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Employers should use online portal to fix SSN errors

Macro shot of a W2 income tax form

In a recent press release, the Social Security Administration (SSA) advised employers to use its Business Services Online (BSO) Portal to correct employee name and Social Security number (SSN) errors. Doing so will ensure accurate wage reporting for employees.

In addition, the SSA announced that it will no longer mail Employer Correction Request Notices (EDCORs) to employers. As you may be aware, EDCORs have been in use to notify employers of name and SSN mismatches.

Correction tools

The SSA reports that nearly 10% of Forms W-2 (“Wage and Tax Statement”) that it receives have mismatched name/SSN combinations. Many of these errors are because of typos, unreported name changes or inaccurate employer records. Erroneous wage information makes it difficult to credit earnings to a worker’s record, potentially resulting in ineligibility for Social Security benefits or incorrect benefit amounts.

Employers may use the BSO portal to correct errors before, during and after the development and submission of wage reports. The BSO portal has three tools:

1. AccuWage Online. This tool reviews the accuracy of Forms W-2 and W-2c (“Corrected Wage and Tax Statement”) by identifying common formatting errors. Employers can use it to identify errors before uploading the forms. AccuWage may be used to test files for any tax year.

Employers who wish to use AccuWage Online must establish a valid BSO username and password. Once you’ve done so, you can log in with your BSO account info and go to the Employer Wage Reporting application webpage.

2. Social Security Number Verification Service (SSNVS). The SSNVS allows employers to verify up to 10 names and SSNs.

3. View Name and Social Security Number Errors. This tool allows employers to view the processing status, errors (including name and SSN mismatches), and error notices for submitted wage files and/or wage reports.

EDCOR mailings discontinued

As mentioned, the SSA’s press release also notes that Andrew Saul, Commissioner of the SSA, has decided that the agency will no longer mail EDCORs to employers. He believes the SSA should “focus agency efforts on making it a better, easier, and more convenient experience for employers to report and correct wages electronically.”

Key role

Employers play a key role in the administration of Social Security benefits. Make sure your payroll staff is aware of these changes by the SSA — particularly the discontinuation of EDCORs, as you’ll need to catch errors on your own. We can help you identify and manage payroll costs, including the impact of handling employer responsibilities related to Social Security.

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Who in a small business can be hit with the “Trust Fund Recovery Penalty?”

There’s a harsh tax penalty that you could be at risk for paying personally if you own or manage a business with employees. It’s called the “Trust Fund Recovery Penalty” and it applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages.

Because taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over. The penalty is also sometimes called the “100% penalty” because the person liable and responsible for the taxes will be penalized 100% of the taxes due. Accordingly, the amounts IRS seeks when the penalty is applied are usually substantial, and IRS is aggressive in enforcing the penalty.

Wide-ranging penalty

The Trust Fund Recovery Penalty is among the more dangerous tax penalties because it applies to a broad range of actions and to a wide range of people involved in a business.

Here are some answers to questions about the penalty so you can safely avoid it.

What actions are penalized? The Trust Fund Recovery Penalty applies to any willful failure to collect, or truthfully account for, and pay over Social Security and income taxes required to be withheld from employees’ wages.

Who is at risk? The penalty can be imposed on anyone “responsible” for collection and payment of the tax. This has been broadly defined to include a corporation’s officers, directors and shareholders under a duty to collect and pay the tax as well as a partnership’s partners, or any employee of the business with such a duty. Even voluntary board members of tax-exempt organizations, who are generally exempt from responsibility, can be subject to this penalty under some circumstances. In some cases, responsibility has even been extended to family members close to the business, and to attorneys and accountants.

According to the IRS, responsibility is a matter of status, duty and authority. Anyone with the power to see that the taxes are (or aren’t) paid may be responsible. There’s often more than one responsible person in a business, but each is at risk for the entire penalty. You may not be directly involved with the payroll tax withholding process in your business. But if you learn of a failure to pay over withheld taxes and have the power to pay them but instead make payments to creditors and others, you become a responsible person.

Although a taxpayer held liable can sue other responsible people for contribution, this action must be taken entirely on his or her own after the penalty is paid. It isn’t part of the IRS collection process.

What’s considered “willful?” For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bending to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes that are due the government is willful behavior. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook. Your failure to take care of the job yourself can be treated as the willful element.

Never borrow from taxes

Under no circumstances should you fail to withhold taxes or “borrow” from withheld amounts. All funds withheld should be paid over to the government on time. Contact us with any questions about making tax payments. 

