File your Taxes for Free!
  • Get your maximum refund*
  • 100% accurate calculations guaranteed*

TurboTax Federal Free Edition - File Taxes Online

Don't let filing your taxes get you down! We'll help make it as easy as possible. With e-file and direct deposit, there's no faster way to get your refund!

Approved TurboTax Affiliate Site. TurboTax and TurboTax Online, among others, are registered trademarks and/or service marks of Intuit Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.


© 2012 - 2018 All rights reserved.

This is an Approved TurboTax Affiliate site. TurboTax and TurboTax Online, among other are registered trademarks and/or service marks of Intuit, Inc. in the United States and other countries. Other parties' trademarks or service marks are the property of the respective owners.
When discussing "Free e-file", note that state e-file is an additional fee. E-file fees do not apply to New York state returns. Prices are subject to change without notice. E-file and get your refund faster
*If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
*Maximum Refund Guarantee - or Your Money Back: If you get a larger refund or smaller tax due from another tax preparation method, we'll refund the applicable TurboTax federal and/or state purchase price paid. TurboTax Federal Free Edition customers are entitled to payment of $14.99 and a refund of your state purchase price paid. Claims must be submitted within sixty (60) days of your TurboTax filing date and no later than 6/15/14. E-file, Audit Defense, Professional Review, Refund Transfer and technical support fees are excluded. This guarantee cannot be combined with the TurboTax Satisfaction (Easy) Guarantee. *We're so confident your return will be done right, we guarantee it. Accurate calculations guaranteed. If you pay an IRS or state penalty or interest because of a TurboTax calculations error, we'll pay you the penalty and interest.
https://turbotax.intuit.com/corp/guarantees.jsp

E File Tax Return

Military Tax CreditsTax Planning Us 1040ez1040ez Tax FormsFiling And Amended Tax ReturnIncome Tax Preparation Fees1040ez Instructions 2012Tax TableH&r Block Free TaxE File 2011 Federal TaxesIrs Instructions 10401040ez Instructions 2012I Didn T File 2011 TaxesHr Block OnlineIrs Amended Tax ReturnMyfreetaxAmend 2010 Tax Return TurbotaxFree Tax SoftwareTax Form EzCan I Amend My Taxes OnlineIrs Gov Tax Forms 2012Www Myfreetaxes Com McrsvpTaxact 2011 Free Federal EditionTurbotax Free Edition2011 Amended Tax Return1040 Form 2012How To File Free State Taxes OnlineHow To Amend 2012 Tax ReturnIrs Efile 20121040 Estimated Tax FormTax Forms 2011 1040Where Can I Get A 1040x Form2011 E-fileWhere To Send 1040xWww Irs Gov Form1040aFree Tax ServicesBankruptcy Back Taxes1040ez 2013 Instructions1040ez WorksheetAmend Federal Tax ReturnFederal Tax Form 1040ez

E File Tax Return

E file tax return Index A Assistance (see Tax help) F Free tax services, How To Get Tax Help H Help (see Tax help) High-low method: Introduction, High-low method. E file tax return October 1, 2010 (Table 1) (see List of states under October 1, 2010 (High-low method) ) Transition rules, High-low method. E file tax return I Internet: Per diem rates, Per diem rates on the Internet. E file tax return Introduction, Introduction M More information (see Tax help) O October 1, 2010 (High-low method): Arizona (AZ), Per Diem Rate Tables California (CA), Per Diem Rate Tables Colorado (CO), Per Diem Rate Tables District of Columbia (DC), Per Diem Rate Tables Florida (FL), Per Diem Rate Tables Illinois (IL), Per Diem Rate Tables Maryland (MD), Per Diem Rate Tables Massachusetts (MA), Per Diem Rate Tables New York (NY), Per Diem Rate Tables Pennsylvania (PA), Per Diem Rate Tables Rhode Island (RI), Per Diem Rate Tables Utah (UT), Per Diem Rate Tables Virginia (VA), Per Diem Rate Tables Washington (WA), Per Diem Rate Tables Wyoming (WY), Per Diem Rate Tables P Per diem rates: High-cost localities, High-low method. E file tax return High-low method, High-low method. E file tax return Internet, Per diem rates on the Internet. E file tax return Regular federal method, Regular federal per diem rate method. E file tax return Standard rate for unlisted localities, High-low method. E file tax return , Regular federal per diem rate method. E file tax return Transition rules, High-low method. E file tax return , Federal per diem rate method. E file tax return Publications (see Tax help) R Regular federal method: Introduction, Regular federal per diem rate method. E file tax return Transition rules, Federal per diem rate method. E file tax return T Table 2 (High-low method, October 1, 2010), Per Diem Rate Tables Tax help, How To Get Tax Help Taxpayer Advocate, Taxpayer Advocate Service. E file tax return Transition rules:, Transition Rules Example: High-low method, High-low method. E file tax return Regular federal method, Federal per diem rate method. E file tax return High-low method, High-low method. E file tax return Regular federal method, Federal per diem rate method. E file tax return TTY/TDD information, How To Get Tax Help Prev  Up     Home   More Online Publications
Print - Click this link to Print this page

