Using your final pay stub from last year, carefully compare the gross federal and state wages, federal, state and local income tax withheld, and Social Security and Medicare taxes withheld with the figures on the W-2s. Also be sure to verify that the Social Security number on the W-2 is correct. This is perhaps the most important number on the form. 

If you find an error or discrepancy, contact the employer, which will issue a corrected W-3c and W-2c to the Social Security Administration (employers send W-2s to the SSA and not the IRS, although the IRS eventually gets the information for matching) and send copies of the corrected W-2c to you. Attach Copy B of the W-2c to your tax return, along with the original erroneous W-2, when you send it in.

While you should also notify your current employer if you find an error or typo in your name or address, such errors should not affect your tax filing and should not require a new W-2.

If you don’t receive a W-2 and can’t contact the employer because it has gone out of business or disappeared, all is not lost. You can use your pay stubs or other records from that job to reconstruct the various items of income and withholding and file Form 4852 (.pdf file), the Substitute for Form W-2 Wage and Tax Statement, with your federal and state tax returns.

Of course, you should also verify that the Social Security and income numbers reported on 1099s you receive for interest, dividends or miscellaneous income are correct as well.

The following is a summary of the most important tax developments that have occurred in the past three months that may affect you, your family, your investments, and your livelihood. Please call us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

Payroll tax cut temporarily extended. The Temporary Payroll Tax Cut Continuation Act of 2011 was enacted late last year. It temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2% to 4.2% of wages paid through Feb. 29, 2012. Shortly after its passage, the IRS instructed employers to implement the new payroll tax rate as soon as possible in 2012 but not later than Jan. 31, 2012. The law also includes a “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (i.e., two-twelfths of the 2012 wage base of $110,100). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2% of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100). In addition, under the new law, the social security tax rate for a self-employed individual remains at 10.4%, for self-employment income of up to $18,350 (reduced by wages subject to the lower rate for 2012). Congress is going to try to negotiate a deal to extend the payroll tax cut for all of 2012. If a deal is struck to extend it for the full year, the recapture provision for employees would not apply.

Credit for hiring veterans extended and enhanced. A law enacted last November extended and enhanced a credit for hiring qualified veterans. Before the law was passed, the credit would have been available only if the qualified veteran were hired before Jan. 1, 2012, and only certain veterans were considered qualified veterans. The new law extends the credit for hiring qualified veterans, adds two new classes of veterans who are considered qualified veterans, increases the credit for hiring certain qualified veterans, “fast-tracks” the process for certifying that an individual is a qualified veteran, and provides tax-exempt employers with a credit against payroll tax for hiring qualified veterans. The credit amount varies depending on a number of factors. It can be as high as $9,600 for hiring a qualified disabled veteran. For an employer to qualify for the credit, the qualified veteran must begin work for the employer before Jan. 1, 2013 and other requirements must be met.

New rules for deducting or capitalizing tangible property costs. The IRS has issued new regulations for determining whether amounts paid to acquire, produce, or improve tangible property may be currently deducted as business expenses or must be capitalized. The regulations will affect virtually all taxpayers that acquire, produce, or improve tangible property. They are comprehensive, voluminous and virtually rewrite the rules in this area. For example, they provide detailed definitions of “materials and supplies” and “rotable and temporary spare parts” and prescribe new rules and elective de minimis and optional methods for handling their cost. They also have rules for differentiating between deductible repairs and capitalizable improvements, among many other items. The regulations generally are effective in tax years beginning after Dec. 31, 2011. However, to add to their complexity, some of the new rules in the regulations do not supersede prior IRS guidance.

New foreign asset reporting guidance and form. The IRS issued detailed guidance on the new law requiring individuals with an interest in a “specified foreign financial asset” during the tax year to attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than $50,000 (or a dollar amount higher than $50,000 as the IRS may prescribe). In addition, the IRS issued Form 8938 (Statement of Specified Foreign Financial Assets), which individual taxpayers will use starting in the 2012 tax filing season to report specified foreign financial assets for tax year 2011. The guidance consists of detailed temporary regulations. They define terms that apply for purposes of the reporting requirement; provide rules to determine if a specified individual must file a Form 8938 with their annual return; define what are specified foreign financial assets; detail what information needs to be reported; provide guidelines for valuing specified foreign financial assets; list exceptions to the reporting requirements; and describe the penalties that apply for failure to comply with the reporting requirements.

Standard mileage rates flat or lower. The optional mileage allowance for owned or leased autos (including vans, pickups or panel trucks) is 55.5¢ per each business mile traveled after 2011. For 2011, it was 55.5¢ for miles driven after June 30 and 51¢ per mile for miles driven before July 1. Further, the 2012 rate for using a car to get medical care or in connection with a move that qualifies for the moving expense deduction is 23¢ per mile. For 2011, it was 23.5¢ for miles driven after June 30 and 19¢ per mile for miles driven before July 1.

