Federal tax tips.

• Author: Josephs, Stuart R.
• Position: Tax SeasonTOOLKIT

Proposed Changes to Circular 230

Proposed regulations were published Sept. 17. 2012, which would modify the standards for providing written tax advice. For details, see the Fed Tax column (Page 26) of this issue.

Guidance on Cell Phones

Many employers provide their employees with cell phones, primarily for noncompensatory business reasons. IRS Notice 2011-72 provides the following tax treatment for these cell phones.

The value of the business use of an employer-provided cell phone is excludable from an employee's income as a working condition fringe to the extent that, if the employee paid or the use of the cell phone, such payment would be deductible under IRC Sec. 162 for the employee.

An employer will be considered to have provided an employee with a cell phone primarily for noncompensatory business purposes if there are substantial reasons relating to the employer's business, other than providing compensation to the employee, for providing the employee with a cell phone.

Possible substantial noncompensatory business reasons include the employer's need to contact the employee at all times for work-related emergencies, the employer's requirement that the employee be available to speak with clients at tunes when the employee is away from the office and the employee's need to speak with clients located in other time zones at times outside of the employee's normal work day.

A cell phone provided to promote an employee's morale or goodwill. to attract a prospective employee or as a means of furnishing additional compensation to an employee is not provided primarily for noncompensatory business purposes.

Notice 2011-72 states that, when an employer provides an employee with a cell phone primarily for noncompensatory business reasons, the IRS will treat the employee's use of the cell phone for reasons related to the employer's trade or business as a working condition fringe benefit. the value of which is excludible from the employee's income and, solely for purposes of determining whether the working condition fringe benefit provision in Sec. 132 (d) applies, the substantiation requirements that the employee would have to meet for a deduction under Sec. 162 to be allowable are deemed to be satisfied.

Also, the IRS will treat the value of any personal use of a cell phone provided by the employer primarily for noncompensatory business purposes as excludible from the employee's income as a de minimis fringe benefit.

Notice 2011-72 applies to any use of an employer-provided cell phone occurring after 2009. The application of the working condition and de minimis fringe benefit exclusions under Notice 2011-72 apply solely to employer-provided cell phones and do not apply to other fringe benefits.

Voluntary Classification Settlement Program This IRS program

permits IRS program permits taxpayers to voluntarily reclassify workers as employees for federal employment tax purposes (Ann. 2011-64). The VCSP allows eligible taxpayers to obtain relief' similar to obtained in the existing Classification Settlement Program (CSP). for taxpayers under IRS examination, the CSP is available to resolve federal employment tax issues related to worker misclassification--if certain criteria are met.

The VCSP is optional and provides taxpayers with an opportunity to voluntarily reclassify their workers as employees for Future tax periods with limited federal employment tax liability for the past nonemployee treatment.

VCSP participants must:

* Meet the eligibility requirements described below:

* Apply to participate by filing IRS Form 8952. Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees; and

* Enter into a closing agreement with the IRS.

Eligibility

To be eligible, a taxpayer:

* Must have consistently treated the workers as nonemployees and filed all required Forms 1099 for the workers for the previous three years; and

* Cannot. be under audit by the IRS or be under audit concerning the classification of the workers by the Department of Labor or by a state government agency

* A taxpayer previously audited by the IRS or the Department of Labor concerning worker classification will only be eligible ir die taxpayer complied with the audit's results.

VCSP's Effect

A taxpayer who participates in the VCSP will agree to prospectively treat the class of workers as employees for future tax periods. In exchange, the taxpayer will:

* Pay 10 percent of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year. determined under the reduced rates of Sec. 3509;

* Not be liable for any interest and penalties on the liability; and

* Not be subject to an employment tax audit with respect to the worker classification of the workers for prior years.

Additionally, a taxpayer participating in the VCSP will agree to extend the period of limitations on assessment of employment taxes for three years for the first, second and third calendar years beginning after the date on which the taxpayer has agreed under the VCSP closing agreement to begin treating the workers as employees.

Rules for Tangible Property Expenditures

On Dec. 23, 2011, the IRS issued more than 250 pages of guidance regarding the treatment of amounts paid to acquire, produce or improve tangible property alter working on this issue for almost eight years. Temporary and proposed regulations Were published Dec. 27. 2011. [See Treasury Decision (T.D.) 9564 and REG-1687.15-03, respectively] The temporary regulations' text also serves as the proposed regulations' text. This guidance applies to tax years beginning alter 2011.

Rev. Procs. 2012-19 and 20 Were issued March 7, 2012. providing procedures to obtain automatic IRS consent to change to accounting methods permitted in these regulations.

The IRS Large Business and International Division issued a directive March 15, 2012 (LB&1-4-0312-004) pertaining to these issues:

* Whether Costs incurred to maintain, replace or improve tangible property must be capitalized: and

* Correlative...