We have again received the highest level of report, consecutively now for over 25 years, on the quality of our work in our firm's accounting and audit practice. We are justifiably proud of this continuing accomplishment and grateful for the efforts of our staff and partners that result in this lofty position.

Dear Clients and Friends:

Many years ago Sinatra crooned “it’s time to come blow your horn”, that is what this message is all about. In late November 2011, we were again visited by an outside accounting firm to assess our firm's accounting and audit practice and the processes we employ in our services involving clients' financial statements. This review regimen, which occurs every three years, is a condition of our membership in the American Institute of Certified Public Accountants and recent statutory requirements.  We began our participation voluntarily in 1977 with the inception of the Private Companies Practice Section of the AICPA.

We have again received the highest level of report, consecutively now for over 25 years, on the quality of our work in this area. We are justifiably proud of this continuing accomplishment and grateful for the efforts of our staff and partners that result in this lofty position. So yeah, we are tooting our own horn a bit here and sharing that with you. In the same tune referred to above, there is a line “you can be either led or be the leader”, clearly in this area we have elected to be the leader.

Many of you are familiar with and aware of our tax practice, which includes not only federal and state tax return preparation (with return filings in 40 states), tax planning and compliance but also significant exposure in the estate and inheritance areas.  You may not be so aware of the accounting and audit side which we highlight here. Below are a few statistics that will serve to illustrate the variety and depth of these endeavors:

• We annually perform nearly 100 Audits, Reviews, Compilations and Agreed Upon Procedure Engagements in Varied Industries & Sizes (from Mid-to-Large Sized Privately Held Businesses with $150 million in revenue down to the Small Sole Proprietor with $50,000 in revenue).
  
• We have serviced many Small and Mid-Sized Non-Profit Organizations in various capacities over the years, a number of them having a significant presence in the Philadelphia and Main Line areas.
  
• Audits of 401(k) Plans ranging in size from 1,500 participants and $50 million in net assets down to those with just over 100 participants (the Department of Labor generally requires an annual audit of plans with 100 or more participants.)  With recent increased scrutiny of employee benefit plans by the DOL and IRS and plan sponsors being held responsible for higher standards of compliance, our dedication to quality is also with the interests of the participants and plan sponsor in mind.
  
• We are a PCAOB registered firm, which enables us to perform audits of privately held Broker-Dealers (a specialized regulated industry in which we have vast experience).

Trust, integrity and reliability are some of the qualities that are essential to any relationship. Our continued successful completion of this peer review program is a testament to our commitment to all of those.  We hope that you agree.  We thank you for the opportunity to be of service to you and invite you to visit our website to learn more about us and the services we offer.  If you like what we do, please tell a friend or colleague about our firm, as referrals are always appreciated.

Sincerely,

The Partners and Staff of Siana Carr O'Connor & Lynam, LLP

The following is a summary of the various changes in payroll withholding and related filing requirements for 2012.  As always, if you have any questions on these matters please contact us.

 A.            FEDERAL TAX DEPOSITS

Most taxpayers are required to make federal tax deposits for payroll taxes, corporate income tax, and back-up withholding electronically through use of the electronic federal tax payment system (EFTPS).  Paper coupons are discontinued as the paper coupon system will no longer be maintained by the Treasury Department.  The primary exemption is for employers that have $2,500 or less in quarterly payroll tax liability and that pay this liability when filing the quarterly employment tax return.

Officers and/or employees of a corporation or partnership can become personally liable for failure to withhold and remit federal employment taxes.  If you are using a payroll service to make your deposits, you should ensure that the payments are timely made.  Penalties can equal the amount of the tax due (100% penalty).  If you are having difficulty paying your employment taxes timely, please call us.

Effective July 1, 2011, the gross FUTA tax rate decreased from 6.2% to 6.0% following the expiration of a 0.2% surcharge.  However, the state credit reduction used to offset this FUTA rate for New Jersey and Pennsylvania employers decreased from 5.4% to 5.1% for 2011 and 2012.  This means that the net FUTA rate for most New Jersey and Pennsylvania employers is 0.9% for 2011 and 2012.  FUTA tax continues to be assessed on the first $7,000 of wages paid to each worker during a calendar year.

