Simplifying compliance for the mobile workforce - looking at state costs

States need revenue and one place they can and do look is to see if an individual or business is in their state who does not pay taxes. One example getting heightened attention by states, employers, employees and Congress is an employee working for a few days, weeks or months in a state. The state wants to be sure the employer is withholding tax on wages paid to the worker and the worker pays income tax in the state (assuming they meet the filing threshold, which varies from state to state).

There are a few complicating factors in all of this, such as:

• The rules vary from state to state as to when an employer must start withholding state tax on the employee. The thresholds might also vary as to whether based on days worked or meeting an income threshold. The Council on State Taxation (COST) has a nice map showing these differences (see Appendix A of their May 2011 testimony before the House Judiciary Committee).
• The rules vary from state to state as to the income tax filing requirement for the visiting employee. The employee has added compliance costs including filing returns in some states to get a refund of overpaid taxes.
• Employers find it challenging to track where employees were each pay period, getting that information to operate with the pay system so as to get the right state withholding, and also factor in issues of annual bonuses or similar type payment. The withholding issue can be challenging beyond the technology pieces in that while the state visited may want withholding, the employee may still or instead owe income tax to his state of residence and will expect that state income tax withholding has been made.

One proposal moving along to help alleviate some of the complications is H.R. 1864. A hearing was held in the House Judiciary Committee on May 25, 2011 and the committee voted favorably on the legislation on November 17, 2011. H.R. 1864 basically provides that no withholding is required of a non-resident employee unless the employee "is present and performing employment duties for more than 30 days during the calendar year in which the income is earned."

The Multistate Tax Commission (MTC) has a Model Mobile Workforce Statute proposal in their review process. This proposal uses a 20-day threshold before withholding is required.

As required by the Unfunded Mandates Reform Act, the Congressional Budget Office (CBO) prepared an estimate to see if H.R. 1864 would violate the UMRA. They could not tell. Per CBO (1/25/12):

"Most states that levy a personal income tax allow residents to take a credit for income taxes
that the residents pay to another state. The cost of the mandate would equal, for all states
collectively, the difference between the amount of revenue that states receive from
nonresidents who work in the state for fewer than 31 days and the amount they would
receive from residents whose credits would be lower under the bill. Generally, states that
have large employment centers close to a state border would lose the most revenue; states
from which employees tend to commute would gain revenue. For example, New York
would likely lose the largest amount of revenue—from $50 million to $100 million
according to state and industry estimates—and Illinois, Massachusetts, and California
would face smaller losses. New Jersey and Connecticut would likely gain revenue.
Because of uncertainty about the amount of revenue that states collect from nonresidents,
and the amount they would receive from residents whose credits would be lower under the
bill, CBO cannot estimate the net cost of the mandate. Consequently, CBO cannot
determine whether the net cost of the intergovernmental mandate in the bill would exceed
the annual threshold established in UMRA ($73 million in 2012, adjusted annually for
inflation)."

I think a few things are interesting about the CBO report:

• It would seem that there would be minimal revenue loss or gain for the states in aggregation. After all, if a State Z employee today works for a few days in State X and has to pay tax in State X, he likely gets a credit in State Z. If the employee works for a few days in a state without an income tax, the employee's home state will have him report all of his wages, just as is done today.
• New York will likely lose the most under H.R. 1864 per CBO.  Well, that seems to be because New York and just a few other states use a "convenience of the employer" test to see where a worker's wages should be taxed. The result is that New York can grab a lot more wages than if it instead only taxed an employee for the time spent working in New York. (For more on this, see a September 2009 article on the mobile workforce issue I wrote for the AICPA - still time, just the bill numbers have changed!)  Hopefully, H.R. 1864 would not be held up because some states that aggressively grab employee wages today will lose revenue under H.R. 1864.  In the aggregate, it doesn't seem that is the case (other than for some wages of mobile employees who reside in states without an income tax).

Another issue is whether this is something the states via the MTC should resolve or if Congress should resolve it. Given a poor track record of voluntary, 50-state conformity for tax matters, it seems that Congress will have to address this issue in order for there to be conformity.  This has been a longstanding issue and Congress has a lot on its plate.  Will H.R. 1864 be enacted before the 112th Congress ends?

What do you think?

Bank and credit card rewards - taxable?

