In this case, the court first looked to whether the S corp’s president and sole shareholder was an employee of the S corp. The court noted that an officer of a corporation who performs substantial services for the corporation and receives remuneration for such services is a statutory employee for employment tax purposes. Here, the president made all decisions for the corporation, such as hiring. Thus, he was a statutory employee of the S corp for employment tax purposes, the court found.

The court next looked to the status of the associate attorneys. They had some independence over the preparation of their cases but the president did assign all of them. The president reviewed the pleadings and correspondence prepared by the associate attorneys. He also provided all of the office tools and furnishings. Although the associate attorneys were not required to work exclusively for the president, in fact, they did. Thus, the court concluded that the associate attorneys were employees of the S corp as well.

Social Security: Chronic fatigue syndrome. An Administrative Law Judge (ALJ) properly determined that the claimant’s chronic fatigue syndrome (CFS) was not severe because it did not more than minimally affect her ability to perform basic sedentary work activities. The claimant had complained of CFS since 1997, but continued to work and applied for work as late as 2002. There were no records of physical complaints since August 2003. Additionally, the CFS, in combination with other impairments, did not make it impossible for the claimant to perform acceptable work. In fact, she failed to present any medical evidence linking her CFS to the unacceptable level of absenteeism she alleges. None of the treating physicians stated that she was incapable of working, and a medical expert stated that the claimant’s ailments did not meet the definition of any of the medical listings and that she was capable of performing a full range of sedentary work (Castile, CA-7).

Social Security: Hypothetical question. An ALJ adequately represented the limitations imposed by the claimant’s cognitive impairments even though he did not use the specific terms found in the psychological reports to describe the claimant. A hypothetical question must set forth all of a claimant’s impairments; however, it need not use specific diagnostic or sympathetic terms where other descriptive terms can adequately define those impairments. In this case, although the hypothetical did not actually use the term “learning disorder” or “borderline intellectual functioning,” the ALJ specifically noted that the claimant could not read or write and was limited to simple tasks (Gragg, CA-8).

Social Security: Borderline age consideration. When considering a claimant’s age in determining whether he or she can perform some other work that exists in significant numbers in the national economy, an ALJ is not required to articulate the reasons for not using an older age category where the claimant’s age was just over a month shy of qualifying for the next higher age category. Although the agency’s internal operating manual, the POMS, requires such articulation, Reg. §404.1563 merely requires the ALJ to consider whether to use the older age category. In this case, the ALJ cited to the regulation, showing that she knew that she had discretion to use the older age category. She also relied on the testimony of the vocational expert, which shows that she did not apply the age categories mechanically, which Reg. §404.1563 prohibits. The POMS requirement was not controlling because it was not in effect at the time the ALJ issued her decision; was in conflict with the HALLEX, a policy manual that guides decision making at hearings and appeals; and because it was not a persuasive interpretation of the regulation (Lockwood, CA-9).

Social Security: Willfulness. A corporation's owner was properly held liable for the trust fund recovery penalties assessed against him. Notice and demand for payment are not required when the government files a civil action because filing the action allows the taxpayer sufficient time to consider and pay any tax due before a judgment or lien can be placed upon his property. In addition, the individual in this case knew about the outstanding trust-fund taxes and, nevertheless, continued to make payments to other creditors and employees. Moreover, the individual’s claim that his failure to pay trust-fund taxes was a consequence of an employee's embezzlement of company funds was not a legally recognized defense. Finally, the individual was not entitled to a theft-loss deduction to offset his trust-fund tax liabilities. The corporation suffered the theft-loss from the employee’s embezzlement, not the individual (Anuforo, CA-8).

Social Security: Responsible person. The controlling member-manager of an limited liability company (LLC) who operated a casino was a responsible person under IRC §6672. As the manager, the operating agreement gave him the authority to conduct any and all business on behalf of the LLC. As the majority interest member, he had absolute power to control the business’ operations because he could override the decisions of the other two managers. However, there was insufficient evidence to determine whether the individual willfully failed to pay the withholding taxes. That matter was to be determined at trial (O’Brien, U.S.D.C. (Nev.)).