Railroad Retirement Tax Act (RRTA) Desk Guide (January 2009)

LMSB-4-0908-048

1. Preface

  • Ground Transportation Technical Advisor

2.  Introduction

  • Role of RRB

The Railroad Retirement Systems

Types of Tax

  • RRTA - Tiers and Rates

Filing Requirements, IRS
  • Forms
  • Form CT-
  • Form CT-2
  • Form 941
  • Form W-2
  • Form W-3

Filing Requirements, RRB
  • RRB Reports

Deposit Requirements

3.  Interaction Between IRS and RRB

  • Memorandum of Understanding (Coordination and Implementation Agreements)
  • On-site Information Exchange
  • IRS Reports
  • RRB Determination of Coverage
  • RRB Audit Report
  • IRS Follow-up

4.  Definitions

Employer

  • RRA vs. RRTA
  • Employer
  • Owned Company
  • Controlled Companies
  • Stock Ownership
  • Licenses
  • Agreements
  • Any Railroad Service
  • Indirect Services
  • Indirect
  • Companies
  • Casual Service
  • Receiver or Trustee as Employer
  • Railroad Associations
  • Railway Labor Organizations
  • Exclusions From "Employer"

Employee

  • In the Service of One or More Employers
  • Officer
  • Special Categories
  • Exclusions

Compensation

  • Comparison of RRTA to FICA
  • Included and Excluded
  • Earned vs. Paid

5.  Audit Techniques

Audit Plan

  • Preliminary
  • Payroll System
  • Computer Audit Specialist (CAS) Applications
  • Reconciliation of CT-1's
  • Supplemental Annuity Tax
  • RURT
  • Fringe Benefits
  • Backup Withholding
  • Conversion Issues
  • FICA vs. RRTA.

6.  Potential Issues

General

  • General Comments
  • Employee vs. Independent Contractor
  • Section 530
  • General Issues

Industry Specific Issues:

  • Severance Pay/ Termination Pay
  • Annual Productivity Fund Payments
  • Productivity Fund Buyouts
  • Employee Achievement Awards
  • Housing Allowances
  • Meals, Travel, Lodging
  • SEGREGATION
  • Excluded Companies
  • Principally Engaged in Railroad Activities
  • Separate, Identifiable Enterprise
  • Court Cases

Employer Issues

  • Common Paymaster
  • Successor Employers

Related Corporations:

  • Car Repair Shops
  • Warehousing and Warehouse Companies
  • Construction Companies
  • Real Estate Companies
  • Data Processing Companies

Examination Techniques, Related Corporations

  • Subsidiary Records
  • Parent Records
  • Contractual Relationship
  • General Inquiries
  • Other Considerations

7.  Report Writing

  • General
  • ET Version 8.0
  • Form 4665, Form 4666, Form 886A, Form 2504, Form 2297, Form 3363
  • Form 4668-RT
  • Form 4667
  • Conversion Case
  • IRC § 3509