B.            SOCIAL SECURITY/MEDICARE TAXES

For 2012, the taxable social security wage base limit is $110,100.  All wages are taxable for the Medicare portion of the tax.  The 2011 reduced employee tax rate for social security of 4.2% has been extended throughout the entire 2012 calendar year.  The employer tax rate for social security remains unchanged at 6.2%.  In 2012, the Medicare tax rate is 1.45% each for employers and employees, unchanged from 2012.  The self-employment tax rate is 13.3% on the first $110,100 of net earnings and 2.9% on net earnings in excess of $110,100.

C.            PENNSYLVANIA PERSONAL INCOME TAXES

The withholding rate remains at 3.07%.  The PA Dept. of Revenue is no longer providing paper coupon booklets.  Instead, employer returns and payments should be filed using three electronic options: Internet, Telefile and third-party software.  If you have not yet registered under one of these methods, we encourage you to do so.  If you want our help in using these filings methods, please call us.  More information can be obtained via the internet at www.revenue.state.pa.us and www.etides.state.pa.us.  Employers may still file using paper returns and checks, however, we recommend that you switch to the DOR mandated methods.

D.            PENNSYLVANIA UNEMPLOYMENT COMPENSATION

The first $8,000 of wages paid to each worker in a calendar year is taxed at the employer's standard rate.  The state will notify you of your 2012 rate in the first quarter of 2012.  The rate for first-time employers for 2012 will be 3.703% for non-construction employers and 10.2626 for construction employers.  In addition, employers are required to withhold unemployment taxes from employees' gross wages at a rate of 0.08%.  The amount of compensation subject to employee withholding is not limited.

E.           LOCAL PAYROLL TAXES

            PA Act 32 - Local Earned Income Tax Law

The Pennsylvania law known as Act 32, which becomes effective January 1, 2012, reforms the local earned income tax withholding system and establishes countywide tax collection districts.  Every business that employs individuals who work within Pennsylvania, either at a work site or from their homes, is required to withhold the applicable local earned income tax amount from employees' wages and to remit this timely to the appropriate tax collection agency.  The employer must withhold the greater of the employee's resident tax rate for where they live or nonresident tax rate for where they work.  Each employee must complete a Residency Certification form to identify the proper subdivision where they live and work.

Additional information regarding Act 32 is available through the PA Department of Community and Economic Development by accessing its website www.newPA.com or calling, toll-free, 1-888-223-6837.  Please feel free to contact our office with  any specific questions.  Philadelphia is not regulated by Act 32, so the present system as administered by the Philadelphia Department of Revenue will remain in effect.

              Local Services Tax (LST)

The Local Services Tax (LST) allows local governments to levy a tax of $10 to $52 per employee per year.  If the locality levies a tax of $10, then the employer should withhold the tax from the first paycheck of the employee unless the employee qualifies for an exemption.  The LST exempts employees who make less then $12,000 annually from the tax. The LST also exempts disabled veterans and reservists who are called to active duty at anytime during the year from the tax.  The employer must obtain and retain exemption certificates to document the non-withholding exemption.   The LST (if more than $10) is not collected at one time, but must be withheld pro-rata during the year with each payroll.

F.           PHILADELPHIA CITY WAGE TAX

Employers must withhold city wage taxes for residents at the rate of 3.928% (.03928) and nonresidents who work in the city at the rate of 3.4985% (.034985).  Every Pennsylvania employer who employs a Philadelphia resident must register with the Philadelphia City Revenue Commissioner and withhold the city wage tax.

G.            NEW HIRE REPORTING

Federal regulation mandates all employers to report information about any new employee within 20 DAYS of their hire date.  Penalties for noncompliance can be up to $500 per employee.  Mandatory information to report for all Pennsylvania employers includes: employee’s name, address, social security number, date of birth and hire date, also employer’s name, address, federal identification number, contact and phone number.  Multi state employers must report employees electronically.  Additional information and the forms can be obtained at www.panewhires.com or call 1-888-PAHIRES.

 H.            RETIREMENT PLANS

 *     The limitation on the exclusion for elective deferrals under 401(k) and other plans is increased from $16,500 for 2011 to $17,000 for 2012.  Taxpayers who are age 50 and older(during 2012) can make an additional contribution in the amount of $5,500 in 2012.