An article in the Los Angeles Times today (1/25/12) -"Citibank deems frequent-flier miles taxable, but does the IRS?" by David Lazarus covers a story that raises question about what does the "income" in "income tax" mean. Citibank issued Forms 1099-MISC to customers who received frequent flyer miles from Citibank for opening accounts, if the points were valued at $600 or more. This caught the customers by surprise.

Are the miles taxable? Good question.  And do note that the answer has little to do with their value.  Even customers who received points worth less than $600 have income if this is indeed income. Just because you don't get a 1099 doesn't mean you don't have income.  It is just that $600 is the threshold for reporting such income to the IRS. But, if the bank gives you a cheap pen or a cup of coffee, it's not taxable to you.

Here is what the US Supreme Court said in 1955 in holding that punitive damages were income to the recipient - "undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion" is income (Commissioner v Glenshaw Glass, 348 US 426).

Could the points be considered a gift?  I don't think so. In 1960, the US Supreme Court said that a "gift in the statutory sense ... proceeds from a "detached and disinterested generosity," ... "out of affection, respect, admiration, charity or like impulses." .... And in this regard, the most critical consideration, as the Court was agreed in the leading case here, is the transferor's "intention."(Commissioner v Duberstein, 363 US 278).

It doesn't seem to be a gift because Citibank wanted something in return for the points - your money!

The Citibank situation is not like two slightly similar situations that do not generate taxable income:

1. You buy a new car and the dealer gives you a $500 rebate.  The $500 is not income to you. The substance of this transaction is that the car really cost $500 less. This is a reduction in the purchase price. (This is also the view of the IRS - Rev. Rul. 76-96.)
2. You use frequent flyer miles you earned by buying airline tickets. In Announcement 2002-18, the IRS stated, "the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer's business or official travel. Any future guidance on the taxability of these benefits will be applied prospectively."  So, the IRS isn't saying the miles are not income, just that there are difficulties in making the determinations. But in some cases though it may be possible to reach a more definitive answer. For example, you only purchase airline tickets for business use. When you cash in your miles, you obtain more travel used for business purposes. This is really like the car rebate example - no income. The challenge is that many people earn miles for both business and personal travel and likely redeem them for personal travel which means they should pick up income or reduce the business deduction for the miles - but how do you value them.   The IRS also notes in the 2002 announcement that, "This relief does not apply to travel or other promotional benefits that are converted to cash, to compensation that is paid in the form of travel or other promotional benefits, or in other circumstances where these benefits are used for tax avoidance purposes"

 So far as benefits received from banks and credit card companies, the tax effect seems to depend on the details of the arrangements. Many of these arrangements do not seem to be like the car rebate situation because the company awarding the points has not sold you anything - they really seem to be rewarding you to use the credit card. But what about a credit card issued by Store X that rewards you with Store X gift cards if you purchase a certain amount of goods from Store X?  That sounds like the car rebate.  But what if it is Store X issued VISA card that you can use anywhere and all of your purchases help earn you rewards?

Perhaps the IRS will step in and say something again in light of this Citibank action.  Perhaps customers will ask more questions before taking the points.

How can this be made more simple? Here are two possibilities.  (1) Require the giver of the award to issue the 1099 at the time the person is about to take the action so they can stop the action if they don't want to income.  Also, while you are generally not allowed to turn your back to income you should be allowed to in the case of awards and rewards.  (2) Enact a de minimis threshold for rewards that are excludable from income, such as $50.

What do you think?

AMT Out of Control - Way Past Time for it to Go!

Probably the most common response to what is one of the more complex and out-of-control parts of our federal income tax would be the alternative minimum tax or AMT.  The "AMT Patch" which keeps about 21 million individuals from paying AMT - people who AMT was never intended to affect, expired at December 31, 2011.  Who knows when Congress will extend it - it likely won't  be until after the November 2012 election. So, many individuals will be paying estimated taxes this year that include AMT.