Computation of Tax

  • Tier I 
  • Tier II

8.  Other Considerations

  • Statutory Period of Limitations
  • Form SS-1O
  • RRB Report Title
  • BA-3a Annual Report of Creditable Compensation
  • BA-4 Report of Creditable Compensation Adjustments
  • BA-9 Report of Separation Allowance or Severance Pay
  • BA-10 Report of Miscellaneous Compensation and Sick Pay
  • Form G-241 Summary Statement of Quarterly Report of Railroad Retirement
  • Supplemental Annuity Tax Liabilities
  • Form G-245 Summary Statement of Quarterly Report of Railroad Retirement
  • Supplemental Tax Credits
  • Form G-440 Report Specifications Sheet
  • Penalties, Interest Free Adjustments, Abatements


1.  Preface

This Desk Reference Guide is intended as a resource tool to assist Revenue Agents who are assigned the examination of a railroad employer. The Guide was prepared presuming that the reader has already received employment tax training. The guide will provide:

  • An overview of the Railroad Retirement System.
  • An explanation of the role of the Railroad Retirement Board (RRB).
  • An explanation of the interaction of the IRS and the RRB.
  • Definitions specific to railroad retirement terminology.
  • A suggested audit plan.
  • A list of potential issues with possible position write-ups.

We have attempted to include as many citations as possible throughout the text to relevant court cases, revenue rulings, revenue procedures, private letter rulings, etc.

Ground Transportation Technical Advisor
Technical Advisors assist the field in identifying, developing and resolving industry specific and cross-industry issues; provide educational opportunities to internal and external customers as appropriate; and maintain and develop industry and issue expertise. The Ground Transportation  Technical Advisor (TA) provides these services for the railroad and trucking industries. The TA maintains a liaison with various functions within the IRS as well as in other governmental agencies, and may also be aware of issues being raised at various other examination sites throughout the country.  As a result, the TA may be able to provide the examiner with current information to consider during the course of the audit.

The TA also maintains a web site at: http://lmsb.irs.gov/hq/pftg/railroad/index.asp

This web site may be useful in obtaining information on topics of an even more current nature The railroad industry is unique in many ways and we encourage examiners to use the web site as a means of obtaining knowledge and understanding about the industry.

It is recommended that the examiner use four hours to review the guide during the planning stages of the examination. The guide can then be used on a continuing basis during the course of the examination as a reference tool.

Back to top


2.  Introduction

Railroad employers are subject to a separate and distinct system of employment taxes from the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) systems covering most other employers.  Parts of the system are the responsibility of the IRS, and parts of the system are the responsibility of the Railroad Retirement Board, an independent governmental agency.

Because this is a separate system for railroad employers, payments subject to railroad retirement taxes are specifically excepted from FICA, FUTA, and the Self-Employment Contributions Act (SECA).

The Railroad Retirement Board (RRB) is an independent agency in the executive branch of the Federal Government.  The RRB is headed by a three member Board appointed by the President of the United States, with the advice and consent of the Senate.  One member is appointed upon the recommendation of railroad employers, one is appointed upon the recommendation of railroad labor organizations, and the third member, who is the Chairman, is appointed to represent the public interest.  The Board Members' terms of office are five years, and are scheduled to expire in different years.

The primary function of the Board is the determination and payment of benefits under the retirement-survivor and unemployment-sickness programs. To this end, the Board employs field representatives to assist railroad personnel and their families in filing claims for benefits, examiners to adjudicate the claims, and information technology staff to operate the data processing equipment and administer the automated programs needed to maintain earnings records, calculate benefits and process payments.

The Board also employs actuaries to predict the future income and outlays of the railroad retirement trust funds, statisticians and economists to provide vital data, and attorneys to interpret legislation and represent the Board in litigation. Internal administration requires a procurement staff, a budget and accounting staff, and personnel specialists. The Inspector General employs auditors and investigators to detect any waste, fraud or abuse in the benefit programs.

The Board's headquarters is located in Chicago, Illinois.  The Board maintains field offices across the United States in localities easily accessible to large numbers of railroad workers.