New Form 8949 replaces Form 1040, Schedule D-1. Many transactions that, in previous years, would have been reported on Form 1040, Schedule D or D-1 must be reported on Form 8949 if they occurred in 2011. Specifically, a taxpayer uses Form 8949 to report:
• The sale or exchange of a capital asset not reported on another form or schedule,
• Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit, and
• Nonbusiness bad debts.
The taxpayer uses Schedule D to figure the overall gain or loss from transactions reported on Form 8949 and to report capital gain distributions not reported directly on Form 1040, line 13, a capital loss carryover from 2010 to 2011, and certain specialized items.

Withholding requirement for government contractors repealed. A law enacted in 2005 was to have required the Federal government and the government of every state, political subdivision of a state, and instrumentality of a state or state subdivision (including multi-state agencies) making certain payments to a person providing any property or services (e.g., payments to a government contractor) to deduct and withhold 3% from that payment. Although the withholding requirement was originally set to apply to payments made after 2010, it was subsequently deferred to apply to payments made after 2012. A law enacted in November 2011 repealed the government contractor withholding requirement.

Sincerely,

Ricci & Company

Even though only a small number of new accounting standards will take effect this year, several major changes are close to being ready for comment. Standards under development include new approaches for recognizing revenue and accounting for leases. The Financial Accounting Standards Board is also modifying the other comprehensive income presentation, and is expected to defer a requirement regarding how to present reclassifications of OCI. For more information, visit the AICPA’s Financial Reporting Center.

{extended} ]]> tag:riccicpa.com,2011:index.php/site/index/1.55 2011-12-19T21:41:09Z 2011-12-20T22:01:10Z Front Desk frontdesk@riccicpa.com NM Changes to Resident Contractor/Business Preference Rules

Effective January 1, 2012 any business or contractor that wants to use the NM resident business preference when contracting with the state of New Mexico under RFP’s or competitive bid will need to obtain a new resident business certification from the State of New Mexico.  The following news flash explains the new rule change.

The New Mexico statutes regarding resident business preferences were amended by the First NM Special Legislative Session of 2011. The amended statutes set forth the criteria required for a business to qualify as a Resident Business or Resident Contractor.  It is important to note, a resident preference is applicable to contracts, which typically call for, but are not limited to, the furnishing of tangible personal property, i.e. goods, supplies, materials, equipment, printed materials and certain services.

Consistent with Sections 13-1-21 and 13-4-2 NMSA 1978, “resident preference” is applicable to COMPETITIVE BID procurements only. Additionally, any person, firm, corporation, or other legal entity must have all required licenses at the time the application for preference is submitted to the Taxation and Revenue Department for consideration.

Please note: All certifications are subject to revocation in accordance with applicable rules. A certification merely establishes that the Taxation and Revenue Department has determined based upon the information provided in the application, as of the date of issuance, that the holder was entitled to treatment as a resident business and/or contractor by state agencies and local public bodies.

An application for preference is required by the amended statute. The application includes an affidavit from a certified public accountant setting forth certain eligibility criteria for businesses or contractors, as required by Section 13-1-22 NMSA 1978.

The completed application along with payment of Thirty Five ($35) dollars must be submitted to the Taxation and Revenue Department prior to issuance of a resident business preference or a resident contractor preference certificate.  In addition to the application, the Taxation and Revenue Department may require submission of additional information to ensure eligibility.

A certificate is valid for three (3) years from the date of its issuance; provided that if there is a change of ownership of more than fifty percent, a resident business or resident contractor shall reapply.

All previous certified preferences held on December 31, 2011 will expire and the business/contractor that would like the resident preference in bidding on contracts with the State of NM will have to reapply.

Please call us for more information.  We would be glad to help you with the certification.

Withholding_Tax.pdf

2012_client_ye_letter_for_website.pdf

The Financial Accounting Standards Board has released a new Accounting Standards Update to improve employer disclosures for multiple-employer pension plans.

Accounting Standards Update No. 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan,” is intended to encourage employers to supply additional information about their financial obligations to multiemployer pension plans. Those plans typically are used to provide benefits to union employees, who may work for many employers during their working life, allowing them to accrue benefits in a single pension plan for their retirement. Up to now, employers have been required to disclose only their total contributions to all of the multiemployer plans in which they participated.

The new disclosures go much further. They include the amount of employer contributions made to each significant plan and to all plans in total; an indication of whether the employer’s contributions represent over 5 percent of the total contributions to the plan; an indication of which plans, if any, are subject to a funding improvement plan; and the expiration dates of any collective bargaining agreements and any minimum funding arrangements.

Another change involves the most recent certified funded status of the plan, as determined by the plan’s so-called “zone status,” a requirement of the Pension Protection Act of 2006. If the “zone status” is not available, an employer will be required to disclose whether the plan is less than 65 percent funded, between 65 percent and 80 percent funded, or at least 80 percent funded.