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Can taxpayers who manage their own investment portfolios deduct related expenses? It depends

Do you have significant investment-related expenses, including the cost of subscriptions to financial services, home office expenses and clerical costs? Under current tax law, these expenses aren’t deductible through 2025 if they’re considered investment expenses for the production of income. But they’re deductible if they’re considered trade or business expenses.

For years before 2018, production-of-income expenses were deductible, but they were included in miscellaneous itemized deductions, which were subject to a 2%-of-adjusted-gross-income floor. (These rules are scheduled to return after 2025.) If you do a significant amount of trading, you should know which category your investment expenses fall into, because qualifying for trade or business expense treatment is more advantageous now.

In order to deduct your investment-related expenses as business expenses, you must be engaged in a trade or business. The U.S. Supreme Court held many years ago that an individual taxpayer isn’t engaged in a trade or business merely because the individual manages his or her own securities investments — regardless of the amount or the extent of the work required.

A trader vs. an investor

However, if you can show that your investment activities rise to the level of carrying on a trade or business, you may be considered a trader, who is engaged in a trade or business, rather than an investor, who isn’t. As a trader, you’re entitled to deduct your investment-related expenses as business expenses. A trader is also entitled to deduct home office expenses if the home office is used exclusively on a regular basis as the trader’s principal place of business. An investor, on the other hand, isn’t entitled to home office deductions since the investment activities aren’t a trade or business.

Since the Supreme Court decision, there has been extensive litigation on the issue of whether a taxpayer is a trader or investor. The U.S. Tax Court has developed a two-part test that must be satisfied in order for a taxpayer to be a trader. Under this test, a taxpayer’s investment activities are considered a trade or business only where both of the following are true:

  1. The taxpayer’s trading is substantial (in other words, sporadic trading isn’t considered a trade or business), and
  2. The taxpayer seeks to profit from short-term market swings, rather than from long-term holding of investments.

Profit in the short term

So, the fact that a taxpayer’s investment activities are regular, extensive and continuous isn’t in itself sufficient for determining that a taxpayer is a trader. In order to be considered a trader, you must show that you buy and sell securities with reasonable frequency in an effort to profit on a short-term basis. In one case, a taxpayer who made more than 1,000 trades a year with trading activities averaging about $16 million annually was held to be an investor rather than a trader because the holding periods for stocks sold averaged about one year.

Contact us if you have questions or would like to figure out whether you’re an investor or a trader for tax purposes.

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Is your company ready for agile auditing?

Agility word concepts banner. Timeliness. Time management. Productivity and efficiency. Isolated lettering typography idea with linear icons. Respect deadlines. Vector outline illustration

Agility — or the ability to react quickly — is essential to surviving and thriving in today’s competitive landscape. Though agile techniques were originally used in the realm of software development, this concept has many applications in the modern business world, including how companies approach their internal audits. Here’s an overview of agile auditing and why many internal audit teams are jumping on the bandwagon.

The basics

Whereas a traditional audit requires extensive planning, fieldwork and reporting, an agile audit moves at a faster pace. An agile audit also allows the audit team to continually refocus their attention and efforts where they’re needed the most.

Agile auditing relies on the following key concepts:

Audit backlogs. The audit team keeps a backlog of reviewed and approved audit programs. As the environment evolves, the audit team can add, remove or reprioritize audit programs within the backlog. This dynamic approach ensures that the audit team focuses on the most pressing issues — and minimizes the likelihood that they’ll waste time on an issue from a previous audit plan that’s no longer relevant.

User stories. Auditors create user stories that are made up of:

  • A user,
  • An action, and
  • An outcome.

Each story corresponds to a unit of work related to the audit. The user is the individual responsible for performing critical tasks related to the story. The action is what the user must do to generate a desired outcome.

For example, a retailer (the user) wants to process credit card payments from customers online (the action), so they can order online (the outcome). Creating a story provides the audit team with an understanding of the user’s requirements and the desired outcome.

Audit sprints. With a story defined, the audit team can deliver their work in sprints. Each sprint is normally completed in one to four weeks. Sprints may include defined tasks and regular check-ins with stakeholders. A sprint has a planning phase and daily “scrums,” which are short meetings with the audit team and stakeholders. Items on the daily agenda include:

  • Yesterday’s progress,
  • The game plan for today, and
  • Potential challenges to completing the sprint.

Each sprint concludes with the delivery of preliminary results to stakeholders. Reviewing the results of each sprint gradually over the course of the audit helps minimize surprises when the final audit report is submitted to stakeholders.

