Category Archives: Payroll Tax

Federal Tax Developments Related to Covid-19

By: Coleman Jackson, Attorney & Certified Public Accountant
March 30, 2020

As you can imagine, things are changing and developing fast and furious during this Covid-19 Pandemic. Developments in taxes are no exception! Our law firm desires to keep our clients and others informed with regards to certain tax developments that might impact their businesses. In keeping with that desire, note some of the most significant recent federal tax developments:

  1. Tax Day now July 15, 2020: The U.S. Treasury and Internal Revenue Service automatically extended from April 15, 2020 to July 15, 2020 the federal income tax filing due date. The IRS gives affected taxpayers until the last day of the Extension Period to file tax returns or make tax payments, including estimated tax payments, that have either an original or extended due date falling within the Period. The IRS will waive any interest and late filing and payment penalties related to these late tax returns.
  2. Small and midsize employers can begin taking advantage of two refundable payroll tax credits designed to immediately and fully reimburse them, dollar of dollar, for the cost of providing Coronavirus-related leave to their employees.
  3. The CARES Act of 2020 enacted in response to Covid-19 provides employers with an employee retention credit in the amount of 50% of their wages impacted by closure due to Covid-19. Further the Act which became law on March 27, 2020 extends the due date for paying employer payroll taxes. Taxpayers must carefully review the law and properly compute the amount of payroll taxes that can be deferred; because it is not 100% deferral of all payroll taxes. Note: The Small Business Administration has announced that they are taking applications for disaster relief from small businesses with respect to loans up to two million dollars for monies borrowed to make payroll and pay rent during this Covid-19 Crisis. The application process and details regarding what businesses qualify and the procedures for applying can be found on the Small Business Administration website. The SBA has announced that they have relaxed some of their processing and documentation requirements to expedite the processing of these emergency loans to small businesses impacted by Covid-19. It appears that these SBA emergency loans could be converted to grants under certain condition(s). The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected Covid-19 taxpayers who need them to apply for benefits or to file amended tax returns claiming casualty losses. Watch our blogs as more changes may be forth coming in the area of employer relief due to Covid-19 closures. But for now, this appears to be the game plan regarding employers.
  4. “Existing Installment Agreements –For taxpayers under an existing Installment Agreement, payments due between April 1 and July 15, 2020 are suspended. Taxpayers who are currently unable to comply with the terms of an Installment Payment Agreement, including a Direct Deposit Installment Agreement, may suspend payments during this period if they prefer. Furthermore, the IRS will not default any Installment Agreements during this period. By law, interest will continue to accrue on any unpaid balances.” Source: IR-2020-59, March 25, 2020.
  5. The CARES Act eliminates the 10% early withdrawal penalty for Covid-19 related distributions from retirement accounts and make other rule changes regarding retirement account contributions.
  6. The Act relaxes certain corporate and individual charitable contributions rules and provides for an above the line deduction up to $300 for charitable contributions.
  7. Texas has been declared a Presidential Disaster Area related to Covid-19, so more specific rules and provisions could be developed by the IRS related to individuals and businesses with business operations in Texas or impacted by this particular Presidential Disaster Area Declaration.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader. You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

Thinking About Taxes

By:  Coleman Jackson, Attorney & Certified Public Accountant
March 07, 2020

Thinking About Taxes

Thinking about spending that money withheld from employees’ wages to take a tour of the world, pay other business expenses or house payments?  Don’t do it before reading Internal Revenue Code Section 7702!   Hear those alarm bells ringing!  Anyone required to collect, account for, and turn over to the United States Treasury and willfully fails to carry out this duty are subject to severe civil penalties and upon being found guilty of the felony of failing to collect, account for, and turn over can be fined up to $10,000 and spend up to five years in federal prison.  Payroll tax fraud is a serious crime that is commonly investigated by the IRS Criminal Investigation (CI) Division.  This unit of the IRS investigates all kinds of violations of the Internal Revenue Code.  CI along with the Financial Crimes Network investigates FBAR violations (these are U.S. persons with foreign bank accounts and other foreign assets who fail to timely and accurately disclose these holding on Form 114), money laundering (these are individuals or entities engaged in some kind of unlawful activity and endeavoring to get dirty money into the normal banking system) and other financial crimes.