 *      401(k) and 403(b) plans may offer qualified Roth contributions that allow employees to elect to make all or a portion of their 401(k) contributions on an after-tax basis.  Similar to Roth IRA’s, earnings grow tax free and, in most circumstances, distributions are free from tax when withdrawn.  Your plan documents must be amended to explicitly allow designated Roth contributions. A Roth 401(k) option may be a particularly important fringe benefit to younger employees.

 *     The annual compensation limit taken into account for qualified plan purposes is increased from $245,000 in 2011 to $245,000 in 2012.

 *     The maximum annual amount of salary reduction contributions to a SIMPLE retirement plan remains unchanged at $11,500 in 2012.  Taxpayers who are age 50 and older (during 2012) can make an additional contribution in the amount of $2,500 in 2012.

 *     The limitation on the annual benefit under a defined benefit plan increased from $195,000 in 2011 to $200,000 in 2012.  The limitation for defined contribution plans increased from $49,000 in 2011 to $50,000 in 2012.

 *     The amount used to identify highly compensated employees for non-discrimination testing purposes increased from $110,000 to $115,000 for 2012.

 I.            1099 REQUIREMENTS

Form 1099-MISC must be issued to persons and unincorporated entities receiving at least $600  for: 1) services rendered other than as an employee; 2) rent; 3) prizes; 4) medical and health care payments; or 5) other payments.  Form 1099-MISC is not required to be filed for payments to corporations or payments for merchandise.  All payments to law firms or attorneys made in the course of business are required to be reported on a Form 1099-MISC regardless of the dollar amount.  Form 1099-INT should be filed to report interest payments of at least $10. 

Penalties for late filing or non-filing, and filing or furnishing incorrect information were sharply increased as of 2011, and typically range from $50 per information return to the greater of $250 or 10% of the aggregate amount of the items required to be reported correctly.  In certain instances, these penalties may be higher.  The filing deadline for Forms 1099 and related Form 1096 is February 28, 2012.  The forms should be provided to recipients by January 31, 2012.

We recommend that you collect names, addresses and taxpayer identification numbers for every payee and vendor with whom you transact business.  forms W-9 should be used for this purpose and may be obtained via the internet at www.irs.gov.  Given these expanded reporting requirements, we recommend that you collect names, addresses and taxpayer identification numbers for every payee and vendor with whom you transact business.  Forms W-9 should be used for this purpose and may be obtained via the internet at www.irs.gov.  If you have any questions regarding these requirements, please contact us.

 Because of its continued importance, we have again attached an announcement from Pennsylvania Department of Labor and Industry regarding the differences between an “Employee or Independent Contractor”.  This distinction is important for federal income taxes also.  Note that an individual with whom you transact business may elect to file Form 8919, "Uncollected Social Security and Medicare Tax on Wages" with his/her Federal individual income tax return if he/she believes that you have improperly classified him/her as an independent contractor.  Improper reporting of workers can result in a requirement to pay back taxes plus interest and punitive penalties.  If you need help determining whether a worker is an employee or independent contractor, call us.

 The standard mileage rate for business automobile usage is 55.5 cents per mile in 2012.  The optional mileage allowance deduction may be used for leased as well as purchased autos.  If you elect the standard mileage rate for a  leased auto,  that method must be used for the entire lease period (including renewals) of the auto. 

ON-CASH FRINGE BENEFITS

 The rules regarding the taxation and reporting of fringe benefits still apply.  Taxable fringe benefits include the following:

 *             The cost of nondiscriminatory group-term insurance provided to employees in excess of $50,000.

 *             Personal use of an employer provided vehicle. (Annual lease value table attached)

 *             The cost of life insurance (other than group-term) provided to employees where the employee may determine the beneficiary.

*             Discriminatory payments to key employees under educational assistance plans, self-insured medical reimbursement plans, dependent care assistance programs and group legal service plans.

 L.          EMPLOYEE BUSINESS EXPENSE REIMBURSEMENTS

 If an employee is reimbursed for business expenses under an “accountable plan”, the reimbursements are not treated as taxable income to the employee.  An accountable plan must require the employer to: 1) substantiate the nature and amount of the expenses, and 2) repay to the employer any reimbursements in excess of the business expenses incurred.  Please contact us if you need assistance in designing an accountable plan.