The update also requires a description of the nature and effect of any changes that affect the comparability for each period in which a statement of income is presented.

For nonpublic entities, the enhanced disclosures will be required for fiscal years ending after Dec. 15, 2012. Early application will be permitted.

Dear Client:

Year-end tax planning is especially challenging this year because of uncertainty over whether Congress will enact sweeping tax reform that could have a major impact in 2012 and beyond. And even if there’s no major tax legislation in the immediate future, Congress next year still will have to grapple with a host of thorny issues, such as whether to once again “patch” the alternative minimum tax (e.g., to avoid a drastic drop in post-2011 exemption amounts), and what to do about the post-2012 expiration of the Bush-era income tax cuts (including the current rate schedules, and low tax rates for long-term capital gains and qualified dividends), and the expiration of favorable estate and gift rules for estates of decedents dying, gifts made, or generation-skipping transfers made after Dec. 31, 2012.

Regardless of what Congress does late this year or early the next, there are solid tax savings to be realized by taking advantage of tax breaks that are on the books for 2011 but may be gone next year unless they are extended by Congress. These include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line deduction for qualified higher education expenses; and tax-free distributions by those age 70 1/2 or older from IRAs for charitable purposes. For businesses, tax breaks that are available through the end of this year but won’t be around next year unless Congress acts include: 100% bonus first year depreciation for most new machinery, equipment and software; an extraordinarily high $500,000 expensing limitation (and within that dollar limit, $250,000 of expensing for qualified real property); and the research tax credit.

We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you will likely benefit from many of them. We can narrow down the specific actions that you can take once we meet with you to tailor a particular plan. In the meantime, please review the following list and contact us at your earliest convenience so that we can advise you on which tax-saving moves to make:

Year-End Tax Planning Moves for Individuals

• Increase the amount you set aside for next year in your employer’s health flexible spending account (FSA) if you set aside too little for this year. Don’t forget that you can no longer set aside amounts to get tax-free reimbursements for over-the-counter drugs, such as aspirin and antacids.
• If you become eligible to make health savings account (HSA) contributions in December of this year, you can make a full year’s worth of deductible HSA contributions for 2011.
• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable for us to meet to discuss year-end trades you should consider making.
• Postpone income until 2012 and accelerate deductions into 2011 to lower your 2011 tax bill. This strategy may enable you to claim larger deductions, credits, and other tax breaks for 2011 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher education tax credits, the above-the-line deduction for higher-education expenses, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that in some cases, it may pay to actually accelerate income into 2011. For example, this may be the case where a person’s marginal tax rate is much lower this year than it will be next year.
• If you believe a Roth IRA is better than a traditional IRA, and want to remain in the market for the long term, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your adjusted gross income for 2011.
• If you converted assets in a traditional IRA to a Roth IRA earlier in the year, the assets in the Roth IRA account may have declined in value, and if you leave things as-is, you will wind up paying a higher tax than is necessary. You can back out of the transaction by recharacterizing the rollover or conversion, that is, by transferring the converted amount (plus earnings, or minus losses) from the Roth IRA back to a traditional IRA via a trustee-to-trustee transfer. You can later reconvert to a Roth IRA.
• It may be advantageous to try to arrange with your employer to defer a bonus that may be coming your way until 2012.
• Consider using a credit card to prepay expenses that can generate deductions for this year.
• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2011 if doing so won’t create an alternative minimum tax (AMT) problem.
• Take an eligible rollover distribution from a qualified retirement plan before the end of 2011 if you are facing a penalty for underpayment of estimated tax and the increased withholding option is unavailable or won’t sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2011. You can then timely roll over the gross amount of the distribution, as increased by the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2011, but the withheld tax will be applied pro rata over the full 2011 tax year to reduce previous underpayments of estimated tax.
• Estimate the effect of any year-end planning moves on the alternative minimum tax (AMT) for 2011, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes (or state sales tax if you elect this deduction option), miscellaneous itemized deductions, and personal exemption deductions. Other deductions, such as for medical expenses, are calculated in a more restrictive way for AMT purposes than for regular tax purposes. As a result, in some cases, deductions should not be accelerated.
• Accelerate big ticket purchases into 2011 in order to assure a deduction for sales taxes on the purchases if you will elect to claim a state and local general sales tax deduction instead of a state and local income tax deduction. Unless Congress acts, this election won’t be available after 2011.
• You may be able to save taxes this year and next by applying a bunching strategy to “miscellaneous” itemized deductions, medical expenses and other itemized deductions.
• If you are a homeowner, make energy saving improvements to the residence, such as putting in extra insulation or installing energy saving windows, or an energy efficient heater or air conditioner. You may qualify for a tax credit if the assets are installed in your home before 2012.
• Unless Congress extends it, the up-to-$4,000 above-the-line deduction for qualified higher education expenses will not be available after 2011. Thus, consider prepaying eligible expenses if doing so will increase your deduction for qualified higher education expenses. Generally, the deduction is allowed for qualified education expenses paid in 2011 in connection with enrollment at an institution of higher education during 2011 or for an academic period beginning in 2011 or in the first 3 months of 2012.
• You may want to pay contested taxes to be able to deduct them this year while continuing to contest them next year.
• You may want to settle an insurance or damage claim in order to maximize your casualty loss deduction this year.
• Purchase qualified small business stock (QSBS) before the end of this year. There is no tax on gain from the sale of such stock if it is (1) purchased after September 27, 2010 and before January 1, 2012, and (2) held for more than five years. In addition, such sales won’t cause AMT preference problems. To qualify for these breaks, the stock must be issued by a regular (C) corporation with total gross assets of $50 million or less, and a number of other technical requirements must be met. Our office can fill you in on the details.
• If you are age 70-1/2 or older, own IRAs and are thinking of making a charitable gift, consider arranging for the gift to be made directly by the IRA trustee. Such a transfer, if made before year-end, can achieve important tax savings.
• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70-+. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70-1/2 in 2011, you can delay the first required distribution to 2012, but if you do, you will have to take a double distribution in 2012—the amount required for 2011 plus the amount required for 2012. Think twice before delaying 2011 distributions to 2012—bunching income into 2012 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2012 if you will be in a substantially lower bracket that year, for example, because you plan to retire late this year.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. You can give $13,000 in 2011 to each of an unlimited number of individuals but you can’t carry over unused exclusions from one year to the next. The transfers also may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