Federal: Subpoena. In an unlawful discharge action, the employer was entitled to obtain a copy of the claimant’s unemployment compensation file. In denying the Indiana Department of Workforce Development’s motion to quash and granting the employer’s motion to compel, the court held that a subpoena for documents such as those requested from the Department was appropriate. The case involved claims that the employer unlawfully had terminated the claimant. When seeking unemployment benefits, the claimant made certain representations that could impact directly on the claims and defenses that were being litigated. Thus, the court directed the Department to produce the documents subject to the employer’s subpoena (Hughes, U.S.D.C. (SD Ind.)).

Social Security: Post-traumatic stress disorder. An ALJ properly rejected a claim for disability benefits based on post-traumatic stress disorder (PTSD) where the claimant never testified that he was incapacitated by his need to be alone and where nothing in the treating physician’s report assigned specific limitations to the claimant or stated that the claimant was unable to work with little interpersonal interaction. In this case, the claimant was diagnosed with post-traumatic stress disorder in 1986, following service in Vietnam as a “tunnel-rat.” He had difficulty concentrating, did not read, avoided crowds, slept sporadically, disliked unexpected noises, did not have friends, avoided everybody, and did not “put up” with most people. The ALJ properly rejected the claimant’s claim that he could not “put up” with most people because the claimant had to deal with people when he went into town, he was trusted as a ranch-hand, and was capable of developing a personal relationship that resulted in marriage. He had also exaggerated his physical limitations, entitling the ALJ to find that the testimony lacked credibility. (Turner, CA-9).

Social Security: Listing of impairments; §12.04 (affective disorders). A claimant who suffered from post-traumatic stress disorder and depression met the criteria for Listing §12.04 when the treating psychiatrist’s opinion was properly credited. In this case, all experts agreed that the claimant met the “A” criteria for depression. The treating psychiatrist also opined that the claimant met the “B” criteria (at least two of the following: (1) “marked” restriction of activities in daily living, (2) “marked” difficulties in maintaining social functioning, (3) deficiencies of conc entration, persistence or pace, or (4) “repeated episodes of decompensation each of extended duration”). That opinion is consistent with the evidence. The claimant quit a part-time job where she occasionally hid in the bathroom to avoid customers, she was able to work only two hours a day waiting tables in a restaurant where she had been hired by a friend as an accommodation, and she shopped late at night to avoid people. Reasons cited by the Commissioner, but not cited in the ALJ’s opinion to support a position that the claimant only had “moderate” limitations in social functioning, could not be used because that would violate the “Chenery” doctrine, which requires that an agency's discretionary order be upheld, if at all, on the same basis articulated in the order by the agency itself. The claimant also demonstrated episodes of decompensation with hospitalization, and a history of adjustments to medication. (Larson, CA-7).

Social Security: Assessment and collection. Married debtors were personally liable for employment taxes incurred in the operation of the husband’s business. The debtor was responsible under IRC §3401(d) for the entire tax liability incurred in operating the business. However, since the IRS could not hold the debtor liable for corporate income taxes when no corporation existed, its entire proof of claim was disallowed without prejudice (In re Mader, U.S. Bankr. (ND Ill.)).

Other Federal News & Updates

Treasury Department Launches Debit Card Pilot Program. For more information, visit http://www.treasury.gov/.

Interest Rates Increase for 2nd Quarter of 2011. IRS announced on Feb. 17th, 2011 that interest rates for the calendar year beginning April 1, 2011 will increase by one percentage point. For more complete information, refer to http://www.irs.gov/.

Notify employees about potential Earned Income Credit (EIC) refund. Employers are required to notify each employee who worked during the year and from whom no income tax was withheld that they may be eligible for a tax refund generated by the earned income credit. However, any employee who has not had any income tax withheld because he or she claimed exemption from withholding on Form W-4, Employee’s Withholding Allowance Certificate, need not be notified. Notification requirements are met when employers give the employee: (1) a Form W-2, Wage and Tax Statement, which has the required statement on the back of Copy B, (2) a substitute Form W-2 with the same statement on the back of the employee’s copy that is on the back of Form W-2’s Copy B, (3) a copy of IRS Notice 797, “Possible Federal Tax Refund Due to the Earned Income Credit (EIC),” (link below), OR (4) a written statement containing the exact same wording as IRS Notice 797. Posting the notice on an employee bulletin board or sending it through office mail is not sufficient. Employers must hand a notice to the employee or send it via first-class mail to the employee’s last known address. Copies of IRS Notice 797 are available at http://www.irs.gov/.

