TaxConnections

 
 

Access Leading Tax Experts And Technology
In Our Global Digital Marketplace

Please enter your input in search

Tag Archive for Employment taxes

TIGTA Finds IRS Faults In Trust Fund Recovery Penalty Appeals

TIGTA Finds IRS Faults In Trust Fund Recovery Penalty Appeals

Federal tax law requires employers to withhold and remit income and employment taxes to the IRS.  The obligation to pay these taxes – referred to as “trust fund taxes” – generally arises when payroll checks are disbursed to employees and is extinguished when the employer properly and timely deposits those taxes to the government.

If the employer fails to timely deposit the trust fund taxes, the IRS usually attempts to collect them directly from the employer.  But, the IRS also has other options.  Specifically, under I.R.C. § 6672, the IRS may go directly after any “responsible person” who “willfully” failed to collect, account for, and pay the taxes.  For these purposes, the trust fund recovery penalty (TFRP) represents the employee’s portion of any employment tax—that is, the withheld income tax and the employee’s portion of the Federal Insurance Contributions Act (FICA) tax.  This remedy is civil in nature, but it is important to note that the IRS may also refer TFRP cases for criminal prosecution, particularly in egregious cases.

To collect the TFRP against the taxpayer, the IRS must follow certain procedures.  First, the IRS must conduct an examination to determine who is a responsible person and whether that person acted willfully.  If the IRS determines the TFRP is appropriate, it is required to issue the taxpayer a Letter 1153, Proposed Trust Fund Recovery Penalty Notification.  After receipt of the Letter 1153, the taxpayer has 60 days to file a written protest with the IRS contesting the TFRP determination.  The IRS Independent Office of Appeals (Appeals) makes the final administrative determination as to whether the TFRP is appropriate.

On August 12, 2020, the Treasury Inspector General for Tax Administration (TIGTA) issued a report entitled “Existing Controls Did not Prevent Unauthorized Disclosures and Case Documentation Issues in Appeals Trust Fund Recovery Penalty Cases.”  As part of its report, TIGTA sampled 125 Appeals TFRP cases and concluded that the IRS failed to follow proper procedure in at least 31 of those cases.  This Insight provides a summary of the TIGTA report.

Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part IV (3) Conclusion

I. A Lesson for the Ages: If You Can’t Beat Them Join Them – continued
b. The Saving Grace: S Corporations

The self-employed businessperson doing business abroad should consider forming an S corporation.

i. Why S Corporations are so Popular Among Small Businesspersons

The short answer is that S corporations allow small businesspersons to avoid paying self-employment taxes on wage payments. Following the lead of C corporation stockholders before them, S shareholders have tried to draw their money out of the Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part IV (2)

I. A Lesson for the Ages: If You Can’t Beat Them Join Them – continued
a. The C Corporation – An Entity to Avoid

The self-employed U.S. citizen or resident doing business abroad should think long and hard before forming a U.S. corporation in which he is the sole shareholder and employee. Before explaining why this is so, it is necessary to cover a fundamental concept of U.S. international taxation. United States citizens are taxed on their worldwide income regardless of its source – i.e., regardless of whether the income’s origin is foreign or domestic. Noncitizens, who are classified as resident aliens for income tax purposes, are also subject to U.S. income taxation on their worldwide income. Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part IV (1)

A Lesson for the Ages: If You Can’t Beat Them Join Them –

Because U.S. citizens working abroad do not have the luxury of escaping U.S. self-employment taxation by forming a foreign entity and because no special exemptions exist for overseas companies, the techniques available for avoiding U.S. self-employment taxation are the same for self-employed individuals working abroad as they are for self-employed individuals working inside the United States. Self-employed individuals working abroad should turn their attention to forming a U.S. entity, such as an S corporation.