Year-End Tax-Planning Moves for Businesses & Business Owners

• Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2011, the expensing limit is $500,000 and the investment ceiling limit is $2,000,000. And a limited amount of expensing may be claimed for qualified real property. However, unless Congress changes the rules, for tax years beginning in 2012, the dollar limit will drop to $139,000, the beginning-of-phaseout amount will drop to $560,000, and expensing won’t be available for qualified real property. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment. What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. This opens up significant year-end planning opportunities.
• Businesses also should consider making expenditures that qualify for 100% bonus first year depreciation if bought and placed in service this year. This 100% first-year writeoff generally won’t be available next year unless Congress acts to extend it. Thus, enterprises planning to purchase new depreciable property this year or the next should try to accelerate their buying plans, if doing so makes sound business sense.
• Nail down a work opportunity tax credit (WOTC) by hiring qualifying workers (such as certain veterans) before the end of 2011. Under current law, the WOTC won’t be available for workers hired after this year.
• Make qualified research expenses before the end of 2011 to claim a research credit, which won’t be available for post-2011 expenditures unless Congress extends the credit.
• If you are self-employed and haven’t done so yet, set up a self-employed retirement plan.
• Depending on your particular situation, you may also want to consider deferring a debt-cancellation event until 2012, and disposing of a passive activity to allow you to deduct suspended losses.
• If you own an interest in a partnership or S corporation you may need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the year-end steps that can be taken to save taxes. Again, by contacting us, we can tailor a particular plan that will work best for you.

Very truly yours,

•

Annamaria Montoya, CPA

Ricci & Company, LLC

July 28, 2011

Norwalk, CT, July 27, 2011— The Financial Accounting Standards Board (FASB) today approved a revised accounting standard intended to provide more information about an employer’s financial obligations to multiemployer pension plans. Multiemployer pension plans commonly are used by an employer to provide benefits to union employees who may work for many employers during their working life, thereby enabling them to accrue benefits in a single pension plan for their retirement.

“Historically, very limited information about these plans has been disclosed, even though they may represent significant potential obligations for many large, unionized industries such as trucking, supermarket chains, and construction firms,” said FASB Chairman Leslie F. Seidman.

“The enhanced disclosures will ensure that shareholders in companies that participate in these plans, workers who depend on them for their retirement benefits, as well as lenders and others, will have more information regarding the employers’ pension commitments and the financial health of the plans.”

Prior to today’s action by the FASB, employers were required to disclose only their total contributions to all multiemployer plans in which they participate.

Today’s decisions conclude comprehensive deliberations about the disclosures an employer should provide. The FASB issued initial proposals for revising disclosures for public comment in September 2010.

As part of its redeliberations, the FASB decided to delete a proposal to require employers to disclose their withdrawal liability to all plans in which they participate, or provide a “point-in-time” estimate of its obligations with respect to the underfunded status of individual plans.

Many of those who commented on the FASB’s proposal on multiemployer plans told the Board that the withdrawal liability would not be an appropriate proxy for an employer’s proportional share of the underfunded status of the plan. They suggested that the employer’s share of the underfunded status of the plan can only be determined through the collective bargaining process and they urged the FASB not to require a “point-in-time” estimate of an employer’s obligations with respect to underfunding.