  M.            ANNUAL LEASE VALUE AMOUNTS FOR PERSONAL USE OF COMPANY CARS

 Attached is a table showing the annual value to employees for the personal use of a company car.  This “Annual Lease Value” (ALV) of the auto is includible in the employee’s income, unless the car is used exclusively for business purposes.  If the car is used partly for personal driving, a percentage of the ALV (based on the percentage of personal use) is reported on the employee’s W-2.  Note that the ALV does not change each year.  Instead, it is treated as constant for each of the first four years of use.  If the company car is still in use after four years, it is revalued at the beginning of the fifth year, and the ALV based on this new fair market value is used for the next four years of employee use.  The ALV includes the value of auto insurance, registration fees and repairs paid by the company.  It does not include the cost of fuel.  If the company pays for fuel, the cost consumed in personal driving is additional W-2 income to the employee.  A standard rate of 5½ cents per mile may be used in computing income attributable to personal fuel costs  paid by the employer.

 N.           MINIMUM WAGE RATE

The minimum wage rate remains at $7.25 per hour in 2012.       

DISCLOSURE

 The above synopses are brief reviews of general payroll tax issues.  They are not intended to be complete explanations or to provide tax advice for specific fact patterns.  Please discuss any decision concerning specific situations with a tax advisor qualified on such issues.

 IMPORTANT NOTICE

 EMPLOYEE OR INDEPENDENT CONTRACTOR?

 It is important that all employers doing business within the Commonwealth of Pennsylvania understand that, under the Pennsylvania Unemployment Compensation Law (LAW), for both benefit and tax purposes, the term, “employee” applies to every individual who is performing or has performed services for which the individual is receiving or has received remuneration from an employer, if those services are subject to coverage under the Law.  Unless specifically excluded from coverage, all work for which wages are paid under any contract of hire, express or implied, written or oral, is “employment.”

 Services performed by a worker will be exempt under the benefit and taxing provisions of the law if the individual is, in fact, an “independent contractor.”  In order to be excluded from coverage, the person who performs the services must meet two conditions:

 (1)     the individual must be free from control or direction over the performance of the services involved, and

 (2)     the individual is customarily engaged in an independently established trade, occupation, profession or business.

 Only if both of these conditions are met to the satisfaction of the Department will the relationship be deemed to be that of an “independent contractor.”  Unless and until those criteria are met, the services will be “employment” subject to the coverage of the Law.

 The mere designation of an employer of independent contractor status, even if agreed to by the individual performing such services, is not compelling.  Similarly, the issuance of a Federal Form 1099 is not conclusive.  A written agreement does not preclude an examination of the facts to determine whether the performance of the services is subject to control or direction.  If the examination demonstrates either the exercise of or the right to exercise such control or direction, then the worker would be considered an employee and not an independent contractor.  It is immaterial if the services are performed on a full-time, part-time or casual basis.

 The Bureau of Employer Tax Operations routinely audits employers to verify the status of employees and contractors.  If audited, an employer should have sufficient documentation to substantiate the reasons for classifying an individual as an “independent contractor”; the Department will make a status determination.  Failure to provide adequate justification could result in a determination that the earnings are covered wages under the Law.  Examples of relevant documentation would include copies of the individual’s pre-printed invoices, business forms and stationery, Federal and State tax ID numbers, business telephone directory listings, public advertisements soliciting business, Articles of Incorporation and leases on business properties.

 If you have any questions regarding the above call us to discuss your situation in greater detail.

Your 2011 tax return has been filed, or you have properly filed for an extension. In either case, now it’s time to start thinking about important post-filing season activities to save you tax in 2012 and beyond.  A few loose ends may pay dividends if you take care of them sooner instead of later.

Successful filing season

The IRS reported that the 2012 filing season moved along without significant problems. The IRS continued to upgrade its return processing programs and systems.  Early in the filing season, some filers experienced a short delay in receiving refunds but the delay was quickly resolved.  The IRS reported just before the end of the filing season that it had processed nearly 100 million returns and issued 75 million refunds. 