 

Thinking about not filing that required income tax, gift tax or other federal tax return or providing fraudulent information the IRS?  Don’t do it before reading Internal Revenue Code Sections 7207 and 7203Hear those whistles blowing!  Anyone who intentionally gives false documents, which includes returns and any other written representation to the Internal Revenue Service and any of its employees knowing that its materially false or fraudulent is subject to civil fines and upon being found guilty of the felony of giving the Service false returns or other documents can be fined up to $10,000 (if individual) and up to $50,000 (if corporation), and spend up to one year in federal prison.  Multiples applies in that cumulative false statements, returns and documents can generate multiplication of the civil fines and additional years to the duration of the prison term.

 

Thinking about paying fewer taxes than is lawfully owed by engaging in creative accounting, leaving that or this item off the return while adding and dreaming about things that never happened? Don’t do it before reading Internal Revenue Code Section 7201Hear those gongs clanging! Anyone who intentionally attempts to evade or defeat any tax imposed under the Internal Revenue Code is subject to civil penalties up to $100,000 (if individual) and up to $500,000 (if corporation), and spend up to five years in federal prison upon conviction.

 

Thinking about taxes?  Stay away from the tumbling … lie.


This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432     

Responsible Party Liability for Willfully Failing to Pay Payroll Taxes

June 12, 2017
Coleman Jackson, Attorney, CPA

Responsible Party Liability for Willfully Failing to Pay Payroll Taxes

The Internal Revenue Code, 26 U.S.C. § 6672 authorizes the Internal Revenue Service to demand collection of unpaid payroll taxes from persons responsible for paying those taxes if those persons willfully fail to pay the payroll taxes in the normal course of running a business.  This statutory duty is imposed on “an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act” imposed by the satute.  See 26 U.S.C. §6671(b) (2000).  Similarly, a member or employee of a limited liability company, or any other form of business entity, with a duty to perform under the statute can likewise be deemed a responsible party under 26 U.S.C. §6672.

Liability for willfully failing to pay payroll taxes is imposed under 26 U.S.C. §6672 on “a person required to collect, truthfully account for, and pay over any payroll tax if the person willfully fails to collect such tax, or truthfully account for and pay over the payroll tax or willfully attempts to in any manner to evade or defeat any such tax or the payment thereof”.  A person with responsibility under the statute who fails to perform this duty is subject to a 100% tax penalty, which is a penalty equal to the amount of payroll tax evaded, or not collected or not properly accounted for or not paid over to the Internal Revenue Service.  See 26 U.S.C. §6672(a).  These officers, members and employees are known as responsible parties under 26 U.S.C. §6672. 

 The meaning of this tax statute, like all laws in the United States is ultimately determined by the judiciary.  Courts are the final governmental body in the U.S. who says what the law is.  In a practical sense- what does 26 U.S.C. §6672 mean to businesses, those who own them and those who work for them?  It depends upon where in the United States the taxpayer resides because the United States is divided into several federal courts of appeal’s jurisdictions.  The laws in the circuits are not always the same, even though, as it is here, the same federal statute is being interpreted.  The fifth circuit is the federal circuit where our law firm is located.  Anyone outside of the fifth circuit must be abundantly careful because the law where they are could be drastically different with respect to responsible party litigation under 26 U.S.C. §6672.

