Major Tax Changes on the Horizon

     It is interesting to note that the Patient Protection Act (PPA) of 2010 contained provisions that impact the reporting of income on IRS Form 1099 and that I believe are the first steps toward enacting a massive new Federal tax: a "Value-Added Tax" (VAT), a "National Sales Tax," or a "Fair Tax."

     IRS Form 1099 is certainly nothing new. For several years the tax laws have required businesses to issue IRS Form 1099 whenever over $600 of rents or services were paid to anyone that was not a corporation. In addition, all lawyers received IRS Form 1099s regardless of whether they operated as an individual, partnership, or corporation (because they are generally horrible when it comes to filing their own taxes on time). Two important exceptions existed under the old law. Form 1099s did not need to be issued for the purchase of "goods," and 1099s did not need to be issued to "corporations."

     The PPA ramps up the IRS Form 1099 filing requirement by eliminating both the goods exception and the corporation exception. This is a significant change. In essence all businesses will be required to report payments of over $600 to the IRS beginning in 2012. All businesses will be required to collect Federal tax identification numbers or social security numbers from their vendors. This is the first step of many. Failure to comply with 1099 reporting exposes the payor to significant monetary penalties.

     The subsequent steps that Congress will need to enact into law are clear. First, income tax withholding (i.e., back-up withholding) will likely be required if no tax identifying number is present for a recipient. Second, the government will need to require that Form 1099s be filed monthly rather than annually (because it is impossible to match an annual Form 1099 to the revenues of a fiscal year business). Third, since businesses currently need to file many items electronically when the volume of paper filings is high, all businesses will soon be expected to electronically file these payment reports in short order.

     Once Big Brother (the US government computers) can identify and track the gross receipts of all businesses, a VAT, National Sales Tax, or Fair Tax becomes a "no-brainer" to administer. The creation of one of these new taxes is exactly what the government will need in order to generate the revenues needed to sustain the growing costs of Big Government. Oh, don’t kid yourself, this will not replace the federal income tax; a new gross-receipts tax will supplement the income tax.

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Like it or not - change is here

Brian is hosting a number of webinars on this topic for business owners and industry associations. If you're interested in having Brian speak to your staff, clients or members, please contact him at 312.980.2941 or bwhitlock@BlackmanKallick.com.

     The 2010 health care legislation enacted by Congress in March promises to dramatically change both health care and tax laws during the next 10 years.

     The Patient Protection Act and the Health Care Reconciliation Act of 2010 combine to impact three major aspects of the Health Care market: Providers (e.g., hospitals), Insurers, and Consumers (both employers and individuals).

     Providers such as not-for-profit hospitals will be required to provide charity care, and they will be heavily monitored on their billing collection practices as regards patients who qualify for financial assistance. These measures are likely to increase the cost of care for individuals who have insurance and/or the means to pay.

     Insurers will be required to standardize coverage, increasingly eliminate policy exclusions, and reduce loss ratios (i.e., profits). Beginning in 2014, insurers will be required to guarantee the issuance of contracts without policy limits to individuals with pre-existing conditions and standardize premiums across groups. These measures are estimated to increase the actuarial cost of coverage by 4%.

     Employers of all sizes will be faced with a range of very difficult choices:

     Small employers (fewer than 25 employees) will be eligible for tax benefits, effective immediately, if they insure more than 10 employees earning average wages under $25,000 and pay at least 50% of the premiumcost.

     Beginning in 2014, employers with more than 50 employees will be mandated to either provide individual coverage for their employees or pay a modest penalty per employee for not providing coverage. This group will be faced with the decision of whether to insure their employees or allow them to migrate toward a government insurance option run by the states.

     Individuals will similarly be mandated to maintain insurance coverage or face a modest tax penalty.

     The provisions of the Act will be paid for largely by taxes on providers (which will lead to higher costs for all consumers) and higher individual income taxes (an additional 3.8%-4.7%) on individuals in higher tax brackets.

     The stealth provisions of the act are likely to have the greatest long-term impact on future tax laws. The Act expands IRS Form 1099 reporting for all business payments made for goods and services. This measure will allow the IRS to track gross receipts for all taxpayers and may likely serve as the springboard for a future National Sales Tax and/or Value Added Tax.