Extensions

Individuals are eligible for an automatic six-month extension until October 15 to file a return. To get the extension, taxpayers must estimate their tax liability and pay any amount due.  When a taxpayer properly files for an extension, he or she avoids the late-filing penalty, generally five percent per month based on the unpaid balance, which applies to returns filed after the April 17 deadline. Any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 17. The current interest rate is three percent per year, compounded daily, and the late-payment penalty is normally 0.5 percent per month.

Installment agreements

Installment agreements generally can be set up quickly with the IRS and help to spread out payments to make them more manageable.  In 2012, the IRS increased the threshold for a streamlined installment agreement from $25,000 to $50,000. Installment agreements however, come with some costs.  The IRS charges a fee to set up an installment agreement.  If you cannot pay the full amount within 120 days, the fee for setting up an agreement is:

• $52 for a direct debit agreement;
• $105 for a standard agreement or payroll deduction agreement; or
• $43 for qualified lower income taxpayers.

It’s important to make your scheduled payments timely and in full. The IRS expects you to pay the minimum amount agreed on; you can always pay more if you are able.  If your installment agreement goes into default, the IRS can charge a reinstatement fee.

An installment agreement does not reduce the amount of the taxes, interest, or penalties owed, and penalties and interest will continue to accrue. In determining the amount of the penalty for failure to pay tax, the penalty is reduced from 0.5 percent per month to 0.25 percent per month during any month that an installment agreement for the unpaid tax is in effect.

You must specify the amount you can pay and the day of the month (1st-28th) on which you wish to make your payment each month. The IRS expects to receive your payment on the date you select. The IRS will respond to your request, usually within 30 days, to advise you as to whether your request has been approved or denied, or if more information is needed.

Amended returns

Taxpayers can file an amended return if they find an error, uncover unreported income or discover an item that will generate a deduction. Amended returns are filed on Use Form 1040X, Amended U.S. Individual Income Tax Return, to correct a previously filed Form 1040, Form 1040A, Form 1040EZ, Form 1040NR, or Form 1040NR-EZ. If you are filing to claim an additional refund, wait until you have received your original refund. If you owe additional tax for a tax year for which the filing date has not passed, file Form 1040X and pay the tax by the filing date for that year to avoid penalties and interest. 

Generally, to claim a refund, Form 1040X must be filed within 3 years from the date of your original return or within two years from the date you paid the tax, whichever is later. Returns filed before the due date (without regard to extensions) are considered filed on the due date. Taxpayers must file a separate Form 1040X for each year they are amending.

Targeted penalty relief

This year – for the first time – the IRS offered penalty relief to qualified individuals who were unable to pay their taxes by the April 17 deadline. Unemployed filers and self-employed individuals whose business income dropped substantially can apply for a six-month extension of time to pay, the IRS explained. Eligible taxpayers will not be charged a late-payment penalty if they pay any tax, penalty and interest due by October 15, 2012. Taxpayers qualify if they were unemployed for any 30-day period between January 1, 2011 and April 17, 2012. Self-employed people qualify if their business income declined 25 percent or more in 2011, due to the economy.  However, income limits apply, which excluded many taxpayers from the program.

Records

The IRS advises that taxpayers maintain tax records for three years.  In many cases, especially for individuals with complex returns, records should be kept longer. Our office maintains taxpayer records with the utmost care and confidentiality.

We encourage you to contact us if you have any questions about the end of the 2011 filing season and how your 2011 return can provide a roadmap to tax savings in 2012.

After three days of oral arguments in March, the Supreme Court is deciding the fate of the Pension Protection and Affordable Care Act (PPACA) and its companion law, the Health Care and Education Reconciliation Act (HCERA).  Not only do the new laws impact health care, they contain numerous tax provisions, many of which have yet to take effect.  The Supreme Court may uphold the laws, strike them down in whole or in part, or decide that the case is premature.  The Supreme Court is expected to render its decision in June.  In the meantime, a quick checklist of the tax provisions in the two laws reveals how extensively they impact individuals, businesses and taxpayers of all types.

Challenges

Congress passed, and President Obama signed, the PPACA and HCERA in 2010.  Almost immediately, several states and taxpayers challenged the laws in court.  The lawsuits generally argued that Congress had exceeded its authority by requiring individuals to obtain health insurance.

