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Which Year to Report

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Stuart O. Bronstein

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Mar 30, 2023, 12:08:23 PM3/30/23
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An employer paid a new employee a signing bonus in 2022 (withholding
all necessary taxes). The employee didn't last to fulfill his
commitment, so paid back the bonus in 2023. The employer just wants to
net everything and not include the $10,000 on the employee's W-2 for
2022. I advised against it, and they asked what the penalty would be
if they did what they propose.

As far as I'm aware, since there would apparently be no taxes due (in
theory - I'm still not so certain) would there be a penalty for that?

Thanks for any thoughts.


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http://DownToEarthLawyer.com


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honda....@gmail.com

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Mar 30, 2023, 1:33:35 PM3/30/23
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IRC Section 1341 appears to be the correct tool for dealing with this, as described
at the following August 2022 site and many other sites:
https://www.investopedia.com/terms/s/section-1341-credit.asp

I guess the employer and employee are going to do what they're going to do here.
I would suppose any penalty would be related to tax fraud. Then again and as you
point out, the bottom line of these two approaches may be exactly the same.

Given the effort required for the IRS to pursue this "fraud" (if the IRS can even detect it
through non-extraordinary means), I have doubts the IRS would notice.

I guess the biggest flag might appear if the employer's books were reviewed.

But why not do it the right way and sleep better at night?

Stuart O. Bronstein

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Mar 30, 2023, 4:08:55 PM3/30/23
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"honda....@gmail.com" <honda....@gmail.com> wrote:

> IRC Section 1341 appears to be the correct tool for dealing with
> this, as described at the following August 2022 site and many
> other sites:
> https://www.investopedia.com/terms/s/section-1341-credit.asp
>
> I guess the employer and employee are going to do what they're
> going to do here. I would suppose any penalty would be related to
> tax fraud. Then again and as you point out, the bottom line of
> these two approaches may be exactly the same.
>
> Given the effort required for the IRS to pursue this "fraud" (if
> the IRS can even detect it through non-extraordinary means), I
> have doubts the IRS would notice.
>
> I guess the biggest flag might appear if the employer's books were
> reviewed.
>
> But why not do it the right way and sleep better at night?

Thanks for the information. It occurred to me that it's really not a
situation where there would be no change. The employee would be
taxed in 2022 and get a deduction in 2023. So failing to include
that money in his W-2 would very likely cause him to not report
taxable income that tax had already been withheld from. So he'd ask
for a refund that was not due to him - based on the mistaken actions
of the employer.

I don't know why they'd be so insistent on not including that money
in his W-2 and just treating the whole thing like it never happened,
since they already withheld taxes on the money. Would the W-2 not be
consistent with the quarterly estimated tax reports? If so, that
could cause a big problem.


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Stu
http://DownToEarthLawyer.com


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Taxed and Spent

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Mar 30, 2023, 4:43:56 PM3/30/23
to
On 3/30/2023 10:29 AM, honda....@gmail.com wrote:
> IRC Section 1341 appears to be the correct tool for dealing with this, as described
> at the following August 2022 site and many other sites:
> https://www.investopedia.com/terms/s/section-1341-credit.asp
>
> I guess the employer and employee are going to do what they're going to do here.
> I would suppose any penalty would be related to tax fraud. Then again and as you
> point out, the bottom line of these two approaches may be exactly the same.
>
> Given the effort required for the IRS to pursue this "fraud" (if the IRS can even detect it
> through non-extraordinary means), I have doubts the IRS would notice.
>
> I guess the biggest flag might appear if the employer's books were reviewed.
>
> But why not do it the right way and sleep better at night?
>

Section 1341 requires "an item was included in gross income for a prior
taxable year (or years) because it appeared that the taxpayer had an
unrestricted right to such item"

In this case, it seems the item did not have an unrestricted right to
such item.

Seems the payment in 2022 was a loan, to be forgiven if the terms were met.

Stuart O. Bronstein

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Mar 30, 2023, 7:59:29 PM3/30/23
to
Taxed and Spent <nospam...@nonospam.com> wrote:
> honda....@gmail.com wrote:

>> IRC Section 1341 appears to be the correct tool for dealing with
>> this, as described at the following August 2022 site and many
>> other sites:
>> https://www.investopedia.com/terms/s/section-1341-credit.asp
>>
>> I guess the employer and employee are going to do what they're
>> going to do here. I would suppose any penalty would be related to
>> tax fraud. Then again and as you point out, the bottom line of
>> these two approaches may be exactly the same.
>>
>> Given the effort required for the IRS to pursue this "fraud" (if
>> the IRS can even detect it through non-extraordinary means), I
>> have doubts the IRS would notice.
>>
>> I guess the biggest flag might appear if the employer's books
>> were reviewed.
>>
>> But why not do it the right way and sleep better at night?
>
> Section 1341 requires "an item was included in gross income for a
> prior taxable year (or years) because it appeared that the
> taxpayer had an unrestricted right to such item"
>
> In this case, it seems the item did not have an unrestricted right
> to such item.
>
> Seems the payment in 2022 was a loan, to be forgiven if the terms
> were met.

Having to pay money back, by itself, doesn't mean the person doesn't
have an unrestricted right to it. If the contract were drafted so
that the money was a loan, to be forgiven if the employee completed
his obligations, then I'd agree with you. But in this case the
employee earned the money and he had every right to keep it, as long
as he performed his obligations under the contract.

If the mere possibility of having to pay money back meant it wasn't
taxable, most of the money companies earn from the sale of goods
wouldn't be taxable for several years after the sale, because the
customer could sue to get their money back, and could even win those
suits, for that period of time.