Check with your respective state agency to determine whether they are accepting voluntary contributions, and if so, under what guidelines. Many states have deadlines approaching. Voluntary contributions can lower your unemployment insurance taxes. Under the laws of many states, an employer can achieve a lower tax rate in the next tax period by deliberately overpaying its unemployment insurance tax in the current tax period. Sometimes a small voluntary contribution can result in big savings.

Reminder- HIRE Act Payroll Tax Exemption Ended December 31, 2010. Employers should be sure they have turned off any related automatic system calculations for tax year 2011 payroll processing.

IRS Defers Application of Nondiscrimination Rule to Insured Group Health Plans, as per IRS Notice 2011-1. (Source: American Payroll Association’s “Payroll Currently,” Jan. 7, 2011). For more information, visit http://www.irs.gov/.

The DOL recently filed 24 civil lawsuits across the country under its Employee Contributions Initiative, in the interest of protecting benefits for employees participating in contributory health or retirement benefit plans. (Source: DOL Press Release, November 16, 2010). For more information, visit http://www.dol.gov/.

IRS Expands Guidance on Small Business Health Care Tax Credit for Small Employers. For more information, visit http://www.irs.gov/.

IRS Announces Pension Plan Limits for 2011. For more information, visit http://www.irs.gov/.

No Change in Social Security Wage Base for 2011; for more information, refer to http://www.ssa.gov/pressoffice/colafacts.htm.

IRS Waives Form W-2 Health Care Reporting Requirement for 2011-Delayed until 2012. For more information, see http://www.irs.gov/.

IRS to Stop Mailing Employment Tax Packages. Read more here http://www.irs.gov/.

Per Diem Rates Under High Low Substantiation Effective October 1, 2010, read more here http://www.irs.gov/pub/irs-pdf/p1542.pdf.

HIRE Act and Exempt Organizations. The IRS clarifies that since exempt organizations have no taxable income in a tax year, they are unable to claim the retention credit, which is meant to offset the taxable income of a business. However, the credit can be carried forward 20 years, so may still be claimed at a later date when they may have taxable income. Read more here: http://www.irs.gov/.

IRS announces quarterly interest rate increases for Q2 2011 (i.e. beginning April 1, 2011).

- 4% for tax overpayments (3% in the case of a corporation)

- 4% for tax underpayments

- 6% for large corporate underpayments

- 1.5% for the portion of a corporate overpayment exceeding $10,000.

More information can be found at www.irs.gov.

Interest rate on Federal Title XII advances:

The Employment and Training Administration announced that the IRS will charge a 4.0869% interest rate on Title XII advances in 2011 (UIPL No. 09-11, 2/8/2011).

SSA seeks emergency clearance for questionnaire related to FICA overpayments. The Social Security Administration (SSA) sought emergency clearance from the OMB for a questionnaire targeting insured workers who were medical residents between 1993 and 2005, and who have filed a request with the IRS for a FICA refund for those years. The refund requests follow a recent IRS ruling that it will consider medical residencies in those years to be student training rather than employment, making it possible for those workers to seek refunds of FICA tax paid in those years. The SSA will contact those seeking refund to explain that accepting the refund will reduce their worker’s earnings records, and in turn, their Social Security Benefit. The questionnaire is to confirm their desire for refund despite the potentially negative impact on their benefits. (Federal Register, March 31, 2011, 76 Fed. Reg. 17978).

In April, the Social Security Administration (SSA) resumed the mailing of no-match letters- notices to employers concerning names and social security numbers provided on Forms W-2 that do not agree with its records. Because of pending litigation involving related Department of Homeland Security (DHS) regulations, the no-match letters were not mailed for tax years 2007 through 2009. However, because the DHS has rescinded their regulations, the mailing of no-match letters has resumed. It’s important to note that potential penalties have increased significantly since employers last received SSA’s no-match letters. Previously, incorrect payee statements carried a maximum penalty of $100,000 and incorrect Forms W-2 carried a maximum $250,000 penalty. Now, each carry a maximum penalty of $1,500,000. Visit the US Dept. of Justice’s Civil Rights Division for more information about no-match letters, including “do’s” and “don’ts” for employers who receive no-match letters. Read more at http://www.justice.gov/crt/about/osc/htm/SSA.php.