The cases made their way from federal district courts to the various federal courts of appeal, which reached different conclusions.  One circuit court invalidated the individual mandate; two circuit courts upheld the individual mandate and another circuit court dismissed the challenge on procedural grounds.

Supreme Court grants review

On November 14, 2011, the United States Supreme Court agreed to review the Eleventh Circuit Court’s decision in Florida v. U.S. Department of Health and Human Services.  The Supreme Court stated it would examine four issues: (1) the Constitutionality of the individual mandate; (2) whether the individual mandate is severable from the PPACA; (3) whether the challenge to the individual mandate is barred by the Anti-Injunction Act^; and (4) whether PPACA’s expansion of Medicaid exceeded Congress's authority. The Supreme Court heard oral arguments in the case on March 26-28 in Washington, D.C. 

Individual mandate and penalty

The individual mandate generally requires individuals to maintain minimum essential coverage for themselves and their dependents after 2013. Individuals will be required to pay a penalty for each month of noncompliance, unless they are exempt (such as individuals covered by Medicaid and Medicare).  The PPACA also provides tax incentives to help individuals obtain minimum essential coverage.  Beginning in 2014, individuals with incomes within certain federal poverty thresholds may qualify for a refundable health insurance premium assistance tax credit.  The PPACA also provides for advance payment of the credit.

In Florida v. HHS, the Eleventh Circuit struck down the individual health insurance mandate but did not declare the entire PPACA unconstitutional.  In contrast, the Sixth Circuit held that the individual mandate was a valid exercise of Congress’ power to regulate commerce (Thomas More Law Center v. Obama).  The Court of Appeals for the District of Columbia Circuit also upheld the individual mandate (Mead v. Holder).  The Supreme Court could find the entire PPACA unconstitutional or could find that the individual mandate is severable, thereby preserving other parts of the statute, including various tax provisions.

Tax provisions

While much attention has focused on the individual mandate, the Supreme Court may also decide the fate of many tax provisions in the PPACA and the HCERA. Among the tax provisions potentially affected by the Supreme Court’s decision are:

• Code Sec. 45R small employer health insurance tax credit;

• 3.8 percent Medicare contribution tax on unearned income for higher income taxpayers after 2012;

• Additional 0.9 percent Medicare tax on wages and self-employment income of higher income taxpayers after 2012;

• Increased itemized deduction for unreimbursed medical expenses after 2012;

• Prohibition on over-the-counter medicines being eligible for health flexible spending arrangement (FSA), health reimbursement arrangement (HRA), health savings account (HSA), and Archer Medical Savings Account (MSA) dollars.

• Additional tax on distributions from HSAs and Archer MSAs not used for qualified medical expenses;

• Excise tax on high-dollar health plans after 2017;

• Tax credit for therapeutic discovery projects;

• Annual fees on manufacturers and importers of branded prescription drugs;

• Reporting of employer-provided health coverage on Form W-2;

• Codification of the economic substance doctrine.

Anti-Injunction Act

The Supreme Court could decide that the challenge to the PPACA is premature.  Under the Anti-Injunction Act, a taxpayer must wait to oppose a tax until after it is collected.  The PPACA’s individual mandate and its related penalty do not take effect until 2014.  The Fourth Circuit Court of Appeals found that the penalty amounted to a tax and taxpayers could not challenge the tax until it took effect (Liberty University v. Geithner).

If you have any questions about the tax provisions in the health care reform laws, please contact our office. We will be following developments as they ensue after the Supreme Court issues its decision in June.

Proposals to reform retirement savings plans were highlighted during an April 2012 hearing by the House Ways and Means Committee.  Lawmakers were advised by many experts to move slowly on making changes to current retirement programs that might discourage employers from sponsoring plans for their workers.  Nevertheless, it is clear that Congress wants to make some bold moves in the retirement savings area of the tax law and that likely it will do so under the broader umbrella of general “tax reform.” While tax reform is gaining momentum, it is unlikely to produce any change in the tax laws until 2013 or 2014. Considering that retirement planning necessarily looks long-term into the future, however, now is not too soon to pay some attention to the proposals being discussed.

