Episode 4: Issues that affect both the taxpayer and their employees

Marissa:

Welcome to KPMG’s Mobility via Podcast.  I’m Marissa Cristi, a Global Mobility Services Managing Director in the Los Angeles office of KPMG.  Joining me today is Bob Rothery, a Director in our Washington National Tax practice. Hi, Bob.

Bob:

Hi Marissa, Happy New Year!

Marissa:

Thanks!  We both know that January means that the tax busy season is about to ramp up. Our annual GMS program manager newsletter just came out and I thought we could spend some time talking about the tax issues it outlines that program managers and assignees are concerned with right now. One thing that should be of concern to everybody right now is the new Form W-4. Can you give us some background on that?

Bob:

Tax reform changed tax calculation. The W-4 no longer reflected tax return and the W-4 was always confusing anyway, particularly for assignees. For 2018 and 19 IRS updated withholding tables but not the form.  Many people had fewer deductions so if they didn’t update their W-4, they would be claiming too many deductions – and be under withheld. For 2020, the IRS has updated the form instructions to make it easier to calculate withholding, and has published online withholding calculators.

Marissa:

This may seem like an issue of concern only for taxpayers because employers of assignees may stop withholding income tax.  But inbound assignees may have withholding, and not understand US tax well enough to cope with Form W-4.  Outbound assignees may still need withholding for personal income, as well as in arrival and departure years.  And note, that underwithholding can result in penalty for underpayment of estimated tax.

Bob:

Good point, the problem was so big in 2018 that the IRS raised the threshold for the penalty, so it would apply to fewer people.

Marissa:

Yes, that applied for 2018 only, though, and the IRS didn’t change the rule until a lot of people had already filed their returns.

Bob:

The IRS recognized the problem and refunded the penalty to people who had paid it before the new rule was made known.  The problem is, if a person’s tax is paid by their employer because they’re on assignment, the employer probably also financed the penalty. The person may not have realized that the refund actually belonged to the employer. And the employer wouldn’t necessarily know that the person was due a refund.

Marissa:

It’s safe to assume that when they get an unexpected check from the IRS, many people will cash it and not ask any questions! Yes, so the dilemma now is whether to go back over 2018 records to determine who might have received such a check, and how to communicate the issue to taxpayers.

Speaking of needing to back over records for prior years, let’s talk about this refund opportunity for those who have been on assignment in France. Can you give me some background?

Bob:

The general rule is that if a person pays foreign social security tax, they can add that to the amount of foreign income taxes they paid for determining FTC. But if the tax is covered by a bilateral social security totalization agreement, no FTC is allowed. We have such an agreement with France, but there are two French social taxes that are NOT covered by the agreement. The IRS for years has insisted these two taxes are not eligible for FTC. This has been frequently challenged, and IRS has finally conceded the issue.  The IRS allows amended returns for up to 10 years prior when FTC is concerned - so US taxpayers who have paid French taxes in 2009 or after may have a refund opportunity.

Marissa:

It’s an example of situation that looks like it’s only of concern to the taxpayer – but employers should also care. If an employer was paying an assignee’s foreign taxes, then a refund that results from such taxes belongs to the employer and represents a program cost reduction.

The employee is unlikely to realize this refund opportunity is available and the employer would need to contact employee and pay for amended return. BUT – may not be feasible for an employee who left the company 8 or 9 years ago …

Bob:

On topic of social security agreements, we have 30 of them now. The list can be found at www.ssa.gov/international.  Two new ones entered into force in late 2018 (Brazil and Uruguay) and two more in early 2019 (Iceland and Slovenia). So if a person was working in one of these countries, they would no longer be subject to double tax, as of the effective date.

Marissa:

This is great, but a lot of people are hazy on whether a new agreement is retroactive.

Bob:

Right – and they’re not. A new agreement doesn’t mean the person has a refund opportunity, but just assures that there shouldn’t be double tax going forward. And since social security is a payroll tax, it’s up to the employer to get it right.

Marissa:

Any other year-end issues to be thinking about?

Bob:

Well every year a new bunch of ITINs expire.

Marissa:

That’s right! Of course an ITIN is an Individual Taxpayer Identification Number, and if a person doesn’t qualify for a social security number, they have to provide an ITIN on their US tax returns. So what’s up with the fact that they expire?

Bob:

Well, first of all, if an ITIN hasn’t been used on a tax return for 3 years, it expires and the taxpayer has to renew it before it can be used on a tax return again.  Also, a number of years ago the documentation requirements for obtaining an ITIN were strengthened, so ALL ITINs obtained under the old rules will eventually expire whether they have been used or not. Each year the IRS announces which ITINs will expire that year. Enter IRS ITIN EXPIRATION FACT SHEET into your search engine for more information.

Marissa:

This can be a major headache for employers. Taxpayers won’t necessarily know that their ITIN has expired, or how to renew it. If the only reason they – or their dependents – need an ITIN is because of their international assignment, they’ll expect their employer to help them with this. Luckily an acceptance agent, including KPMG, can perform the required documentation requirements.

Before we wrap up, can you think of any other headaches employers should be thinking about?

Bob:

Well, there’s always passport revocation.

Marissa:

The logical follow-up question is, how is that a tax issue?

Bob:

It never was until Congress included it as a revenue raiser in an infrastructure bill a few years ago.

If a taxpayer has a seriously delinquent federal tax debt in excess of a certain amount - $52,000 for 2020 – the IRS must inform the U.S. State Department. The State Department then may deny an application for a new passport or a passport renewal – and may even revoke an existing passport.

Last year, the IRS announced that it had begun providing that information to the State Department.

If a taxpayer is complying with the IRS, they probably won’t enter into “seriously delinquent” status, even if they owe a large amount, but it’s important to be aware of this new rule.

Marissa:

Well, obviously this can have an impact on an international assignment! At the very least, employers should probably be mentioning this issue to current and potential assignees.

We’ve covered a lot of ground – thanks, Bob! And thank you for joining this episode of Mobility via Podcast.  In future episodes we’ll spend more time on top-of-mind issues, geopolitics, digitization and changing business models. In the meantime, we’d love to hear from you.

If you have thoughts on today’s episode or ideas for future episodes, send us an e-mail at us-taxwatch@kpmg.com.

Thanks for listening!