New Utah Mandate to Electronically File Tax Forms Reporting Income Tax Withholding, and Delay in Issuing Individual Tax Refunds until March 1st

The 2015 Utah Legislature passed Senate Bill 250 which is effective January 1, 2016.  The new law requires an employer to electronically file W-2s and Forms 1099 having state income tax withholding by January 31^st.  There does not appear to be an exception for small employers, and so this requirement impacts all businesses reporting Utah income tax withholdings for 2015 and later.  Information can be found here on the Utah State Tax Commission’s website.  The Tax Commission will provide more information as it works to implement the new law.

Failure to electronically file this information on time will result in significant penalties.  The penalties are complex and increase depending upon how late the information is provided.  If the information is provided more than 14 days after the due date but not later than 30 days after the due date, the penalty is $30 per form not to exceed $75,000.  If the information is filed more than 30 days late but by June 1^st the penalty is $60 per form not to exceed $200,000.  The penalty for filing after June 1, or for failing to file at all, is $100 per form not to exceed $500,000.

The new law also prohibits the Tax Commission from issuing individual income tax refunds prior to March 1^st unless the employer and the employee have both filed forms and returns as required.  This delay will allow the Tax Commission time to match the withholding reported with the tax return claiming the credit.

The purpose of this new law is to cut down on fraudulent tax refunds.  The Tax Commission discovered its computers were compromised on February 1, 2015 and had to suspend issuing 2014 tax refunds for a period of time, and this new law is clearly a response to that event.

Estate Tax Closing Letters No Longer to be Automatically Provided by IRS

In line with IRS Commissioner John A. Koskinen's infamous retort of "doing less with less" in response to Congress' slashing of his budget, the IRS announced last week that it will no longer issue estate tax closing letters for estate tax returns filed on or after June 1, 2015.  Providing such letters automatically is an important service to taxpayers.  Now, more paperwork is necessary in order to obtain the closing letter.  The IRS says that it will issue the letters upon request, but that taxpayers must wait at least four months after filing the estate tax return before making the request.  This places an unnecessary burden on the public and increases government inefficiency.

An estate tax closing letter provides the assurance the decedent's personal representative (PR) needs to close the estate and distribute the estate assets to the beneficiaries.  Distributing assets before such letter is received increases the PR's risk of personal financial liability for any unexpected additional tax.  So the IRS' new policy will only serve to delay the distribution of assets to estate beneficiaries or else increase the PR's personal liability if distributed without the letter.

Update

The IRS has created another option to receive confirmation that the estate tax return was accepted as filed or that any audit has been completed.  The IRS has added Code 421 to the account transcript of the estate to indicate acceptance of the estate tax return.  If that code does not appear on the transcript, the tax return is still under review.  The IRS advises the PR to wait six months from the date of filing the estate tax return before requesting a copy of the transcript.  For more information on this procedure, click here.

June 30th Deadline for Employers to Stop Paying for Employees’ Non-Group Health Insurance Policies

At the beginning of 2015, many small employers became aware that the Affordable Care Act (ACA) required changes to the long-standing practice of providing financial assistance to employees purchasing personal health insurance policies.  These changes apply to employers not subject to the mandate to offer health insurance because they have less than 50 employees.  That is the confusing part.  The employers aren’t subject to the mandate but they still must comply with other provisions of the ACA, including how financial assistance with premium costs are to be provided to employees.

Small employers affected by the change did not offer group policies, but rather reimbursed or directly paid part or all of the premiums of policies selected by their employees.  The ACA rendered such practice impermissible after 2013.  The IRS terms these arrangements as “employer payment plans” which, while still permitted for income tax purposes, are not permitted by the ACA.  At the beginning of 2015, such employers realized that they were exposed to a year’s worth of devastating penalties of $100 per day per employee or $36,500 per employee!

On February 18, 2015, the IRS issued Notice 2015-17 which granted a transitional period of time through June 30, 2015 to permit impacted employers to cease such arrangements and avoid penalty.  If the practice continues after June 30^th, absent an extension of time by the IRS, the $100 per day per employee penalty resumes.

