One of the challenges of political advocacy is to separate real from imagined threats. For S Corps, the threat of increasing payroll taxes on S Corp profits continues to be very real indeed, despite the best efforts of a broad coalition of business groups to educate policy makers on why the proposals on the table are bad policy and bad economics. For example, the attached BNA story is about a relatively narrow proposal in the President’s new budget to increase collections of payroll taxes from companies that lease employees to other businesses.
At first blush, it’s not really about S Corps. But look at the language they use to defend the proposal and you’ll see it is part of a much broader agenda that has broad implications for all S corporations, not just those in the employee leasing business. As the Blue Book notes, “Noncompliance with federal employment tax proposals is a significant part of the tax gap. The tax gap undermines confidence in the fairness of our tax administration system.”
The challenge for the S Corp world is that two key proposals to address the tax gap put forth by the Joint Committee on Taxation and the Treasury Inspector General for Tax Administration would unfairly impose payroll tax levies on all S Corp income, not just the income derived from the labor of the S Corp’s owners. These proposals obviously overreach, but as long as there is a budget deficit, Treasury, the IRS, and the tax writing community in Congress will be under pressure to increase collections. And as long as they are under such pressure, the S Corp community, representing America’s most popular business structure, needs to be ever vigilant that bad polices are not enacted in the name of deficit reduction.
Tax Gap Hearing Announced
Which brings us to this week’s announcement that the Senate Budget Committee will be holding a February 15th hearing on the Tax Gap issue. We’ve reported on this previously, but it always pays to remind readers that the goal of the S Corp Association is not to defend individuals and businesses that fail to pay the taxes they owe. We support effective administration of the tax code.
On the other hand, we also share the concerns of House Small Business Committee Chairman Donald Manzulo expressed in his letter to IRS Commissioner Mark Everson [attached]. As the Chairman writes, “The IRS’s apparent obsession with targeting small businesses through the NRP [National Research Program], the very engine of our economic growth, continues to confound me.” More to follow on this…
2005 Tax Relief Package Approaching Conference (Slowly)
Finally, the House approved a motion to go to conference with the Senate on tax reconciliation legislation (H.R. 4297). It named as conferees Bill Thomas (R-CA), Jim McCrery (R-LA), and Dave Camp (R-MI) for the Republicans, and Charles Rangel (D-NY) and Rep. Pete Stark (D-CA) for the Democrats. The Senate should appoint conferees following debate over the asbestos bill. Their goal is to name them before the Senate adjourns for its recess the week of February 20-24, which means the actual conference would not finish up until early March.
Key difference between the two bills: The House bill would extend for two years the 15-percent tax rate on capital gains and dividends, while the Senate instead includes a one-year extension of the higher Alternative Minimum Tax exemption. This larger exemption would prevent 15 to 20 million taxpayers from paying the AMT in tax year 2006. The House passed a stand-alone AMT exemption bill late last year and is pressing the Senate to do the same, outside of reconciliation. For S Corps, the Senate-passed bill includes a provision to eliminate the so-called “sting tax” for S Corps with passive income that exceeds certain thresholds. The underlying reason for this tax was eliminated years ago, and its time for this punitive tax to be eliminated as well.
Tuesday February 7, 2006
Federal Employment Tax Issues Targeted In Budget Proposals to Reduce Tax Gap
The Treasury Department Feb. 6 unveiled a host of provisions designed to help close the tax gap and facilitate tax administration, with a big focus on employment taxes, as part of the administration’s fiscal year 2007 budget plan. “Noncompliance with federal employment tax proposals is a significant part of the tax gap,” Treasury said in the FY 2007 blue book, or general explanation of the revenue provisions in the budget. “The tax gap undermines confidence in the fairness of our tax administration system.”
One area that has caused major uncertainty is the question of whether employee leasing companies or their clients are liable for employees’ federal income taxes. Treasury proposed a new standard that would make both the leasing company and the client joint and severally liable for those taxes. It also would provide standards for holding employee leasing companies solely liable for those taxes in cases where they met certain requirements. Both parts of the proposal will “facilitate the assessment, payment, and collection of those taxes,” Treasury said. The measure are intended to “preclude taxpayers who have control over the withholding and payment of those taxes from denying liability when the taxes are not paid,” the blue book added.
Treasury Calls for Collection Changes
Treasury also announced a proposal to allow the government to collect employment taxes by levy before it is required to give a taxpayer a collection due process hearing. Noting employment taxes represent nearly one-fifth of the nation’s unpaid taxes, the government said it is trying to prevent employers from using the collection due process (CDP) rules to avoid collection efforts by the Internal Revenue Service for multiple tax periods. Under current rules, once a taxpayer has requested a CDP hearing, all collection action stops until the hearing has taken place. Liabilities from subsequent periods can “pyramid” because they cannot be collected until the taxpayer has been given notice and judicial review for each period, Treasury said.
“The existing CDP framework compounds the pyramiding problem by allowing employers to continue to accrue federal employment tax obligations without risk of collection action,” it added.
To prevent this problem, Treasury proposed allowing collection of employment taxes by levy to continue during the CDP proceedings. Taxpayers would retain their current right to seek managerial appeal of a proposed levy and to participate in the formal collection appeals process before a levy is issued, Treasury said.
More Tax Gap Proposals Outlined
In other proposals designed to close the tax gap, the administration called for measures that would: require increased reporting on payment card transactions; require increased information reporting for government payments for goods and services; and expand the signature requirement and penalty provisions for paid tax return preparers. The administration also called for a range of provisions that Treasury said would implement IRS administrative reforms and initiate cost savings measures.
Among other things, the provisions focus on curbing the use of frivolous submissions or filings to impede or delay tax administration, the government said. They also would prevent abuse of installment agreements by allowing IRS to terminate those agreements if a taxpayer fails to file a return or fails to make a deposit. In addition, these provisions would: consolidate judicial review of collection due process cases in the U.S. Tax Court; eliminate the monetary threshold for counsel review of offer in compromise cases; allow the Financial Management Service to retain transaction fees from levied amounts; and extend IRS authority to fund undercover operations.
Treasury also proposed lowering the 250-return minimum now in place for mandatory electronic filing. The proposal did not give a specific new threshold for mandatory e-filing, but stressed IRS would “maintain the minimum at a high enough level to avoid imposing an undue burden on taxpayers.”
By Alison Bennett