Testimony

The Chief of Actuarial Issues and Director of Retirement Policy for the American Society of Pension Professionals and Actuaries testified that current federal tax incentives can transform taxable bonuses for business owners into retirement savings contributions that benefit both owners and employees. “This incentive for the business owner to contribute for other employees results in a distribution of tax benefit that is more progressive than the current income tax structure," she observed.

An American Benefits Council representation warned at the hearing that the wisest course for lawmakers is to not enact new laws that would disrupt the success of the current system. Short-term retirement legislation designed to boost tax revenues generally do so by eliminating the existing savings incentives and eroding the amount that workers actually save.

Committee Chairman Dave Camp, R-Mich. questioned whether the large number of retirement plans now existing with their different rules and eligibility criteria leads to confusion, reducing the effectiveness of the incentives in increasing retirement savings. Ranking member Sander Levin, D-Mich., questioned the value of making tax reform-inspired changes to retirement plans. "Tax reform should approach retirement savings incentives with an eye toward strengthening our current system and expanding participation, not as an opportunity to find revenue," Levin said.

JCT report

In advance of the hearing, the Joint Committee on Taxation (JCT) summarized the tax treatment of current-law retirement savings plans and described some recent reform proposals in a report, “Present Law and Background Relating to the Tax Treatment of Retirement Savings” (JCX-32-12). The report highlighted several of the recent proposals on retirement savings:

Automatic enrollment payroll deduction IRA.  President Obama has proposed mandatory automatic enrollment payroll deduction IRA programs.  An employer that does not sponsor a qualified retirement plan, SEP, or SIMPLE IRA plan for its employees (or sponsors a plan and excludes some employees) would be required to offer an automatic enrollment payroll deduction IRA program with a default contribution to a Roth IRA of three percent of compensation. An employer would not be required to offer the program if the employer has been in existence less than two years or has 10 or fewer employees.

Expand the saver's credit.  The Administration has also proposed to make the retirement savings contribution credit, known as the saver's credit, fully refundable and for the saver’s credit to be deposited automatically in an employer-sponsored retirement plan account or IRA to which the eligible individual contributes. In addition, in place of the current credit ranging from 10 percent to 50 percent for qualified retirement savings contributions up to $2,000 per individual, the proposal would provide a credit of 50 percent of such contributions up to $500 (indexed for inflation) per individual.

Consolidate plans.  The JCT also reviewed two retirement proposals from the Bush administration:  Consolidating traditional and Roth IRAs into a single type of account called Retirement Savings Accounts (RSAs) and creating Lifetime Savings Accounts (LSAs) that could be used to save for any purpose with an annual limit for contributions of $2,000. The JCT explained that the tax treatment of RSAs and LSAs would be similar to the current tax treatment of Roth IRAs (contributions would not be deductible, and earnings on contributions generally would not be taxable when distributed). Additionally, the Bush Administration had proposed to consolidate various current-law employer-sponsored retirement arrangements under which individual accounts are maintained for employees and under which employees may make contributions into a single type of arrangement called an employer retirement savings account (ERSA).

The American Society of Pension Professionals and Actuaries (ASPPA) told the Ways and Means Committee that the large number of plans with different rules and criteria does not reduce the effectiveness of the incentives in increasing retirement savings. ”Consolidating all types of defined-contribution type plans into one type of plan would not be simplification,” the ASPPA cautioned. “It would disrupt savings, and force state and local governments and nonprofits to modify their retirement savings plans and procedures.”

Code Sec. 1231 applies to gains and losses from property used in the trade or business and from involuntary conversions. Normally, you have to determine whether property is a capital asset or is ordinary income property. Property generally can’t be both. However, Code Sec. 1231 allows you to “have it” both ways. Any gains are taxed at low capital gains rates (generally 15 percent for 2012), and any losses are treated as ordinary losses, taxable at more favorable ordinary loss rates, and available (without limit) to offset other ordinary income.

Who qualifies?

Code Sec. 1231 gains include:

--Recognized gains on the sale or exchange of property used in the trade or business; and

--Recognized gains from the involuntary or compulsory conversion (into money or other property) of property used in a trade or business, or of property held for more than one year and either used in the trade or business or used in a transaction entered into for profit.

Property used in a trade or business is property that is subject to depreciation and held by the taxpayer for more than one year.