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Good news for parents: Insurance coverage for dependent children under 27 not taxable

Guest contributor, David Lowenthal, Senior Tax Manager, explains how the Affordable Care Act impacts the treatment of employer-provided health benefits to employee children who are adults.

     The IRS released Notice 2010-38 on April 28, 2010, which clarifies the treatment of employer-provided health benefits to certain employee children who are adults. The recently passed healthcare legislation (the Affordable Care Act) requires group health plans and health insurance issuers that provide dependent coverage of children to continue to make such coverage available for an adult child until age 26. In so doing, the legislation amended IRC §105(b) effective March 30, 2010 to extend the general exclusion from gross income of reimbursements for medical care under an employer-provided health plan to any employee’s child who has not attained age 27 as of the end of the taxable year.

     These changes clarify a legal incongruity that created taxable income when employers provided health insurance benefits (under applicable state law) to children who no longer fit the IRS definition of dependent (as defined in §152). Typically, this problem arose for employee children who remained full-time students after age 23 or nonstudents older than 19. The prior law also created confusion as to the value of the taxable benefit provided to the employee.

     The Notice provides several examples of the breadth of the new law. The employee’s child need not live with the employee to be covered under the insurance plan. Moreover, even if the employee’s child is employed and offered health benefits, as long as the child does not participate in his employer health insurance plan, the child may be covered under the parent’s employer plan without triggering any taxable income. In fact, the child’s spouse and dependent children may also participate in the parent’s employer plan, assuming the child and spouse are under 27 years of age during the calendar year of the plan. Although employer subsidies for the child are not taxable, any subsidy that covers the child’s spouse and the child’s dependents would be taxable to the employee.

     Modifications were also made to §401(h) with regard to retiree health accounts, §501(c)(9) with regard to voluntary employee beneficiary associations (VEBAs), and to §162(l) with regard to the deduction for self-employed health insurance. These modifications allow for similar tax treatment for these alternative methods of offering health insurance.

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IRS Officials Outline Increased Examination Focus for Exempt Organizations

Guest contributor, David Lowenthal, Senior Manager at Blackman Kallick, shares information from a meeting of the Chicago Bar Association's Federal Taxation Committee.

     Two IRS Exempt Organizations Managers addressed the Exempt Organization Division of the Chicago Bar Association’s Federal Taxation Committee on March 12. Fred Kluss, IRS Exempt Organization Manager identified the current projects that his group was working on. Mr. Kluss also identified areas of future interest. Mr. Kluss was accompanied by Renee Wells, IRS Exempt Organization Great Lakes Area Manager. Mr. Kluss did the majority of the talking.

     Mr. Kluss did not specifically state that EO audit rates would increase. However, he explained that EO had hired 100 additional professionals (nationwide) in the compliance area over the last year. He indicated that during the 2009 fiscal year (ended September 30, 2009); significant resources were expended training the new personnel. The implication of these statements is that as the 2010 fiscal year unfolds, there will be more agents available to perform examinations.

     The most significant ongoing compliance project is the college and university initiative. The Service is following up on the 400 questionnaires sent out in October of 2008, with 20 to 30 examinations. The institutions selected for examination are described as large and complex with audit expected to take 12-18 months. The exams will focus particularly on: determining whether compensation levels of officer and other key employees are excessive; unrelated business income including aggressive allocations of expenses, significant unreported sources of income and large recurring Net Operating Losses (NOLs); and possibly employment taxes. Mr. Kluss volunteered that gigantic NOL’s year-after-year are frequently the subject of inquiry.

     The Service is initiating 500 payroll tax audits of EO’s as part of a broader Agency-wide project. These audits will focus upon: proper worker classification (independent contractor or employee); wage underreporting; fringe benefits; back-up withholding, officer compensation and pension plans.

     Mr. Kluss unveiled plans to measure compliance of 501(c)(5) business leagues and 501(c)(6) business leagues. He expected 650 examinations over general compliance with specific focus on prohibited inurement and unrelated business income. Mr. Kluss also revealed plans for a significant Private Foundation compliance project slated to begin in fiscal year 2011.

     Other areas mentioned for scrutiny were international activities, day care providers and what seems like an ever-present governance study. We will highlight these different IRS projects as additional information becomes available.

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