The Internal Revenue Service (the “IRS”) recently issued Chief Counsel Advice 201810007 requiring the fair market value of tax preparation services provided by a large U.S. company to its employees who frequently transfer employment from country to country be included in the employees’ gross income. Key points in the guidance include the following:
- Employer-provided tax preparation services do not qualify as a working condition fringe which can be excluded from gross income. Filing tax returns is the employee’s personal obligation. By fulfilling the employee’s personal obligation, an employer’s payment of employee’s personal expenses results in taxable income to the employee.
- The amount includible in income is the fair market value of tax preparation services. It is determined by the amount the employee would have to pay for in an arm’s length transaction. Therefore, the employer’s payment of the services or the employees’ subjective belief of the value of the benefit is not relevant to the determination of the fair market value. However, when data regarding arm’s length transactions is unavailable, the employer-paid amount could be used as the best indicator of fair market value.
- The fair market value of tax preparation services is subject to FICA taxes, unless a totalization agreement between the United States and the foreign country may apply to determine the social security taxation of the employer-provided tax return preparation services.
- The fair market value of tax preparation services is subject to income tax withholding unless the employer has a reasonable belief that the value of services would be excludable from the employee’s gross income under Code Section 911, or the employer is required by foreign law to withhold income taxes on that value in foreign countries.
In summary, when the employer provides tax return preparation services to its employees who work within the Untied States, it should include the fair market value of such services in the employees’ gross income and withhold income tax and FICA taxes accordingly. Regarding the U.S. employees who work in its international offices, the employer should consult relevant agreements, regulations and law to determine FICA tax and income tax withholding requirements.