A Grant Thornton survey found 54% of global businesses are not aware a major accounting change: the virtual elimination of off-balance sheet leases. The survey found that awareness of the change was greatest in the United States, followed by Mexico and Chile. Awareness was lowest in mainland China, followed by Denmark and Turkey.

The survey of 2,800 businesses globally was completed in early September 2011 and also found that, of those who were aware of the changes, 33% thought the change would increase cost and complexity, but only 15% thought it would increase transparency. Only 12% of business indicated they would alter the way they structure leases in the future.

With the IASB and FASB set to re-expose their latest proposals in 2012, it is critical that businesses and investors engage in the process to help ensure these goals are achieved. Grant Thornton stresses the need for businesses to assess the impact of the potential changes and for investors to consider whether the new model will make leasing activities more transparent and financial statements easier to use.

“There is no question that a global review of lease accounting is long overdue,” said John Hepp, a partner in Grant Thornton LLP’s Accounting Principles Group. “The lack of transparency with regard to leases has festered for years, but a major change to lease accounting is a once-in-a-generation event and the IASB and FASB need to be patient to get things right. Our survey findings should give the Boards pause for thought as businesses are seeing costs and complexity in the proposals, but are questioning whether there is any improvement in transparency. Some of the proposals we’ve seen could create a different set of incentives to structure leases to achieve desired accounting outcomes. Change for the sake of change is not the goal, and a rush to a new standard could actually make things worse.”

“Grant Thornton welcomes the Boards’ decision to consult publicly on their latest thinking. We desire a new standard that is practical for business — avoiding undue complexity and excessive estimation uncertainty. Investors need transparent, understandable information on leasing transactions, including the obligations and expenses of the lessee, and the receivables and revenue of the lessor. The Boards have a difficult task, but we encourage them to look closely at two issues: first, whether the leasing proposal is sufficiently aligned with the ongoing review of revenue recognition — these areas are interrelated; and second, whether they have adequately distinguished leases from other types of contracts (so-called executory contracts) which, under current standards, generally are not recognized in the financial statements at all.”

The SEC estimated the undiscounted value of future lease payments among U.S. listed companies alone at more than $1.25 trillion in a report issued in 2005 — an amount that is greater than the gross domestic product of many countries. Globally, the figure is far greater.

Although there are legitimate tax and legal advantages to lease financing, too many transactions have been structured for the purpose of arriving at a desired accounting treatment. The current financial statements do not present a complete and transparent financial picture. Clearly there is a need for better disclosure about leasing arrangements and similar contractual commitments.

The Social Security Administration (SSA) announced on Wednesday, October 19, 2011, that the 2012 social security wage base will be $110,100, up from $106,800 where it had been set for the past three years. As in prior years, there is no limit to the wages subject to the Medicare tax; therefore all covered wages are still subject to the 1.45% tax.

The FICA tax rate, which is the combined social security tax rate of 6.2% and the Medicare tax rate of 1.45%, will be 7.65% for 2012. The maximum social security tax employees and employers will each pay in 2012 is $6,826.20. Note that the 2011 FICA tax rate was 4.2% for employees and 6.2% for employers under the Tax Relief Act of 2010, and that the rate is scheduled to be 6.2% for both employees and employers in 2012. However, bills currently being considered in Congress may change this.

The social security wage base for self-employed individuals in 2012 will also be $110,100. There is no limit on covered self-employment income that will be subject to the Medicare tax. The self-employment tax rate will be 15.3% (combined social security tax rate of 12.4% and Medicare tax rate of 2.9%). In 2012, the maximum social security tax for a self-employed individual will be $13,652.40. Again, note that the 2012 FICA tax rate for both employees and employers is scheduled to be 6.2%, but that Congress is considering proposals that would change this.

FICA coverage threshold for domestic, election workers

The threshold for coverage under social security and Medicare for domestic employees will be $1,800 in 2012, up from $1,700 in 2011; the coverage threshold for election workers will be $1,500 in 2012, unchanged from 2011.

Cuda, (DC PA 10/04/2011) 108 AFTR 2d 2011-5354

A district court has determined on summary judgment that the former operations director and chief of a non-profit corporation was liable for the trust fund recovery penalty under Code Sec. 6672. The court rejected the taxpayer’s argument that the chief financial officer (CFO) should have collected and paid the taxes, finding that Code Sec. 6672 imposes liability on all responsible persons, not just the most responsible person.

Background. Under Code Sec. 6672(a), if an employer fails to properly pay over its payroll taxes, the IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a “responsible person,” i.e., a person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility.

Facts. Anthony Cuda (Cuda) was the operations director and chief of Seneca Area Emergency Services, Inc. ("SAES"), a non-profit corporation that provides ambulance and emergency medical services. Cuda was responsible for overseeing the day-to-day operations of SAES, and he had the authority to sign checks on SAES’s behalf and provide input on how to prioritize SAES’s bill payments.