Impacted employers can take one of several steps to provide premium assistance to employees and avoid the penalty, but they must cease reimbursing and paying premiums for individual policies by June 30^th.

1.     Offer ACA-compliant group health insurance and pay a portion or all of the premiums.

2.     Enroll in the Small Business Health Options Program (SHOP) Marketplace (known as Avenue H in Utah) which allows employees to pick their own policies offered through the SHOP.

3.     Give employees a raise in compensation with no conditions that the money actually be spent on health insurance premiums.  This, of course, is a very tax-inefficient method because unlike methods 1 and 2, such compensation is taxable.

Notice 2015-17 also indicates that the ACA changes do not apply if there are fewer than two participants who are current employees on the first day of the plan year.

Application to > 2% S Corporation Shareholder Employees

Notice 2015-17 extends relief from the $100 per day penalty for reimbursing or paying for individual policy premiums of S corporation employees (who own more that 2% of the stock) through December 31, 2015.  The Notice indicates that further IRS guidance will be issued.  There are conflicting tax rules with respect to S corporation shareholder employees’ health insurance premiums and the IRS evidently needs more time to resolve the conflict.

Update on Various 2015 Affordable Care Act Tax Matters

U.S. Supreme Court Ruling Expected at the End of this Month

In March 2015, the Court heard the King v. Burwell case.  The plaintiffs argued that the IRS unlawfully extended the premium support tax credit to residents of states having a Federal individual health insurance exchange instead of a state-run exchange.  The plaintiffs argued that the language of the law limits the credit to only state-run exchanges.  Only 16 states run their own exchanges and six state run exchanges in partnership with the Federal government.  The credit pays for a substantial portion of the premium of health insurance policies purchased by low to middle income taxpayers from the exchange.  If the Court rules against the government, health insurance would once again become unaffordable to millions of taxpayers who would also be penalized for not having health insurance!  Furthermore, employers may escape the penalty for not offering affordable, minimum essential health insurance in those states having Federal exchanges.  Clearly, an adverse ruling to the government will have far reaching consequences!

Update:  On June 25, 2015, in a 6-3 vote, the U.S. Supreme Court upheld the availability of the premium credit for health insurance policies purchased on a Federal exchange.

Employer Reporting Requirements

Employers having 50 or more full-time equivalent employees (FTEs) during 2015 must report monthly health insurance information for 2015 for each full-time employee (those working on average 30 hours a week) on Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) and Form 1094-C (used to transmit Form 1095-C and also to claim transitional rules relief).  Form 1095-C must be provided to each full-time employee by February 1, 2016 and the forms must be filed with the IRS by February 29, 2016.  Applicable employers need to begin gearing up to meet these filing requirements.

Inflation Adjustments for 2015

The employer mandate penalties and the premium support credit eligibility figures are adjusted for inflation for 2015.

·       The penalty for not offering health insurance increases to $2,080 from $2,000.

·       The penalty for offering unaffordable health insurance increases to $3,120 from $3,000.

·       A premium credit for policies purchased on the exchange is available for those with household income of 100% to 400% of the federal poverty line:

o   Household income for a single person:  from $11,670 to $46,680 in 2015, up from $11,490 to $45,960 in 2014.

o   Household income for a family of four:  from $23,850 to $95,400 in 2015, up from $23,550 to $94,200 in 2014.

2015 Applicable Large Employer Mandate Transitional Relief

Employers with 50 to 99 FTEs in 2014.

·       There is no penalty for not offering health insurance to full-time employees if certain IRS mandated requirements are met:

o   The employer does not reduce the workforce count or reduce hours worked during the period of February 9, 2014 through December 31, 2014 to get under 100 FTEs, and

o   The employer does not reduce health insurance benefits during the period of February 9, 2014 through December 31, 2014.

·       These employers will be subject to the mandate beginning in 2016.

Employers with 100 or more FTEs in 2014.

·       The standard exemption of 30 used to calculate the penalty for not offering health insurance where an employee obtains a premium credit is increased to 80 for 2015 only.  For example, if the employer did not offer health insurance and there were 120 full-time employees, the penalty would be $83,360 [$2,084 X (120-80)] instead of $187,560 [$2,084 X (120-30)].