--
Stu
http://DownToEarthLawyer.com


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Taxed and Spent

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Mar 31, 2023, 1:02:13 PM3/31/23
to
On 3/30/2023 4:55 PM, Stuart O. Bronstein wrote:

adding back the OP from Mr. Bronstein:

An employer paid a new employee a signing bonus in 2022 (withholding
all necessary taxes). The employee didn't last to fulfill his
commitment, so paid back the bonus in 2023. The employer just wants to
net everything and not include the $10,000 on the employee's W-2 for
2022. I advised against it, and they asked what the penalty would be
if they did what they propose.

As far as I'm aware, since there would apparently be no taxes due (in
theory - I'm still not so certain) would there be a penalty for that?

Thanks for any thoughts.


--
Stu
http://DownToEarthLawyer.com



So, he DIDN'T earn the money and have every right to keep it.

>
> If the mere possibility of having to pay money back meant it wasn't
> taxable, most of the money companies earn from the sale of goods
> wouldn't be taxable for several years after the sale, because the
> customer could sue to get their money back, and could even win those
> suits, for that period of time.

Getting a bit far afield, I'd say.

>
>

Unable to sleep, I found a number of web sites with varying idea on how
to handle this.

One reg suggests the bonus is not a valid deduction until its
contingencies are met, although the fact that the money was paid seems
to counter this thought. I think this is not the favored approach, and
there may be other regs, etc. that clarify this, as it is part of
employee compensation.

Others say use the section 1341 approach, brought to our attention by
honda.lioness, of whom I am a fan.

This site throws a bit of a wrinkle in the section 1341 analysis: "You
must have a reasonable expectation that you had an unrestricted right to
the money at the time you received it. If you knew you were going to
quit within the bonus vesting period, then you do not qualify for the
credit. If you had no idea that you would be leaving within the vesting
period then you can claim the credit- just make sure you document this
case." But: "knew" - when? Being unable to claim the credit in this
manner seems to favor the W2C approach suggested by others, below.

https://www.cerebraltaxadvisors.com/blog/signing-bonuses-and-their-tax-implications/

Here is an article that says employee can, depending on specific facts,
claim in either year 1 or year 2:

https://gct.law/Att/2375

One approach which I seem to like says that if the employee received
wages in year 2, net the repayment against year 2 wages:

https://tax.thomsonreuters.com/blog/overpayments-and-repayments/

Other sites say issue a W2C for year 1, and have employer and employee
amend their year 1 filings.

https://dimovtax.com/how-to-get-tax-paid-back-for-bonus-repayment/

Another site says this is not the way to do it, use section 1341.

Here is a Law Review Article with more history and footnotes than you
can bill your client for:

https://scholarship.law.wm.edu/wmblr/vol1/iss2/3/


If it was me, I would do what the client wishes in this case, assuming
the amount of the bonus is fairly ordinary and not huge. I doubt anyone
would notice, and the net effect, all around, is not unreasonable. Of
course, appropriate cautions should be given to cover your behind.

Alan

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Mar 31, 2023, 8:28:34 PM3/31/23
to
On Thursday, March 30, 2023 at 9:08:23 AM UTC-7, Stuart O. Bronstein wrote:
> An employer paid a new employee a signing bonus in 2022 (withholding
> all necessary taxes). The employee didn't last to fulfill his
> commitment, so paid back the bonus in 2023. The employer just wants to
> net everything and not include the $10,000 on the employee's W-2 for
> 2022. I advised against it, and they asked what the penalty would be
> if they did what they propose.
>
> As far as I'm aware, since there would apparently be no taxes due (in
> theory - I'm still not so certain) would there be a penalty for that?
>
> Thanks for any thoughts.
>
>
> --
> Stu
> http://DownToEarthLawyer.com
>
>
> --
> This email has been checked for viruses by AVG antivirus software.
> www.avg.com
>
Bonuses paid to a new hire come with an unrestricted right in every case I have ever seen. Employers do not pay the amount and restrict the employee's use. The employer assumes that the money is gone and will never be paid back. Therefore, if the contract is violated and the bonus is paid back in the next year then the employee can use the deduction method or the credit method if the repayment is in excess of $3000. And... if upon request the employer refuses to refund the social security and medicare taxes that were withheld, the employee can request a refund on IRS Form 843.

Stuart O. Bronstein

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Apr 1, 2023, 11:31:02 AM4/1/23
to
Alan <temp...@vacationmail.com> wrote:

> On Thursday, March 30, 2023 at 9:08:23 AM UTC-7, Stuart O.
> Bronstein wrote:
>> An employer paid a new employee a signing bonus in 2022
>> (withholding all necessary taxes). The employee didn't last to
>> fulfill his commitment, so paid back the bonus in 2023. The
>> employer just wants to net everything and not include the $10,000
>> on the employee's W-2 for 2022. I advised against it, and they
>> asked what the penalty would be if they did what they propose.
>>
>> As far as I'm aware, since there would apparently be no taxes due
>> (in theory - I'm still not so certain) would there be a penalty
>> for that?
>>
>> Thanks for any thoughts.
>>
> Bonuses paid to a new hire come with an unrestricted right in
> every case I have ever seen. Employers do not pay the amount and
> restrict the employee's use. The employer assumes that the money
> is gone and will never be paid back. Therefore, if the contract is
> violated and the bonus is paid back in the next year then the
> employee can use the deduction method or the credit method if the
> repayment is in excess of $3000. And... if upon request the
> employer refuses to refund the social security and medicare taxes
> that were withheld, the employee can request a refund on IRS Form
> 843.

Thanks Alan. That was my thought too, but I wanted to check with
people who had more experience on this point than I do.


--
Stu
http://DownToEarthLawyer.com


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