Page 35 - JoFA_Jan_Apr23

Net annual compliance rate and tax gap
Tax Return, for the first quarter that
begins after the income tax return
The net tax gap and compliance rates take into account tax that will subsequently be
making the election was filed. This paid late or collected through IRS administrative and enforcement activities.
is accomplished through completing
and filing Form 8974, Qualified Small
100
Business Payroll Tax Credit for Increasing 84% 87% 87%
Research Activities, along with the quar-
80
terly payroll tax return. For example, if
a taxpayer files the return that includes
the election for payroll tax offset during 60
the taxpayer’s second quarter, the tax- Compliance rate
payer may begin using the payroll credit 40
against its third-quarter payroll taxes.
Any credit amounts that cannot be used
20
on that quarter’s payroll tax return are
carried forward to future quarters.
0
2011-2013 (revised) 2014-2016 2017-2019 (projected)
COMMON PITFALLS
Below are some of the common pitfalls Annual average tax gap (billions)
that taxpayers will have to navigate when
evaluating if there is an opportunity to 500 $470
use an R&D credit to offset a payroll $428
tax liability. To reiterate a point in the $380
400
section above, taxpayers must make an
annual election to use the R&D credit
300
against payroll tax on the originally filed
tax return (including extensions). Failure
to properly make the election could 200
create several issues with the taxpayer’s
income and payroll taxes. 100
Another challenge relates to the
aggregation rules under Sec. 41(f).
Specifically, if a taxpayer is a member of 2011-2013 (revised) 2014-2016 2017-2019 (projected)
a controlled group or is part of a group
Source: IRS, Tax Gap Estimates for Tax Years 2014-2016 (And Projections for Tax Years 2017-2019
under common control, then the QSB (Publication 5364), Table 3.
rules must be met at that aggregated
group level to qualify for the payroll tax
offset. Taxpayers should carefully review result in its not being eligible for the taxpayer to have “gross receipts,” as
all members of the same controlled payroll tax offset. Additionally, gross reflected on line 1 of its federal filing,
group or group under common control, receipts for purposes of computing below $5 million, but when other
which are treated as a single taxpayer, as the R&D credit and evaluating the relevant items are included, the tax-
it may impact a taxpayer’s ability to use $5 million limitation include several payer’s gross receipts may exceed the
the payroll tax offset. sources of income including gross maximum amount. The years in which
Additionally, unlike the regular receipts or sales, royalties, and interest, a taxpayer has gross receipts should
credit rules, Notice 2017-23 does not among others. Taxpayers must consider also be evaluated.
provide an exception for a de minimis all types of gross receipts as included If a taxpayer uses a professional em-
amount of gross receipts. This means in the definition when evaluating if ployer organization (PEO), it should
that no matter how small the amount, the taxpayer falls below the threshold. coordinate with the PEO to claim
a taxpayer may have income that could In other words, it is possible for a the payroll tax credit. While a PEO

journalofaccountancy.com January 2023 | 33