·       There is no penalty for not offering health insurance if at least 70% of its full-time employees are offered health insurance.  The percentage increases to 95% after 2015.

o   Even if this percentage is met, if the health insurance offered is not deemed “affordable” to the employee, or if the policy is not at least a “bronze-level” policy, the employer is subject to a $3,126 penalty for each full-time employee receiving a premium support credit.  This penalty cannot exceed what the penalty would be if no health insurance were offered.  A policy is deemed affordable if the employee’s portion of the premium does not exceed 9.56% of wages.

Individual Mandate Penalty

The individual mandate penalty increases.

·       The flat dollar penalty increases from $95 per adult (with a $285 household maximum) to $325 per adult (with a $975 household maximum).  For children under age 18, the penalty is 50% of the per-adult amount.

·       The penalty calculated as percentage of household income in excess of the tax return filing threshold increases from 1% to 2%.  This penalty applies if it is greater than the flat dollar penalty.

·       However, the maximum individual mandate penalty is limited to the national average bronze-level premium.  This average increases to $2,484 in 2015 from $2,448 in 2014 for an individual policy, and to $12,420 from $12,240 for a family policy covering five or more members.

2014 Foreign Bank Account Report (FinCEN Form 114) must be Electronically Filed by June 30, 2015

U.S. persons having interests in or signature authority over a foreign financial account must file an annual report with the U.S. government if the aggregate value of all foreign accounts exceeds US$10,000 on any day during the calendar year.  A foreign exchange rate is used for conversion purposes.  Conversion rates as of December 31^st should be used and they are published here.

Last year’s FBAR was for the first time that new FinCEN Form 114 (which must be electronically filed) replaced old paper-filed Form TD F 90-22.1.  FinCEN stands for Financial Crimes and Enforcement Network.  The foreign bank and financial accounts report, or FBAR, must be filed by June 30, 2015 through the BSA E-Filing System here.  BSA stands for Bank Secrecy Act.  You may file your FBAR by using the services of a third-party upon granting the proper permission using FinCEN Form 114a.

No extension of time is permitted, so plan ahead!  Significant penalties exist for late or non-filing.  Such penalties can range from $500 to the greater of $100,000 or 50% of the account balance.  In addition, criminal penalties can range from a fine of up to $500,000 plus 10 years in jail in some situations.  Clearly the US government is serious about forcing FBAR compliance.  You should consult legal counsel if you have serious concerns about any delinquency.

Owners of entities that are required to file an FBAR must also file an FBAR at the owner level if they have more than a 50% direct or indirect ownership interest.  So-called “disregarded entities” for income tax purposes are not disregarded for this purpose and must file the report.  Records of accounts required to be reported on the FBAR should be kept for five years from the due date of the report.

Be sure to also check the appropriate boxes at the bottom of Schedule B, Form 1040, and to include any account earnings in your U.S. income tax return.

For more information, consult the IRS’ online FBAR Reference Guide here.

Lessons from Tax Season

"Tax season" ended last week for 2014 income tax returns.  This season seemed particularly painful given the delay in receiving Forms 1099 from financial institutions, new health insurance reporting, and IRS tangible property regulations that were modified in the middle of February!  These factors served to make the time frame for completing tax returns even more compressed than in the past.  Here are a few observations that can make the next tax season smoother for you and for us.

Certain investments can greatly complicate your income tax return.  Although income taxes should not be the primary factor in choosing suitable investments, you should be aware of the tax reporting implications of those choices, which can add to the costs of preparation and delay the timing of when the tax return can be completed.

For example, with the sharp decline in interest rates over the past several years, purchasing bonds, notes, and certificates of deposit on the market rather than at original issue will result in the payment of premiums and accrued interest.  The financial institution's Form 1099 will report to the IRS the amount interest income earned according to the stated coupon rate, which greatly overstates the actual economic interest earned.  Tax elections and complicated calculations for premium amortizations and accrued interest adjustments are necessary to avoid overpaying tax.