A lot has been written about the AMT (including by me - my 2007 op ed - "Simplicity and transparency versus the dread AMT, Silicon Valley/San Jose Business Journal is still relevant in 2012!).  I'd like to share two items:

1. The modern AMT stems from the Tax Reform Act of 1986. The Blue Book to TRA86 (page 473) states that for 1991, the AMT for individuals was projected to raise $334 million.* The year is relevant because by then new provisions of the TRA'86 would be fully phased in (revenue estimates were higher for 1987 to 1990 probably due to fact that passive activity loss limitations (Section 469) and repeal of personal interest deduction (Section 163(h)) were being phased in for regular tax, but fully in effect for AMT) Using an inflation calculator from the US Bureau of Labor Statistics, that one year revenue estimate would be $551 million in 2011.  YET - just to enact a "patch" - which does not repeal the AMT, it just helps adjust the exemption amount for the effects of inflation, costs $64 billion for a year!  Clearly, the AMT is way beyond being out of control.

2. The National Taxpayer Advocate's Report to Congress for 2008 (released 12/31/08) included a blunt observation about the AMT:

"Today, we have reached a point where even one-year fixes are extremely expensive [$64 billion] – and the perniciousness and invasiveness of the AMT is demonstrated by the fact that it will cost more in 2009 to repeal the AMT than it would cost to repeal the regular income tax rules and leave the AMT in place. Absent continual one year patches, almost a quarter of all individual taxpayers will have to navigate the AMT. That is a sad statement about the complexity of our tax system, and that fact alone should compel the new administration and Congress to undertake the fundamental tax reform necessary to repeal the AMT.  It is simply inexcusable for a tax system to impose this kind of burden on millions of taxpayers." (page vii of the report)

The National Taxpayer Advocate's 2011 report to Congress continues to call for repeal of the AMT (2011 report, page 468).

* For a link to the JCT Blue Book and an article of things to consider upon the 25th Anniversary of the TRA'86 (that anniversary was October 22, 2011), see my short article here (and see the "table" link) in the article.

Repeal of the AMT has many supporters besides the National Taxpayer Advocate - also many members of Congress, the Joint Committee on Taxation and the Tax Sections of the AICPA and ABA.

What do you think it will take for the AMT to be repealed?  Or should it be kept and the regular tax repealed for individuals?

IRS encouraging individuals to help monitor return preparers

The IRS released an "FS" (Fact Sheet) today on "Tips for Choosing a Tax Return Preparer" (FS-2012-5).  Among the tips is to be sure the preparer signs the return and puts their PTIN on the form. The last tip:

"Make sure the preparer signs the form and includes his or her preparer tax identification number (PTIN). A paid preparer must sign the return and include his or her PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return."

The IRS will have to see if this works. Certainly one outcome of requiring over 300,000 preparers who are not attorneys, CPAs, Enrolled Agents or supervised/non-signers, to pass a test to continue to be able to prepare 1040s, is that some may decide to continue to prepare but just not sign. (Click here for more information on the IRS Program to regulate return preparers);

I think the IRS is going to have to ask Congress to enact a new penalty on taxpayers who pay someone to prepare their return, but fails to sign the turns. How else can IRS regulate paid return preparers?

What do you think?

Feb. 3 Tax Policy Conference in Santa Clara - Don't Miss Out

2012 Tax Policy Conference -
    Tax Reform: Status, Needs and Realities 

Speaker just added - Mike Hauswirth, Tax Counsel for the House Ways and Means Committee.

Find out how tax reform discussions and proposals are progressing including having a lower corporate tax rate. At the 2012 Tax Policy Conference you'll have the opportunity to find out how tax reform will affect you and your employer and have an opportunity to discuss the issues with colleagues.  

Details:

Friday February 3, 2012

8:30 - 5:15 (registration and breakfast at 8 am)

Techmart

5201 Great America Parkway, Santa Clara

Presenters include:

• Mike Hauswirth, Tax Counsel for the House Ways and Means Committee
•  Joshua Odintz, Baker & McKenzie, former Senior Advisor for Tax Reform to the Asst. Secretary (Tax Policy) at Treasury
• Fred Silva, California Forward
• Gina Rodriquez, CalTa
• Greg Turner, COST
• Oksana Jaffe, Principal Consultant, CA Assembly Revenue & Taxation Committee

 Registration fee = $150  ($135 for TEI members) - includes refreshments, lunch and materials

Don't miss this - you will need to be familiar with the issues, proposals and how to analyze them as you and your companies consider tax planning.  This is the event to get you up to speed on tax policy and reform.

Registration and more information - http://www.tax-institute.com