This blog will discuss the law in the Fifth Circuit Court of Appeals which includes Texas, Mississippi and Louisiana.  The taxation, litigation and immigration law firm of Coleman Jackson, P.C. is located in Dallas, Texas.  For a long time now, the Fifth Circuit Court of Appeals have said that willfulness under 26 U.S.C. §6672 can be established in two ways:  (1)  the Internal Revenue Service can prove willful violation of the statute by presenting credible evidence that the responsible person had knowledge that payroll taxes were due the United States and other creditors were being paid; and (2) The Internal Revenue Service can prove willful violation of the statute by presenting credible evidence that the responsible person acted with reckless disregard that the payroll taxes were not being collected, or paid or turned over to the Internal Revenue Service.  There is no requirement of ill will or evil intent here.  The reckless disregard of risk standard is met when the responsible party clearly ought to have known that there was a grave risk that withholding taxes were not being paid and was in the position to find out with little or no effort.  Intentional ignorance or willful ignorance is enough in the fifth circuit to impose the 100% penalty on a responsible party; but negligence is not enough to find a person a responsible party under 26 U.S.C. §6672.  See Morgan v. United States, 937 F.2d 281 (5th Cir. 1991) and its long line of progeny that basically governs the responsible party analysis for taxpayers located in the States within the Fifth Circuit Court of Appeal’s jurisdiction.

Another fifth circuit federal case known as Conway establishes the contours of a potential reasonable defense argument where an officer, member or employee can produce evidence that they relied on professional advice or counsel under certain circumstances.  In tax law, reasonable defense arguments must be based in fact and circumstances demonstrating that an owner or member or employee is not responsible, after all, for the business’ failure to collect and timely turn over payroll withholding taxes to the Internal Revenue Service.  See Conway v United States, 647 F.3d 228 (5th Cir. 2011).

This blog only addresses the law in the fifth circuit as it stands today; the law can change without notice.  When a Judge sits on the bench and makes a ruling, that ruling is the law in its jurisdiction- and sometimes nationwide, unless that Judge reverses, or until some higher court in its jurisdiction reverses, or the United States Supreme Court rules.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432

WHEN ARE PAYMENTS FOR SERVICES PERFORMED EXCLUDED FROM AN EMPLOYEES GROSS INCOME?

By Coleman Jackson, Attorney, CPA
May 30, 2017

WHEN ARE PAYMENTS FOR SERVICES PERFORMED EXCLUDED FROM AN EMPLOYEES GROSS INCOME?

The term wages are defined in 26 U.S.C. Sec. 3401 as all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include services performed under certain circumstances.  A lot of special circumstances are listed in this tax statute; but in this blog, we will focus on only a few of the circumstances where compensation for services performed as an employee are not wages and, are therefore, excluded from an employee’s gross income for federal tax purposes. The terms employee and employer are very broad terms, and are not precisely defined in American law.   The United States Supreme Court in a case styled, United States v. Silk, 331 U.S. 704, 716 (1947) established several relevant factors in determining whether a worker is an employee or independent contractor (self-employed).  Some of the relevant factors on the Silk list indicating that a worker is an employee versus independent contractor are the degree of control the employer has over the worker’s results and  procedures in achieving those results, the degree to which the worker can realize a profit or loss, the degree to which the worker must personally perform the work or is permitted to hire helpers (commonly known as sub-contractors); the degree the worker has investment in facilities, equipment and other assets for performing the work, and the degree of permanency of the relationship.  This list is not exhaustive; the critical test is to what extent the employer can control the results and the means of achieving the results.  The Silk list is called the common law test.  The common law test was codified in U.S. tax law in Treasury Regulation 91 and also the State of Texas has codified the Silk test in the Texas Labor Code and the Texas Tax Code for employer-employee situations and payroll tax matters.  Wages paid to employees are, typically included in the employee’s gross income for tax purposes and typically American employers must withhold appropriate withholding taxes from employees’ wages.  This blog identifies and discusses several circumstances when wages earned by employees are not subject to federal income tax.; therefore, employers do not withhold federal income taxes, nor does the employee include those wages in their gross income.  Although we try to make this blog very reader friendly, the reader must not lack the understanding or forget that terms employer and employee can be the subject of intense disagreement with enormous tax and legal consequences.  The proper classification of employment relationships are not determined by a single factor or even multiple factors, but by the economic circumstances as a whole.