A popular technique for the small businessperson to avoid self-employment taxation is to Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part III (3)

Recommendations to Assist Self-Employed U.S. Citizens Working Abroad Avoid or Reduce Self-Employment Taxes and Social Security Taxes – continued
c. Forming a Foreign Affiliate of an American Employer

A more practical solution for the self-employed U.S. citizen seeking to avoid U.S. self-employment and social security taxation is to form a foreign affiliate of an American employer. The term “foreign affiliate” is defined in two sections of the IRC: 26 U.S.C. 3121(l)(6) and 26 U.S.C. 3121(l)(8). Under 26 U.S.C. 3121(l)(6), a foreign affiliate of an American employer is defined as any foreign entity in which an American employer has at least a 10% interest. This 10% interest is determined by a 10% ownership of the stock of Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part III (2)

Recommendations to Assist Self-Employed U.S. Citizens Working Abroad Avoid or Reduce Self-Employment Taxes and Social Security Taxes – continued
b. Forming a Foreign Entity –

As described above, forming a foreign entity is essential to any plan that seeks to avoid domestic and foreign social security taxation. This section describes the obstacles that a self-employed individual from the United States must overcome to form a foreign entity. In doing so, it explains why certain definitions in the Federal Insurance Contribution Act (FICA) and the Federal Unemployment Tax Act (FUTA) make forming a foreign entity for U.S. citizens working abroad virtually impossible. Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part III (1)

III. Recommendations to Assist Self-Employed U.S. Citizens Working Abroad Avoid or Reduce Self-Employment Taxes and Social Security Taxes –

Because self-employment taxes represent such a significant threat to the survival of U.S. citizens or residents doing business abroad, recommendations are needed to assist these individuals in avoiding self-employment taxation or reducing the amount of self-employment taxation paid. Can a U.S. citizen working abroad escape self-employment taxation? How about social security liability and medicare liability? If so, how? Is there a special exemption for overseas companies? Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part II (4)

II. Social Security Taxes: The Bane of the Existence of Self-employed U.S. Citizens Who Work Abroad –
ii. Absence of a Totalization Agreement –

Now assume that the same facts exist in Japan, a country in which a social insurance program exists, but which does not have a totalization agreement with the United States. Because John works in Japan, he would be taxed under the Japanese social insurance program.

A critical issue confronting U.S. citizens and residents who work abroad is what to do in the event they are subject to social insurance taxes in the foreign country where they work Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part II (3)

Social Security Taxes: The Bane of the Existence of Self-employed U.S. Citizens Who Work Abroad – continued –
i. Existence of a Totalization Agreement

Consider the same facts as discussed above, except that the hotel that John has been contracted to design is located in Germany, not China. Unlike China, Germany has its own social insurance program. That program is similar to the U.S. social security program. In addition, a totalization agreement exists between the United States and Germany. That agreement governs every aspect of social security taxation for U.S. citizens working abroad in Germany. Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part II (2)

Social Security Taxes: The Bane of the Existence of Self-employed U.S. Citizens Who Work Abroad – continued –
b. U.S. Citizens Working Abroad as Self-Employed Individuals

This section explores the self-employment taxes that face a U.S. citizen who works abroad as a self-employed individual. The self-employed U.S. citizen or resident faces self-employment taxes on all qualified earned income. In other words, the self-employed individual must always pay U.S. Social Security tax. Exclusions for foreign earned income under 26 U.S.C. 911, while reducing the amount of federal taxable income due, do not apply in calculating the self-employment tax. Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part II (1)

II. Social Security Taxes: The Bane of the Existence of Self-employed U.S. Citizens Who Work Abroad –

A hostile environment faces the person who, alone or with one or two others, goes into business for himself. In recent years, various factors have increased the adversity the small businessperson faces. Escalating employment taxes represent a significant barrier to the economic survival of these individuals.

This section explores the self-employment taxes that face a U.S. citizen working abroad as a self-employed individual.

a. The Employment Tax Regime Read more

Employment Taxes And The Self-Employed Global Worker – So “Un”Happy Together – Part I (4)

I. Domestic Administration of Social Security Taxation and the Scope of International Coordination – continued
c. The Third Aspect: Taxation of Benefits

Up to 85% of social security benefits received by United States citizens and residents are included in income and subject to taxation, depending on the level of benefits, tax filing status, and other income received. For non-United States citizens and non-residents, income tax is generally withheld by the payor of benefits at a rate of 30% of 85% of the gross benefit amount, or an effective rate of 25.5%.

This jurisdictional overlap is typically dealt with by tax treaties. If not for tax treaties, Read more