Money Matters: Tips for employers using payroll service providers

James W. Rahmlow, The Daily Record Newswire

On its website, the IRS recently posted tips for employers who use third-party service bureaus to handle their payroll and payroll tax reporting duties. It appears that the posting is a word to the wise, indicating that while the vast majority of providers are reputable, the IRS has seen instances of third-party payroll providers being prosecuted for stealing funds that were intended by the employer to pay the tax liabilities.
The first suggestion has the IRS encouraging qualifying employers to enroll in the Electronic Federal Tax Payment System (EFTPS). This system is essentially a monitoring system that allows employers to access their EFTPS payment history to ensure that the third-party payment provider is doing their job from a deposit standpoint. Missed payments can be identified and quickly dealt with.
Other tips suggested by the IRS include:

• Not substituting the third-party payment provider address for the employer’s address,

• Other than the most basic notices, not sending notices received from the IRS to the third-party provider for resolution, but directly contacting the IRS,

• Knowing the special rules that apply to reporting agents, and

• Being aware of the actual due dates for employer payments and monitoring such payments for accuracy and timeliness.

Proposed IRS budget cut
For fiscal 2014, the House Appropriations Subcommittee on Financial Services and General Government has approved a Treasury/IRS appropriations bill establishing a $9 billion dollar budget for the IRS. The proposed budget represents an over 20 percent decrease in funding for the IRS.

The bill would withhold funds for IRS enforcement activities and conferences, until the IRS has implemented the recommendations of the Treasury Inspector General for Tax Administration, preventing future unacceptable oversight of organizations seeking tax-exempt status. Subcommittee approval paves the way for a vote by the full House Appropriations Committee.

IRS to provide post DOMA guidance

Following the U.S. Supreme Court’s Decision to strike down Section 3 of the Defense of Marriage Act (DOMA), the IRS got into gear, indicating on its website that it will be revising its guidance to reflect the actions of the Supreme Court. An important consideration for the IRS is the determination of governing location. The question to be answered is whether the IRS will look to where the same-sex couples were married (actual place of celebration of the marriage) or where the same-sex couple resides for status determination for federal income tax purposes.

Small, controlled group victory

In a Chief Counsel Information Letter, the IRS has indicated in a narrow clarification that an S Corporation is not a component member of a Code Sec. 1563 (controlled group rules) for purposes of the Code Sec. 179 election. This can be a significant tax planning opportunity for S Corporation members of controlled groups, especially those in capital intensive industries. The Code Section 179 provision allows a taxpayer to treat the cost of Code Sec. 179 property as a currently deductible expense, rather than capitalizing the amount and depreciating it over a future number of accounting periods.

Largest, most profitable corporations effective tax rate is 12.6 percent

According to a recent Government Accountability Office (GAO) report, “large” corporations while having a maximum federal marginal tax rate of 35 percent, pay an average of only 12.6 percent tax on their overall worldwide income. The GAO looked at the tax years of 2008 through 2010 and compared the information reported on the corporate tax returns to income reported for comparable periods in their financial statements filed with the Securities and Exchange Commission.

As part of ongoing efforts to revamp the United States income tax system and achieve a mechanism for taxing worldwide income, the report was requested by Sen. Carl Levin, D-Mich., and Sen. Tom Coburn, R-Okla.

No constructive dividend for C Corporation providing at cost construction services
When deciding whether a constructive dividend has been conferred to a shareholder of a C Corporation, the key point that is analyzed is whether the corporation has awarded a benefit on the shareholder to distribute available earnings. In Welle, 140 TC No. 19, the court concluded that the 100 percent owner of a C Corporation did not receive a constructive dividend when the corporation furnished construction services to the shareholder without charging the standard profit margin. The IRS attempted to prove that the fact that the corporation gave up its rights to profits in effect gave rise to a constructive dividend.
Surprisingly, the court found that the IRS had failed to prove how a corporate decision not to make a profit on a particular construction project for services provided to a shareholder who fully reimbursed the corporation for the cost of the services, including overhead, constitutes a distribution of property. A key consideration here appears to be that the corporation was made whole for any direct and indirect expenses since the cost of materials, services and overhead were all reimbursed.

Waiver of 60-day rollover requirement for spouse

Normally, distributions from an IRS must be rolled over to another IRA within 60 days of the distribution or the distribution becomes immediately taxable. However, in a Private Letter Ruling, the IRS held that a spouse whose husband withdrew funds from her IRA without her consent or knowledge had not violated the 60-day requirement since she did not become aware of the distribution until after the 60 days.
Upon finding out about the husband’s unauthorized distribution, the IRS used its facts and circumstances discretion and waived the 60-day rollover period. The spouse’s case was certainly not hurt by the fact that the spouse also subsequently learned that the husband had a gambling addiction. The husband, an attorney and a CPA, used a power of attorney to make the unauthorized distribution, telling the IRA trustee that the distribution was for his wife’s medical expenses. The wife revoked the power of attorney upon discovering the unauthorized distribution.
Generally, the owner of an IRA has 60 days from the date of the distribution to roll the distribution to another IRA or retirement plan without incurring current taxable income. Generally, a distribution after the 60 days is subject to income tax and a 10 percent early withdrawal penalty, if applicable.

Since the wife was able to prove, with the assistance of a statement from the treating doctor, that the husband had a gambling addiction, and also that the husband had lost significant sums in his gambling, the IRS waived the 60-day rollover requirement and the 10 percent penalty.


James W. Rahmlow, a certified public accountant, is a partner with Mengel, Metzger, Barr & Co. He can be contacted at