Bear in mind: Private letter rulings (PLRs) only apply to the companies seeking them. But they do give you an idea of how IRS looks at certain issues.

In this case, employees sued the company for unpaid leave and vacation time. As part of the settlement, the court ordered the company to pay attorney’s fees for the employees in the suit. According to the PLR, the awarding of attorney’s fees is essentially a reimbursement of an expense. Therefore, it’s not subject to taxes or reporting.

You can the download the PLR here to see all the details.

IRS has warned its going to start doing random employment tax audits in 2010. It’s aim: To find out exactly how much tax revenue the feds are losing due to employees being misclassified as independent contractors (ICs).

IC classification has always been a gray area — which is why many companies have relied on making an educated guess and then knocking on wood. Without any other red flags, many potentially misclassified employees (and their employers) have flown under the radar.

Random audits could be done at any company — there’s no way to minimize your risk of getting flagged.

What you can do: Go through your hiring procedures now and review the work done by ICs. The first random audits won’t be done until around April 2010, so there’s still time to address any questionable classifications you have on your books.

Starting with Tax Year ’11, all “payment card transactions” will have to be reported on information returns, just like all your other vendor payments — but in this case, you’ll be relying on the card issuer or other third-party processor to hand over the vendor’s name, address, Taxpayer Identification Number (TIN) and the gross amount paid.

All of this is to make sure that those payments (a) get reported and (b) get taxed properly. The rule also drives home the point that these transactions are subject to backup withholding if you don’t have a TIN for the vendor –  just as any other payment would be. The problem there is, you can’t backup withhold on a payment that’s already been made.

For that reason, the rule also allows card issuers and other payment processors to immediately start submitting the names and TINs of vendors in their networks to IRS’ TIN Matching Program. The hope is that by getting a running start, the payment processors can confirm accurate TINs for every vendor and avoid having to do any backup withholding.

A new form 1099 needed?

Two things are still up in the air:

1. How exactly these transactions will be reported, and
2. How you and your card processor will need to interact to ensure all the correct info is recorded and filed.

It may require a new form altogether, or IRS may opt to simply add a few lines or boxes to the existing 1099-MISC. It may also require you and the bank or other third party that facilitates these payments for you to get together to revamp processes, confirm transaction records, etc.

The good news is: You have two years to prepare — and IRS still has time to work out the kinks. We’ll keep you posted on any developments.

You can read all the details here.

In the case, a woman moved into her boyfriend’s home. She cooked and did light housekeeping for him, but did not contribute to his art business. There was no contract indicating that she would perform any task for pay.

The boyfriend gave her checks totaling $10,500, many marked “wages” in the info line. At the end of the year, he reported them as payments for business services and issued her a 1099-MISC.

When she didn’t include the $10,500 as income, IRS took her to court. But the judge ruled that the payments were actually gifts, since there was no contract, and that whatever tasks she performed were unrelated to his business.

She’s now off the hook for the back taxes.

No word on whether the couple is still together. But we’re betting not.

The company treated its salespeople as ICs because the workers set their own hours, had no set territory and didn’t have to report back to the company on how or where they spent their time. The workers weren’t required  to provide written reports on their work, although some did so voluntarily.

Sounds as if the workers had control, right? But the court found that they were employees, in part because of the amount of support the company gave them. The company reimbursed the sales force for business expenses ranging from gas and hotels to advertising costs and photocopying. It also provided company-owned vehicles the salespeople used.

Because the salespeople had no ownership stake or personal investment in the tools and equipment used to perform their work, they were employees.

The company is currently fighting the assessment, arguing that, at minimum, it qualifies for Sec. 530 relief — for having made a good-faith effort to correctly classify the workers.

We’ll keep you posted as the case develops.

• There’s a new due date for sending 1099s to payees. If you’re reporting gross proceeds paid to an attorney (Box 14) or substitute payments (Box 8 ) the deadline is now Feb. 15 for statements due after 2008.
• Death benefits paid to the estate of a deceased employee are now reported on 1099-MISC, not the 1099-R. That’s true whether the payment comes from a qualified or nonqualified compensation plan.
• You are not required to complete Box 15a in relation to deferrals paid under nonqualified plans subject to Sec. 409A.
• If you make military differential payments after 2008 those payments should be reported on the W-2, not the 1099. This applies to payments made to former employees on active duty for more than 30 days.

Updated: For more info on how to treat military differential payments, check this guide from IRS or download Publication 15, Employer’s Tax Guide.

Keep these tips in mind to minimize your extra work — and make sure you’re covered if IRS has any questions about what you sent when:

• When sending W-2s and 1099s, make a copy of the postmarked envelopes for your files. It shows that you sent the documents on time and confirms that you had the right address from the start.
• If a form is returned by the postal service, keep it in the original envelope. If the employee or vendor provides you with a new address, you can merely send the entire package in a new envelope. If you don’t hear from them, hold the docs for 4 years — to show any future auditor that you did your required filing.
• For 1099s that need to be reissued, there’s a check box to indicate if it’s a duplicate or a correction. For W-2s, you’ll need to write “reissued statement” in the upper-right corner.

Bonus: If you have a lot of requests for duplicate W-2s or 1099s, consider this time-saver. IRS allows you to charge a nominal fee, say $5 or so, to reissue lost forms. You’d be amazed how many “lost” documents are found once people realize they’ll have to pay for a new copy.

Just be sure the document was actually lost or misplaced. You can’t charge for a duplicate if the person says he or she never received the original.

Some A/P departments ask for updated W-9s each year. That’s great if you have the time, but it does mean spending some time on tasks that don’t need to be done. 

Bear in mind: W-9s are good indefinitely, so if there’s no reason to believe a vendor’s information is out of date, you don’t need a new W-9. 

Best practice: Instead of hounding every vendor for a new W-9 (or even confirming the info) you may want to limit your efforts to companies who throw up a yellow flag that they may need a new form. Some of the signs:

• moving to a new location
• mergers or acquisitions (some merged companies take on the buying company’s TIN)
• a change in ownership (may indicate that a company is now a corporation).

The only time you have to get a new W-9 is if IRS sends a B-notice for a vendor.

What’s your take? Is it worth to get new W-9s (or their equivalent) from vendors each year? Or does it take more time than it saves? Let us know in the comments.

Of the 31,000 independent contractors IRS contacted about discrepancies, 65% took action. 

What’s it mean for you? It may slow down Congress’ push to force all payments to vendors to be reported on 1099s. Unless you love paperwork, that’s a good thing.

IRS is also looking for other “compliance-challenged” areas of taxation to apply a similar soft-touch approach. No word yet on what areas that might be, but we’ll keep you posted.

Just under 2 million corporate and partnership income tax returns were filed electronically — more than 50% more than the prior year.

Large partnerships using e-filing increased a whopping 156% over ’07.

It’s easy to see why more companies are jumping on the bandwagon: Electronically filing your corporate tax returns and related information returns can reduce errors. And for some forms, like the 1099-MISC, extended deadlines make it more convenient to use the e-file option.

Which filing methods do you use — and why? Share your perspective in the comments.