As previously published in Forbes by Jason B. Freeman on May 1, 2020.
This day in time, everyone has an opinion about everything. Tax law is no different. Tax attorneys routinely provide written tax opinions to their clients on a variety of tax issues. Generally, clients request tax opinions to get additional comfort or gauge risk on the tax effects of a transaction. Other times, clients may request a tax opinion to protect against certain penalties under the tax laws or to determine whether their reporting position should be disclosed on a tax return. With the passage of the Families First Coronavirus Response Act (FFCRA) last month, tax attorneys are now being called upon to provide tax opinions on whether businesses are entitled to payroll tax credits with respect to paid sick leave. This latter issue—paid sick leave—has historically been a labor law issue, but in light of provisions in the FFCRA regarding associated payroll tax credits, it has become an important federal tax issue. Many businesses will need to consider obtaining a legal tax opinion regarding the tax credit in order to avoid exposure to penalties.
The Families First Coronavirus Act. The CARES Act has received considerable attention due to the Payroll Protection Program (PPP) and the individual recovery rebates. However, small business owners should also be aware of its legislative predecessor, the FFCRA, enacted nine days prior to the passage of the CARES Act. Under the FFCRA, certain employers are required to compensate their employees in the event an employee requests paid sick leave because, among other reasons, the “employee is subject to a Federal, State, or local quarantine or isolation order related to COVID-19.” This paid sick leave is mandatory, and a failure by the employer to pay where required opens up the employer to potential lawsuits or other civil penalties.
Federal, State, or Local Quarantine or Isolation Order. Prior to guidance by the Department of Labor, there was much confusion regarding the scope of the language in the FFCRA requiring paid sick leave due to a “Federal, State, or local quarantine or isolation order[s].” However, on April 6, 2020, the U.S. Department of Labor issued a temporary rule, which provided clarification. Under the Rule, an employee is “subject to a quarantine or isolation order” if the employee is subject to a “quarantine, isolation, containment, shelter-in-place, or stay-at-home order issued by any Federal, State, or local government authority that causes the Employee to be unable to work even though his or her Employer has work that the Employee could perform but for the order.” The Rule further provides that any employee subject to such an order may claim paid sick leave only if, but for being subject to the order, he or she would be able to perform work that is otherwise allowed or permitted by his or her employer, either at the employee’s normal workplace or by telework. Stated differently, an employee subject to an order may not claim paid sick leave if the employer does not have work for the employee as a result of the order or other circumstances.
The Mechanics of Paid Sick Leave. Initially, it should be noted that the FFCRA’s paid sick leave requirements only apply to certain employers. Generally, these include employers with fewer than 500 employees unless the employer has fewer than 50 employees and qualifies for a hardship exemption. If the employer fits within the scope of the FFCRA, the employer must pay sick leave to eligible employees who request it. If the employee is full-time, the employee is generally entitled to up to 80 hours of paid sick time. Conversely, if the employee is part-time, he or she is entitled to an amount of sick time equal to the number of hours such employee works, on average, over a 2-week period. In either scenario, paid sick time cannot exceed $511 per day and $5,110 in the aggregate.
Federal Payroll Tax Credit. Recognizing the economic hardship of requiring paid sick time to employees, the FFCRA provides a payroll tax credit for employers that pay qualified paid sick leave. The credit amount is equal to 100% of the qualified paid sick leave wages paid by the employer. In other words, if done properly, the small business employer can be compensated in full by the government for any paid sick leave the employer pays to its employees (up to the prescribed limits above). The credit or refund can be claimed through IRS payroll tax filings (i.e. Forms 941).
The Written Tax Opinion. Similar to the rest of the world, tax attorneys communicate to their clients through various methods. For example, they provide legal advice orally, either over the phone or in person. Alternatively, and particularly this day in time, the communication may be made through e-mail.
But, in some instances, a more formal written communication may be appropriate. In tax parlance, this written communication is referred to as a “tax opinion.” The tax opinion provides the tax attorney’s reasoned level of confidence on a particular transaction or aspect of federal tax law. Generally, the tax opinion will have a specified level of confidence—such as “more likely than not,” “substantial authority,” or “reasonable basis.” The specific level of confidence can be significant, particularly for tax reporting. For example, taxpayers are generally not required to disclose a reporting position if the position has substantial authority. However, taxpayers are generally required to make a disclosure if the position has a lower threshold of reasonable basis if the taxpayers wants to avoid civil penalties.
Tax Penalties. The Internal Revenue Code contains a litany of penalties. In many cases, the penalties are designed to promote certain taxpayer conduct, such as the filing of a timely tax return or the timely payment of tax. In other instances, the penalties may be designed to keep taxpayers (and even their tax preparers) honest in their tax return reporting.
The quintessential “honesty penalty” is referred to as the “accuracy-related penalty.” This penalty seeks to promote compliance with the federal tax laws by imposing penalties on taxpayers for, among other things, negligence or disregard of rules or regulations. Generally, a taxpayer is negligent if the taxpayer fails to make a reasonable attempt to comply with the federal tax law or fails to exercise ordinary and reasonable care in the preparation of a tax return. In addition, a taxpayer disregards rules or regulations if the taxpayer is careless, reckless, or intentional in failing to follow certain federal tax authorities, such as the Code or temporary and final Treasury Regulations.
Should I get a Tax Opinion? As with any tax issue, there is no cookie-cutter answer to this question. Rather, it depends on the clients’ wants and needs and the particular set of facts. In more cases than not, taxpayers routinely take reporting positions and file their returns without obtaining written tax opinions. Nothing is necessarily wrong with this approach, provided the taxpayer is exercising reasonable care in the preparation of the return.
But tax opinions can be useful where the tax law is unclear, such as the claiming of payroll tax credits under the FFCRA. For example, to properly claim the payroll tax credit on the employment tax return, the employer will be required to show that the wages were qualified paid sick leave wages under the FFCRA. If the employer has paid sick leave for a Federal, State, or local government shelter-in-place or stay-at-home order, the employer will need to show that such wages fall within the Department of Labor guidance mentioned above. Because each shelter-in-place and stay-at-home order is unique and depends on the location of the employer, a careful analysis of the terms of the order will be required.
In the event paid sick leave is paid and the IRS later determines the employer did not qualify for the payroll tax credits, the credits will have to be repaid. In addition, the employer could potentially be subject to accuracy-related penalties for the reporting position claimed on the employment tax returns if it is incorrect.
Thus, in these cases, a written tax opinion may come in handy. Both the federal courts and governing regulations recognize that procuring a tax opinion from a qualified tax professional and relying on the tax opinion can constitute reasonable cause. See, e.g., Nix v. U.S., 2:17-CV-00434-JRG (E.D. Tex. Dec. 20, 2018); Kennedy v. Comm’r, T.C. Memo. 2010-206; Treas. Reg. § 1.6664-4(c). Moreover, a tax professional can advise on the associated risks of claiming payroll tax credits, particularly after analyzing the applicable shelter-in-place order at issue. Accordingly, in times of persistent anxiety such as these, the tax opinion may potentially provide at least some level of comfort to taxpayers on issues of federal tax.
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