Washington is at work on two new federal tax proposals that will undoubtedly have impacts on your business. One comes from the IRS and the other from Congress.
The IRS proposal is designed to encourage employers to establish transportation spending accounts. Similar to the day-care and health-care expense accounts employers now set up for their workers, these accounts would allow employees to set aside pre-tax money to pay for some of their commuting costs. The other proposal concerns a House-passed bill that's designed to give taxpayers additional rights when they take up with the IRS.
Joan Szabo is a writer in Great Falls, Virginia, who has reported on tax issues for more than 13 years.
- Employers Council on Flexible Compensation, www.ecfc.org
Free Ride, Almost
Under the IRS proposal, employees could set aside up to $65 per month for both van-pooling expenses and transit fares, and up to $180 per month for parking costs. Through these accounts, employees receive reimbursement for their parking or transit fares and don't have to pay taxes on that amount.
For example, a commuter with $245 in monthly parking and transit expenses may be able to save $750 to $900 in taxes per year, depending on the tax bracket. "This adds up to a tremendous savings for employees," says Bonnie Whyte of the Employers Council on Flexible Compensation (ECFC), an association representing 2,800 employers nationwide. It's a welcome idea to employers as well. Though business owners are allowed to pay for employee transit fares and parking, few employers currently provide this benefit because of the cost.
The cost to an employer of setting up and administering the proposed program should be minimal, as long as it's done within the company, says John Hickman, a partner in the Atlanta office of the law firm Alston & Bird LLP and chairman of ECFC's technical advisory committee. With day-care and health-care accounts, companies often use third-party administrators because such programs involve a level of expertise not available in most companies, but that option is obviously expensive. The individual who does your company's billing and payroll should be able to handle the transportation account, according to Hickman.
As a way to encourage employers to sign up for the program, the IRS will allow them to establish and operate transportation savings accounts without written plans, which are normally required when companies set up new fringe benefits. In addition, the program would allow workers to carry into the next year any unused portions of their monthly allotments. With health-care and day-care spending accounts, employees are required to use what is in their accounts by the end of the year or forfeit any funds that have not been spent by that time.
The proposed rule would also simplify record-keeping requirements to some extent. For example, workers could show receipts for parking or transit costs if they are available; and if they aren't, employees would still be able to sign a statement indicating that they have incurred the costs.
The new proposal "would be ideal for small to midsized companies," says Whyte. "It would work especially well in urban areas with expensive parking where large numbers of people take public transportation."
One issue that still must be clarified by Washington has to do with the effect these proposed transportation accounts would have on pensions. Unfortunately, lawmakers did not indicate whether reducing workers' pay for tax purposes to provide the transportation benefit also lowers it when calculating retirement benefits.
Whyte says she expects clarification on that issue either from the IRS or Congress. She predicts the rule will be finalized by the end of the year.
Righting Possible Wrongs
On April 11, the House passed a new taxpayer rights bill (H.R. 4163) that would provide taxpayers with additional protections when having to deal with the IRS. The measure is a follow-up to the Internal Revenue Service Restructuring and Reform Act of 1998.
Under this most recent measure, penalties on unpaid taxes would be reduced and penalties or interest charged would be eliminated when the IRS causes a mistake or an unreasonable delay during a tax investigation. It also aims to clarify rules about the disclosure of tax return information. For example, the measure would provide for judicial review of an IRS decision to withhold the release of information on a return. The IRS would also be required to let taxpayers know whenever their returns have been inspected or when tax information has been disclosed illegally.
While this bill promises some improvements when dealing with the IRS, its disclosure provisions may not be especially beneficial for business owners, says Mark Luscombe, principal federal tax analyst with CCH Inc., a Riverwoods, Illinois-based provider of tax and business law information. As now drafted, the bill raises concerns that "too much confidential tax information would be disclosed in an administrative tax proceeding," he explains. For example, tax return information might be disclosed during situations where the IRS is scrutinizing cash payments to partners in a partnership.
The White House responded to the legislation by saying the admin-istration is committed to strengthening taxpayer rights and will continue to work with Congress and the IRS to ensure that taxpayers receive the best service possible. Nevertheless, the Clinton administration's Office of Management and Budget (OMB) did register some objections. It's specifically concerned about a provision that would allow an exclusion from income for interest received on overpayments of tax. OMB claims that dishonest taxpayers would have an incentive to "invest" with the IRS by "intentionally overpaying their taxes in order to receive this tax-free interest."
OMB says it's possible that Congress can address these concerns by modifying the bill. If the changes meet OMB's satisfaction, analysts predict this new taxpayer rights bill could be one of a number of provisions in a tax measure that Congress is likely to clear this session.
While the House usually passes smaller tax measures, "the Senate tends to gather all the little tax bills the House has passed and put them together in one big bill for consideration," says Luscombe. But there are, of course, still no assurances that even if a bill passes, it will actually see the light of day. "There could be another situation like last year," he explains, "where Congress came up with a big tax bill, but the president vetoed it."
- Employers Council on Flexible Compensation, www.ecfc.org