IRS Official Tuzynski Shares Insights on HIRE Act Audits. On an IRS payroll industry conference call in early March, John Tuzynski of the IRS's Small Business/Self-Employed Division, provided some information on IRS audits of employers who claimed the payroll tax exemption under the HIRE Act.

Tuzynski said that the IRS has been asking employers to provide a list of the employees for whom they claimed the payroll tax exemption on Form 941. Employers must provide documentation to support the wages that were paid to the workers and the date that the workers were hired. The audit centers around Form W-11. Depending on how many workers there are, the IRS will review information for some or all of them. The IRS may also ask if the worker was hired to replace another worker, and if so, why the worker was replaced. Tuzynski also said that the audits are not random. A return is selected for audit based on something on the return that was of interest to the IRS. Tuzynski said that roughly 1,000 exams are currently being conducted.

August per diems issued for foreign areas. The U.S. State Department has released the maximum travel per diem allowances for travel in foreign areas. The rates apply to all U.S. government employees and contractors and are effective as of August 1, 2011. In addition, the rates are used by private employers for travel expense reimbursements.

IRS to end high-low method for substantiating travel expenses. The IRS intends to discontinue authorizing the high-low method for substantiation of travel expenses. In 2011, the IRS plans to publish a revenue procedure providing the general rules and procedures for substantiating lodging, meal, and incidental expenses incurred in traveling away from home (omitting the high-low substantiation method). The IRS will publish a revenue procedure in subsequent years only when modifying the substantiation rules and procedures and will publish the special transportation rate in an annual notice. For additional information regarding this announcement, contact Karla M. Meola of the Office of Associate Chief Counsel (Income Tax and Accounting) at (202) 622-4930.

IRS Warns Employers to Beware of Email Scams. The IRS is warning employers to beware of scam emails about federal tax payments the emails claim have been rejected. The emails then direct recipients to a bogus link that, when clicked, downloads malware that infects the victim's computer.

USCIS Implements New E-Verify Tool That Confirms Drivers' License Data. U.S. Citizenship and Immigration Services has launched RIDE (Records and Information from DMVs for E-Verify) to validate the authenticity of driver's licenses used by employees as Form I-9 identity documents. Mississippi is the first state to partner with USCIS to implement RIDE. Read the news release.

Final States Weigh In on Tax Treatment of Health Care Benefits for Adult Children. Three more states – Hawaii, Massachusetts, and Minnesota – now conform to the federal tax treatment of health care benefits for employees' children under age 27 under the Affordable Care Act. Wisconsin is the only nonconforming state.

Federal Unemployment Insurance UIPL 16-11. The Employment and Training Administration of the U.S. Department of Labor (DOL) has issued an Unemployment Insurance Program Letter (UIPL) to inform the states of the new methodology used to calculate the “on” or “off” total unemployment rate. In order to give full effect to this methodology, and to ensure that all unemployed individuals who are eligible to receive EB are paid in a timely manner, the DOL is implementing it retroactive to April 16, 2011. Copies of this UIPL may be obtained at http://wdr.doleta.gov/directives/ (UIPL 16-11, 5/20/2011).

USCIS Issues Final I-9 Rule Requiring Unexpired Documents to Prove Work Authorization. U.S. Citizenship and Immigration Services has finalized interim regulations governing the types of acceptable identity and employment authorization documents and receipts that employees may present to their employers when completing Form, I-9, Employment Eligibility Verification. 76 F.R. 21227.

New Combined EAD-Advance Parole Card Satisfies Form I-9 List A Requirements. U.S. Citizenship and Immigration Services is now issuing employment and travel authorization on a single card for certain applicants filing Form I-485, Application to Register Permanent Residence or Adjust Status. Employers may accept the new card as a List A document when completing Form I-9, Employment Eligibility Verification.

IRS Extends TIN-Masking Pilot Program Without Expanding It. The IRS pilot program that allows filers of certain information returns to truncate an individual's nine-digit identifying number on specified paper payee statements is being extended for calendar years 2011 and 2012, and one form is being removed from the pilot. Notice 2011-38.

New Hire Credit Retention Form Won't Hinder Corporate e-Filing. Form 1120 filers can continue to electronically file their corporate income tax return with Form 5884-B, New Hire Retention Credit, by attaching the retention credit form as a PDF document.

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