In 2003, office manager Gary Pennington began embezzling money from SAES and stopped paying the company’s bills, including its federal payroll taxes. Cuda learned in May of 2003 that Pennington had not paid SAES’s payroll taxes for over a year, and sometime in 2004 he met with IRS to discuss the outstanding taxes. Pennington was discharged from his position in 2004, and his responsibilities were delegated to Brian Dankis.

In 2005, SAES could only pay some of its bills, and cuts were made to keep it operating. Dankis, the CFO, was responsible for all of the company’s expenses, including tax payments. Withheld payroll taxes for the period ending Mar. 31, 2005, weren’t paid over to IRS, and Dankis sent Cuda an email notifying him of a “tax situation.” The payroll taxes for the period ending June 30, 2005, similarly weren’t paid, and Cuda was expressly made aware of the outstanding taxes and IRS’s recent demand for payments.

Dankis told Cuda that he would handle the taxes, then falsely informed SAES’s accountant that a tax payment had been made. In August of 2005, Dankis was notified that he and Cuda might have a Code Sec. 6672 penalty imposed against them, but didn’t notify Cuda of this warning. Payroll taxes went unpaid for the next tax period ending Sept. 30, 2005.

Dankius resigned later in 2005, and SAES filed for bankruptcy protection in December. (Its Chapter 11 plan was later confirmed in December of 2006.) SAES’s payroll taxes again went unpaid for the tax period ending Dec. 31, 2005. Cuda testified that while he knew of SAES’s ongoing tax problems, he wasn’t aware that no payments were being made towards its outstanding payroll taxes until 2006. Cuda left SAES in August of 2006.

IRS assessed a Code Sec. 6672 penalty against Cuda on Nov. 16, 2006, for $73,680.69. On May 10, 2010, IRS filed a complaint to reduce the assessment, plus accrued statutory additions, to judgment. Cuda asserted in his answer that Dankis, and not himself, was responsible for collecting, accounting for, and paying the taxes.

Court upholds penalty. The district court agreed with IRS that Cuda was liable for the Code Sec. 6672 penalty. Cuda admitted that he was a “responsible person,” and the court rejected his attempts to show that he didn’t act willfully.

Cuda first argued that he didn’t have knowledge that the payroll taxes weren’t being paid in 2005. However, this claim was belied by Cuda’s own admission that he was made aware of IRS’s demand for payments as early as July of 2005, and continued to sign checks paying off other creditors after that time. (Other facts also indicated that Cuda acted recklessly, in that he ignored earlier indications that SAES wasn’t paying the withheld taxes.) Further, the court noted that since Cuda was a responsible person during the period when the taxes should have been paid, even if he didn’t have knowledge of the tax delinquency until later, he nonetheless had a duty but failed to pay over all after-acquired funds to IRS.

The court also rejected Cuda’s attempts to insulate himself from liability based on Dankis’s assurances regarding the taxes and SAES’s bankruptcy. Regardless of whether Dankis had a duty to pay SAES’s taxes, such wasn’t relevant to Cuda’s liability since Code Sec. 6672 applies to all responsible persons. Additionally, Cuda’s claim that SAES’s bankruptcy should mitigate his liability was rejected as unsupported and meritless.

In the end, the court found that Cuda, despite having the authority to authorize payment of the delinquent taxes, instead relied on Dankis’s assurances that he would handle them. Since he was aware of the delinquencies, but used the company’s funds that it received to pay other non-tax obligations, he was clearly liable for the Code Sec. 6672 penalty.

Form 8939, Allocation of Increase in Basis for property Acquired From a Decedent and its instructions

Under Sec. 301(c) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (2010 Tax Relief Act, P.L. 111-312), estates of decedents who died in 2010 can choose zero estate tax, but at the price of beneficiaries being limited to the decedents’ basis plus certain increases under Code Sec. 1022. In early August, IRS issued detailed guidance on how this election is made. The guidance, in the form of a notice, revealed that the election is made by filing a Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, which IRS did not release at that time. IRS has now released this long-awaited Form 8939 and its instructions. In general, as discussed in more detail below, Form 8939 is due by Jan. 17, 2012.

Background. Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the estate tax was to have been repealed for individuals dying in 2010, and the rules allowing a step-up in basis for property acquired from a decedent were to have been replaced with a modified carryover basis regime. The 2010 Tax Relief Act restored the estate tax for individuals dying in 2010 with a $5 million per-person exemption and a maximum rate of 35%. It also repealed the modified carryover basis rules for property acquired from a decedent who died in 2010. However, Sec. 301(c) of the 2010 Tax Relief Act allows estates of individuals dying in 2010 to elect zero estate tax and the modified carryover basis rules that would have applied before they were repealed.