Payment for services performed outside of the United States by a United States citizen are excluded from an employee’s wages under Internal Revenue Code Sec 3401(a)(8)(B)Internal Revenue Code Sec 911(a) (2) provides, in part, that where a United States citizen is present in a foreign country for 18 consecutive months or countries during at least 510 full days in the tax period, any amounts paid, other than by the United States or its agency, for earned income attributable to services performed during such 18 month period is excluded from the individuals gross income.  The worker must make an election to exclude such wages pursuant to 26 USCS Sec 911(a) (2) on IRS Form 2555 or on a comparable form which is filed with the taxpayer’s federal income tax return or amended tax return for the first year of the individual for which the exclusion election is to be effective.

Compensation qualifying for the foreign earned income exclusion

Payment for services performed on behalf of a foreign government by a United States citizen are excluded from an employee’s wages under Internal Revenue Code Sec 3401(a)(5)26 U.S.C Sec 893(a) excludes wages, fees or salary of any employee of a foreign government or of an international organization (including a consular or other officer, or a nondiplomatic representative) received as compensation for official services to the foreign government or international organization.  In Abdel-Fattah v. Commissioner, 134 T.C. 190 (2010), the U.S. Tax Court ruled that certification under 26 U.S.C. 893(b) by the U.S. State Department is not a prerequisite for the Sec  893(a) exemption of earned income paid by a foreign government. The exemption from federal U.S. taxation of such wages paid by foreign governments is also exempt from federal income tax withholding statutes which means that the foreign government or international organization does not have any tax withholding obligations.

. Compensation for services performed in U.S. possessions

Payment for services performed by a United States citizen qualifying for the Foreign Earned Income Credit are excluded from an employee’s wages under Internal Revenue Code Sec 3401(a)(8)(A).  The tax policy behind the foreign earned income tax credit is to avoid double taxation that would occur, but for, this foreign earned income tax credit, when U.S. citizens’ foreign source income (income earned abroad) is taxed by both the United States and the foreign country where the citizen works or earns the income.  Taxes paid or accrued to a foreign country or a U.S. possession, also known as U.S. territory, qualifies for the foreign income tax credit.  Also certain payments in lieu of income taxes paid or accruing to a foreign country or U.S. territory qualifies for the foreign earned income credit.  Foreign earned income can be taking by the taxpayer as a credit or deduction, but not both.  The basic policy behind the foreign earned income credit is avoidance of double taxation of foreign sourced income earned by U.S. citizens.   As in tax law in general, there are exceptions to these general rules.

Compensation subject to foreign or possession withholding

Payment for services performed by a United States citizen subject to foreign or U.S. possession withholding tax are excluded from an employee’s wages under Internal Revenue Code Sec 3401(a)(8)(A)(ii).  The basic tax policy behind exclusion of income earned by U.S. citizens subject to foreign or U.S. possession withholding tax is the same as for foreign earned income tax credit; namely, the relief desired is avoidance of double taxation of U.S. citizen’s earned income that is subject to foreign taxation or taxation in U.S. territories.  U.S. territories include Puerto Rico, Northern Mariana Islands, American Samoa, Guam and various Islands, such as, Navassa Island, Wake Island, Baker Island and a couple other Islands in the Pacific Ocean, known as U.S. Minor Outlying Islands.

Gleaned from reading the U.S. Congressional historical record for these various gross income exclusions by U.S. citizens of income earned as employees of foreign governments or while working abroad are designed to avoid double taxation of U.S. citizens.  In the legislative records, Congress expresses the sentiment that the exemption policy is one further step toward increasing our foreign trade by excluding from gross income in case of U.S. citizens employed abroad in selling their merchandise amounts received as salary or commission for the sale for export of tangible personal property produced in the United States in respect of such sales made while they are actually employed outside the United States.   The U.S. Senate record gives the following justification for such policies:

“For example, many employees of American business in South America do not return to the United States for periods of years.  Such persons are fully subject to the income tax of the foreign country of their residence.”  See Senate Report No. 1631, 77th Congress 2d Session 54 (1942). 

These types of tax policies are simply designed to remove impediments and national barriers holding back American citizens in fully participating in the global market place with their peers from other countries.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432