Code Sec. 1231 losses are any recognized loss from a sale, exchange, or conversion of the same categories of property.

A win-win equation

Gains and losses from these transactions are referred to as Code Sec. 1231 gains and Code Sec. 1231 losses. The character of the gain or loss depends on whether Code Sec. 1231 gains exceed Code Sec. 1231 losses for the tax year. If the Code Sec. 1231 gains exceed the Code Sec. 1231 losses, then all of the Code Sec. 1231 gains and losses are treated as long-term capital gains and losses. The result is a net long-term capital gain. This amount can then be netted with other capital gains and losses.

Code Sec. 1231 does not apply to depreciation that must be recaptured as ordinary income under either Code Sec. 1245 (depreciable personal property and certain real property) or Code Sec. 1250 (depreciable real property that is not Code Sec. 1245 property).

If, however, the Code Sec. 1231 losses equal or exceed the Code Sec. 1231 gains, then all of the Code Sec. 1231 gains and losses are treated as ordinary income and losses. The net result is an ordinary loss, which can offset other ordinary income.

The family partnership is a common device for reducing the overall tax burden of family members. Family members who contribute property or services to a partnership in exchange for partnership interests are subject to the same general tax rules that apply to unrelated partners. If the related persons deal with each other at arm's length, their partnership is recognized for tax purposes and the terms of the partnership agreement governing their shares of partnership income and loss are respected.

Interfamily gifts

Because of the tax planning opportunities family partnerships present, they are closely scrutinized by the IRS. When a family member acquires a partnership interest by gift, however, the validity of the partnership may be questioned. For example, a partnership between a parent in a personal services business and a child who contributes little or no services is likely to be disregarded as an attempt to assign the parent's income to the child. Similarly, a purported gift of a partnership interest may be ignored if, in substance, the donor continues to own the interest through his power to control or influence the donee's business decision. When a partnership interest is transferred to a guardian or trustee for the benefit of a family member, the beneficiary is considered a partner only if the trustee or guardian must act independently and solely in the beneficiary's best interest.

Capital or services

The determination of whether a person is recognized as a partner depends on whether capital is a material income-producing factor in the partnership. Any person, including a family member, who purchases or is given real ownership of a capital interest in a partnership in which capital is a material income-producing factor is recognized as a partner automatically. If capital is not a material income-producing factor (for example, if a partnership derives most income from services, a family member is not recognized as a partner unless all the facts and circumstances show a good faith business purpose for forming the partnership.

If the family partnership is recognized for tax purposes, the partnership agreement generally governs the partners' allocations of income and loss. These allocations are not respected, however, to the extent the partnership agreement does not provide reasonable compensation to the donor for services he renders to the partnership or allocates a disproportionate amount of income to the donee. The IRS can re-allocate partnership income between the donor and donee if these requirements are not met.

Investment partnerships

The general rule for determining gain recognition for marketable securities does not apply to the distribution of marketable securities by an investment partnership to an eligible partner. An investment partnership is a partnership that has never been engaged in a trade or business (other than as a trader or dealer in the certain specified investment-type assets) and substantially all the assets of which have always consisted of certain specified investment-type assets (which do not include, for example, interests in real estate or real estate limited partnerships).

If a family limited partnership (FLP) qualifies as an investment partnership, the FLP could redeem the partnership interest of an eligible partner with marketable securities without the recognition of any gain by the redeemed partner. To qualify, substantially all the assets of the FLP must always have consisted of the eligible investment assets, and the holding of even totally passive real estate interests (real estate that does not constitute a trade or business), for instance, must be kept to a minimum. In addition, any eligible partner must have contributed only the specified investment assets (or money) in exchange for his or her partnership interest.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important tax reporting and filing data for individuals, businesses and other taxpayers for the month of May 2012.

May 2

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 25–27.

May 4

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates April 28–May 1.

May 9

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 2–4.

May 10

Employees who work for tips. Employees who received $20 or more in tips during April must report them to their employer using Form 4070.

May 11

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 5–8.

May 16

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 9–11.

May 18

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 12–15.

May 23

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 16–18.

May 25

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 19–22.

May 31

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 23–25.

June 1

Employers. Semi-weekly depositors must deposit employment taxes for payroll dates May 26–29.