Even though an executor may elect out of the estate tax, the generation-skipping transfer (GST) tax provisions continue to apply. Section 302(c) of the 2010 Tax Relief Act, however, provides that the applicable tax rate for each GST occurring during 2010 is zero.

In Notice 2011-66, 2011-35 IRB 179, IRS provided detailed guidance on how to make the election (see Federal Taxes Weekly Alert 08/11/2011). At that time, it said that the Form 8939 would have to be filed on or before Nov. 15, 2011. Subsequently, it extended the due date to Jan. 17, 2012 (see Federal Taxes Weekly Alert 09/15/2011).

Code Sec. 1022 applies to the estate of a decedent who died in 2010 only if the executor makes the Section 1022 Election. Code Sec. 1022(a)(1) generally provides that property acquired from the decedent (within the meaning of Code Sec. 1022(e)) is treated as having been transferred by gift. If the decedent’s basis is less than or equal to the property’s fair market value (FMV) determined as of the decedent’s date of death, the recipient’s basis is the decedent’s basis. (Code Sec. 1022(a)(2)(A)) If the decedent’s basis is greater than that FMV, the recipient’s basis is limited to that FMV. (Code Sec. 1022(a)(2)(B))

Code Sec. 1022(b) and Code Sec. 1022(c) allow the executor to allocate additional basis (Basis Increase) to increase the basis of certain assets that both are acquired from the decedent and are owned by the decedent at death (within the meaning of Code Sec. 1022(d)). If the property is acquired from and owned by the decedent, and if the decedent’s basis in the property is less than the property’s FMV on the decedent’s date of death, then the executor generally may allocate Basis Increase to the property, provided that the property’s total basis may not exceed the property’s FMV on the date of death.

Basis Increase consists of the sum of the General Basis Increase (Aggregate Basis Increase and Carryovers/Unrealized Losses Increase) under Code Sec. 1022(b) and the Spousal Property Basis Increase under Code Sec. 1022(c).

The General Basis Increase is the sum of the Aggregate Basis Increase and the Carryovers/Unrealized Losses Increase under Code Sec. 1022(b). The Aggregate Basis Increase is $1,300,000 under Code Sec. 1022(b)(2)(B).

Simultaneously with the issuance of Notice 2011-66, IRS issued Rev Proc 2011-41, 2011-35 IRB 188, providing safe harbor basis rules for purposes of the election. For discussion of these safe harbor rules and additional background on Code Sec. 1022 (see Federal Taxes Weekly Alert 08/11/2011).

Purpose of form. As revealed in the instructions, Form 8939 is an information return used by the executor of a decedent who died in 2010:

(1) to make the Section 1022 Election;

(2) to report information about property acquired from a decedent; and

(3) to allocate Basis Increase to certain property acquired from a decedent.

Section 1022 election. The instructions explain the meaning of the Section 1022 Election and make it clear that if the election is made, the estate will not be subject to federal estate tax and won’t have to file Form 706. As a result, Code Sec. 1022 will apply to determine the recipient’s basis in most (but not all) property acquired from a decedent.

Making the election. The election is made by filing a timely Form 8939. Generally, once the executor has made the election, it is irrevocable. However, the executor can revoke a prior Section 1022 election on a subsequent Form 8939 filed before the due date.

Required disclosure. Generally, if the executor makes the election, the executor must report all the information required by Form 8939 and its instructions about all property acquired from the decedent other than cash. The executor filing Form 8939 must furnish to each person whose name is required to be set forth in Form 8939 (other than the executor) a written statement showing the information required by Code Sec. 6018(e) with respect to property acquired from the decedent to the person required to receive the statement. Schedule A of Form 8939 should be used to provide this information.

Makeup of the form. Part 1 is used to enter information about the decedent and the executor. Part 2 contains entries for the basis allocation computation. As noted above, Schedule A is used to provide information to property recipients. A separate Schedule A should be completed for each recipient, including the estate.

GST exemption. Schedule R of Form 8939 is used to allocate the GST exemption. Schedule R-1 is used to inform the trustee of certain trusts of the amount of GST exemption allocated to such trusts. Because the GST tax rate for 2010 is zero, these schedules are not used to compute the GST tax.

Due date. Form 8939 must be filed by Jan. 17, 2012. There are only a few limited circumstances where IRS will accept an amended form 8939. One circumstance is to allocate Spousal Property Basis Increase but only if certain requirements are met, as detailed in the instructions. See Notice 2011-66 for other instances in which an amended return may be allowed.

Form 8939 can be viewed on the IRS website at http://www.irs.gov/pub/irs-pdf/f8939.pdf. The instructions can be viewed at http://www.irs.gov/pub/irs-pdf/i8939.pdf.

