IRS Chief Counsel Memorandum 201810007 (Nov. 28, 2017)
Available at https://www.irs.gov/pub/irs-wd/201810007.pdf
The IRS Chief Counsel’s office has released a memorandum concluding that employer-provided foreign tax preparation services are not excludable as a working condition fringe benefit, and that the fair market value of those services must be treated as income and FICA wages, and subject to withholding, unless an exclusion applies. The tax preparation services at issue were provided pursuant to an employer’s tax equalization policy, which was intended to ensure that employees stationed away from their home countries would not pay more income tax due to their work location. An accounting firm hired by the employer prepared employees’ foreign, U.S., and state tax returns, and provided other services needed to implement the program. The employer treated the value of the U.S. and state tax return-preparation services as imputed income, but claimed that the foreign tax return-preparation services were provided primarily for its own benefit and that consequently, the fair market value of those services should be excludable as a working condition fringe benefit.
The memo explains that employer-provided tax preparation services confer a personal benefit, the value of which is includible in income unless an exclusion, such as the exclusion for working condition fringe benefits, applies. The working condition fringe exclusion could apply only if the tax preparation services were employment-related expenses deductible by employees under Code § 162 if the services had not been employer-paid. But, according to the IRS, the tax preparation services in this case were personal expenses deductible, if at all, only under Code § 212(3) (expenses for determination, collection, or refund of any tax), regardless of whether the taxes were foreign or domestic. Consequently, the employer should have included the fair market value of the services in employees’ income. The memo then rejects the employer’s computation of the services’ value as inadequate because the proffered fee averages and survey data did not fairly represent what an individual employee would have had to pay in an “arms’ length” transaction for the sophisticated tax return-preparation services received. Absent other data, the memo concludes that—while cost is not determinative—the amount paid by the employer was, in this case, the best indicator of the services’ fair market value. Federal income tax withholding applied, unless the value was excludable under Code § 911 (which allows for the exclusion of certain foreign earned income) or because it was subject to income tax withholding in the foreign country where the employee was stationed. Subject to any applicable totalization agreement between the U.S. and the country where the employee worked, the value of tax preparation services was also subject to FICA taxes.
EBIA Comment: The memo is consistent with, and helpfully explains, the IRS’s longstanding position regarding tax preparation services offered under a tax equalization policy, but it also highlights some potential sources of confusion. While a substantial business benefit to the employer, distinct from the payment of additional compensation, is needed to show that the expense would have been employment-related if the employee had paid and taken a business deduction, that benefit is not enough. The expense must also be of a type that the employee could have deducted under Code § 162 (or Code § 167, but that section seldom applies). Because Code § 162 doesn’t apply to personal tax preparation, the working condition fringe exclusion is unavailable. Also, while imputed income from non-cash fringe benefits is determined by fair market value, cost can sometimes be the most reasonable basis for determining fair market value. For more information, see EBIA’s Fringe Benefits manual at Sections II.B.3 (“Fair Market Value Generally Determines Amount of Fringe Benefit Income”) and XXIII (“Working Condition Fringe Benefits”).
Contributing Editors: EBIA Staff.