Benefits abound

Agile auditing facilitates more frequent and timelier communications between auditors and stakeholders. This can lead to more robust partnerships and improvements in the accuracy and integrity of audit team’s findings. More frequent communication also allows the audit team and the business to identify and resolve problems quickly.

Contact us for more information. We can help you decide whether you’re ready to transition to a more agile auditing approach and, if so, guide your internal audit team through the implementation process.

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IRS continues to address COVID-related leave

I am sick. Sad young man talking on the phone to his employer while asking about the sick leave

The American Rescue Plan Act (ARPA), signed into law earlier this year, amended and extended the tax credits available to eligible employers that provide paid sick and family leave. This relief is consistent with the COVID-related leave originally provided under the Families First Coronavirus Response Act enacted in March of 2020.

Just last month, the IRS issued News Release 2021-128 containing information aimed at helping small to midsized employers claim the credits. Among the most pressing challenges faced by eligible employers is determining what information they should gather and retain to substantiate eligibility.

Pertinent points

The IRS clarifies that, to substantiate eligibility for the paid sick leave or paid family leave credits, a qualifying employer must receive a written request for the leave from an employee that includes:

  • The employee’s name,
  • The date or dates for which leave is requested,
  • A statement of the COVID-related reason the employee is requesting leave as well as written support for that reason, and
  • A statement that the employee is unable to work, including by means of telework, for that reason.

In the case of a leave request based on a government quarantine or isolation order or self-quarantine advice, the statement from the employee should include the name of the governmental entity ordering quarantine or isolation, or the name of the health care professional advising self-quarantine. If the person subject to quarantine or isolation, or advised to self-quarantine, isn’t the employee, that person’s name and relation to the employee must be provided.

For a leave request based on a school closing or child care provider unavailability, the statement from the employee should include the name and age of the child (or children) to be cared for and the name of the school (or summer camp, summer enrichment program or other summer program) that has closed or place of care that’s unavailable. A statement should also be included indicating that no other suitable person will be providing care for the child during the period for which the employee is receiving family medical leave.

If a leave request is submitted while an employee is awaiting the results of a COVID-19 test or diagnosis, because of either exposure or an employer request, the statement from the employee should include the date of the test. Should an employee request leave to recover from a condition related to vaccination, the statement from the employee should include the date of vaccination.

Care and diligence

Employers must exercise great care and diligence when substantiating their eligibility for the ARPA’s paid sick leave or paid family leave credits. Of course, there are other details to consider — many of which are also addressed in IRS News Release 2021-128. Our firm can help you better understand and follow the rules.

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IRS audits may be increasing, so be prepared

The IRS just released its audit statistics for the 2020 fiscal year and fewer taxpayers had their returns examined as compared with prior years. But even though a small percentage of returns are being chosen for audit these days, that will be little consolation if yours is one of them.

Latest statistics

Overall, just 0.5% of individual tax returns were audited in 2020. However, as in the past, those with higher incomes were audited at higher rates. For example, in 2020, 2.2% of taxpayers with adjusted gross incomes (AGIs) of between $1 million and $5 million were audited. Among the richest taxpayers, those with AGIs of $10 million and more, 7% of returns were audited in 2020.

These are among the lowest percentages of audits conducted in recent years. However, the Biden administration has announced it would like to raise revenue by increasing tax compliance and enforcement. In other words, audits may be on the rise in coming years.

Prepare in advance 

Even though fewer audits were performed in 2020, the IRS will still examine thousands of returns this year. With proper planning, you may fare well even if you’re one of the unlucky ones.

The easiest way to survive an IRS examination is to prepare in advance. On a regular basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns.

It’s possible you didn’t do anything wrong. Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why.

Returns can also be selected if they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors.

The government generally has three years within which to conduct an audit, and often the exam won’t begin until a year or more after you file your return.

Complex vs. simple returns

The scope of an audit depends on the tax return’s complexity. A return reflecting business or real estate income and expenses will obviously take longer to examine than a return with only salary income.

An audit may be conducted by mail or through an in-person interview and review of records. The interview may be conducted at an IRS office or may be a “field audit” at the taxpayer’s home, business, or accountant’s office.

Important: Even if your chosen for audit, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented.

Don’t go it alone

It’s advisable to have a tax professional represent you at an audit. A tax pro knows the issues that the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow certain deductions) even though courts and other guidance have expressed contrary opinions on the issues. Because pros can point to the proper authority, the IRS may be forced to concede on certain issues.

If you receive an IRS audit letter or simply want to improve your recordkeeping, we’re here to help. Contact us to discuss this or any other aspect of your taxes.

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