The Nov. 1, 2011 deadline for persons who have signature authority over, but no financial interest in, foreign financial accounts to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR) is quickly approaching. This deadline was extended by IRS in Notice 2011-54, 2011-29 IRB 53, in order to give those individuals extra time to gather the necessary information to file complete and accurate FBARs for 2009 and earlier calendar years.

Background. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship each calendar year by filing TD F 90-22.1 with the Department of the Treasury on or before June 30th of the succeeding year.

In Notice 2009-62, 2009-35 IRB 260, IRS extended the deadline to June 30, 2010, to file a FBAR for years 2008 and earlier, for (i) persons with no financial interest in a foreign financial account but with signature or other authority over that account; and (ii) persons with a financial interest in or signature authority over a foreign financial account in which the assets are held in a commingled fund (see Federal Taxes Weekly Alert 08/13/2009).

In Notice 2010-23, 2010-11 IRB 441, which modified and supplemented Notice 2009-62, IRS deferred the deadline for persons with signature authority over, but no financial interest in, a foreign financial account for which a FBAR would otherwise have been due on June 30, 2010, until June 30, 2011. This deadline applied to FBARs reporting foreign financial accounts for the 2010 and prior calendar years (see Federal Taxes Weekly Alert 03/04/2010). Both of these extensions were provided to give Treasury more the time to develop comprehensive FBAR guidance.

On Feb. 24, 2011, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued a final rule to amend the Bank Secrecy Act (BSA) regs regarding FBAR reporting requirements (see Federal Taxes Weekly Alert 03/03/2011). The rule was made effective as of Mar. 28, 2011 and applies to 2010 reports required to be filed by June 30, 2011, and those for subsequent years. It largely adopted the proposed regs issued on Feb. 26, 2010, which provided additional guidance and clarification regarding who must file FBARs (see Federal Taxes Weekly Alert 03/04/2010).

Deadline further deferred. In response to comments that individuals with signature authority over, but no financial interest in, foreign financial accounts were having difficulty gathering the necessary information to file complete and accurate FBARs for 2009 and earlier calendar years by the June 30, 2011 deadline, IRS pushed the deadline back to Nov. 1, 2011 in Notice 2011-54, 2011-29 IRB 53 (see Federal Taxes Weekly Alert 06/23/2011). However, the June 30, 2011, deadline for reporting either signature authority over, or financial interest in, foreign financial accounts for the 2010 year remained unchanged. IRS also stressed that Notice 2011-54, had no effect on the requirements to provide information or file FBARs in connection with IRS’s 2009 or 2011 Offshore Voluntary Disclosure Programs.

Extended deadline quickly approaching. Individuals with signature authority over foreign financial accounts are reminded of the looming Nov. 1, 2011 deadline to file FBARs for 2009 and earlier calendar years.

Although the deadline has been extended a number of times in the past, there has been no indication that it will be further extended.

The IRS has issued a draft version of 2011 Form 940, Schedule A, Multi-State Employer and Credit Reduction Information. Under Title XII of the Social Security Act, states with financial difficulties can borrow funds from the federal government to pay unemployment benefits. If a state defaults on its repayment of the loan, the amount of state unemployment tax credits that employers in the state may claim on Form 940 is reduced (i.e., the state is a “credit reduction” state). Employers in credit reduction states pay federal unemployment tax (FUTA) at a 0.3% rate higher than other employers, beginning with the second consecutive January 1 in which the loan isn’t repaid. This calculation is made on Form 940, Schedule A. As of Sept. 29, 2011, 27 states and the Virgin Islands have borrowed money from the federal government to help keep their unemployment insurance (UI) trust funds solvent. Many of these states have had outstanding loans with the federal government for two consecutive years. If these loans are not repaid by Nov. 10, 2011, the FUTA tax rate for employers in these states will increase by 0.3%.

Form changes. The format in the draft version of 2011 Schedule A is significantly different than the format on the 2010 Schedule A. The 2010 Schedule A only lists the three states that were subject to credit reduction. The 2011 draft version of Schedule A lists all 50 states, plus the District of Columbia, Puerto Rico, and the Virgin Islands. Employers will need to place an “X” in the box of every state in which they were required to pay state unemployment tax in 2011 even if the state is not a credit reduction state. The IRS indicated on the October payroll industry conference call that it decided to list all of the states on the draft version of 2011 Schedule A, because so many more states could possibly be subject to credit reduction than in previous years.

Employers may not file the draft version of Schedule A. Employers in credit reduction states do not have to make a federal unemployment tax deposit for the 0.3% reduction in their FUTA rate until the fourth quarter deposit due on Jan. 31, 2012. The IRS will finalize 2011 Schedule A sometime after Nov. 10, 2011.

The draft version of 2011 Form 940, Schedule A Multi-State Employer and Credit Reduction Information can be viewed athttp://www.irs.gov/pub/irs-dft/f940sa--dft.pdf.