Another example relates to investments that are bought and sold by investment advisors as if the investment were shares of stock, but the investment is actually a tax partnership.  As an owner of a partnership you will receive a Schedule K-1 rather than a Form 1099 for the investment income or loss.  Tax partnerships are complicated!  Many times the K-1s are not even provided until September, requiring a six-month extension of your tax return.  Some of the partnerships invest in foreign entities that require expanded disclosures in your tax return.  Others hold property in a variety of other states that may require you to file tax returns in those states.  All of these consequences bring delays and added costs.

Asset location can simplify the complexities of these investments.  Placing complicated fixed income or tax partnership investments in individual retirement accounts (IRAs) avoids the associated tax reporting requirements.  Your investment advisor should be able to view your IRA and regular investment accounts on an overall portfolio basis.  Each type of account does not need to be perfectly allocated among asset classes if on an overall basis proper asset allocation is achieved.  Those with small IRAs may have sizeable company 401(k) accounts that can be separately managed under the terms of the company plan.

Get an early start with the information that is available.  Much of your tax information should be available at the first of February.  Organizing that information will help to identify what is missing.  Preparing that portion of your tax return and adding the information that arrives later will help avoid last minute surprises, allow better service and reduce the likelihood of mistakes.

There isn’t a lot we can directly do to cause the government to simplify the burden of tax compliance, but we can each take some steps in our personal circumstances to deal with the reality of what we face.  We appreciate each and every one of our clients and look forward to continuing to serve you in the future.

Problems Arise in Implementing Obamacare on 2014 Income Tax Returns

The Affordable Care Act is an extremely large and complicated law.  Not only are there technical legal issues that are still being resolved, but there are also many compliance problems that have arisen in connection with preparing 2014 individual income tax returns.  The year 2014 is the first time taxpayers must have health insurance for each month of the year or face a tax penalty.  The year 2014 is also the first time that health insurance exchanges operated and provided premium tax credits to offset the cost of health insurance for lower to moderate income taxpayers.  Just like when serious problems arose with the government’s website when it first started, several problems affecting 2014 income tax returns have arisen.

Incorrect Information Reported by Health Insurance Exchange Marketplaces

On February 20^th the government announced that it sent incorrect Forms 1095-A to 800,000 people who enrolled in the Federal exchange.  The form incorrectly used 2015 premium information instead of 2014 information.  Corrected forms will be sent in March.  The form is used to compute the proper amount of the premium support tax credit.  If too much credit is claimed it must be repaid.  If too little credit was received it can be claimed on the tax return.  The government estimates that some people who have already filed their 2014 income tax returns using the erroneous information will have received too much credit while others will have received too little, expecting to roughly break even.  Therefore the government said that amended tax returns are not required, in an attempt to avoid additional compliance costs to the affected taxpayers, although taxpayers may file amended returns if they wish.

Payback of Excess Premium Support Credits

According to an announcement by H&R Block, 52% of their customers are required to repay part of their tax credit subsidies used to purchase health insurance on the exchange.  The average payback is $530 which is treated as an additional tax on the income tax return.  This has been a surprise to many of their customers who were counting on higher refunds.

Estimated Tax Payment and Late Payment Penalty Relief

The IRS issued Notice 2015-9 where it announced penalty relief for taxpayers who must repay excess premium support credits and who have a balance owing on their tax returns.  Many taxpayers are now realizing that they must repay excess credits if they understated their estimate of 2014 income when they applied for premium tax credits.  The government is heading off complaints by granting relief from late payment and estimated tax payment penalties if the taxpayer can’t pay the tax due by April 15, 2015.  In order to qualify for the relief, taxpayers must file their tax return on time showing the amount of the excess credit, and they must not otherwise be delinquent with their prior tax filings and payment obligations.  The Notice indicates that IRS computers will bill the late payment penalty and that the taxpayer must respond to the billing notice with the phrase, “I am eligible for the relief granted under Notice 2015-9 because I received excess advance payment of the premium tax credit.”  To obtain relief from the estimated tax payment penalty, which is computed as part of the 2014 tax return, taxpayers should check box A in Part II of Form 2210, complete page 1, and include a statement with the form:  “Received excess advance payment of the premium tax credit.”  Interest will still be charged on amounts paid after April 15^th.