Role of RRB
The role of the RRB is to administer the benefits of the Railroad Retirement Act (RRA) and Railroad Unemployment Insurance Act (RUIA) systems. Thus, the RRB maintains earnings records for each railroad employee in a manner similar to those maintained by the Social Security Administration.   The RRB’s relationship with the Social Security Administration (SSA) is particularly extensive because of the coordination between the two systems.  Railroad retirement annuities may be based in part on social security credits and social security benefit amounts awarded after 1974 to railroad retirement annuitants are made through the Board as part of combined railroad retirement-social security monthly benefit payments.

The RRB and the Social Security Administration have an interagency agreement providing for system-to-system access between the two agencies.
 
The Railroad Retirement System
Railroad employment taxes consist of employer and employee taxes. The employer and employees pay certain taxes at different rates and some are only paid by one or the other, though all taxes are collected by the employer and the employer makes deposits of these taxes.

  1. Railroad Retirement Tax Act (RRTA) – RRTA taxes fund railroad worker retirement benefits.  Collection of these taxes is the responsibility of the IRS.  These taxes are imposed by chapter 22 of the Internal Revenue Code (IRC).
  2. Railroad Retirement Act (RRA) – RRA is the benefit system through which payments are made to retired railroad workers. Benefits are administered by the RRB.
  3. Railroad Unemployment Insurance Act (RUIA) - This system provides unemployment and sickness insurance benefit program for railroad workers. The system is administered, and the taxes are collected by, the RRB.
  4. Railroad Unemployment Repayment Tax (RURT) - in periods of economic downturn, when the RUIA account becomes insufficient to cover payments of unemployment benefits, funds are advanced to the RUIA account from the RRTA account.  RURT taxes are then collected as a means of repaying the advance, bringing the RUIA fund back into balance.  Thus, this tax goes into and out of effect, depending on the balance in the RUIA account.

    As of June 29, 1993, the RUIA account was fully funded and all advances from the RRTA account had been repaid.  As a result, the RURT was terminated effective with respect to wages paid on or after July 1, 1993.  This tax could be reinstated at some future date.  When in effect this tax is imposed by Chapter 23A of the IRC.
  5. Tax on Employee Representatives - Certain individuals perform services as an officer or official representative of a railway labor organization for purposes of representing employees under the Railway Labor Act.  These individuals are subject to RRTA taxes, and file a separate return to report the wage payments and RRTA taxes. Individuals subject to this tax will not be covered in detail in this desk guide due to the limited number of returns filed for this special situation.  Discussion of employee representatives will be limited to an awareness only basis.
  6. IRC 6103 (l) (1) (C) - The IRS is authorized to disclose tax information regarding RRTA taxes to the RRB for purposes of its administration of the RRA.  The RRB may not use such tax information to administer any other statutes.  Such tax information may not be disclosed to RRB contractors (in connection with the administration of the RRA).  The IRS may not disclose RURT information to the RRB.

RRTA – Tiers and Rates
Legislation was enacted in 1934, 1935, and 1937 to establish a railroad retirement system separate from the Social Security Act of 1935.  Under Railroad Retirement provisions, service was credited back to 1936 and rail workers received a somewhat higher benefit than they would have under Social Security.  Additional legislation passed in 1974 restructured railroad retirement benefits into two tiers to coordinate them more fully with social security benefits. 

Railroad retirement replaces the social security system for railroad workers. The taxes under the railroad retirement system are included in two tiers.  The first tier is based on combined railroad retirement and social security credits, using social security benefit formulas.  The second tier is based on railroad service only and is comparable to the pensions paid over and above social security benefits in other heavy industries.  These tiers and rates are as follows:

RRTA

2008

2007

2006

Tier I Wage Base/Rate *

$102,000/6.20%

$97,500/6.20%

$94,200/6.20%

Tier I Wage Base/Rate *

unlimited/1.45%

unlimited/1.45%

unlimited/1.45%

Tier II ER Wage Base/Rate

$75,900/12.1%

$72,600/12.1%

$69,900/12.6%

Tier II EE Wage Base/Rate

$75,900/3.9%

$72,600/3.9%

$69,900/4.4%

* Subject to both employer and employee

 

 


When looking at the rates for RRTA, and comparing them to the rates used for social security, it is readily apparent that a railroad employer is subject to a much higher rate of tax than a non-railroad employer.  Thus, there is a significant incentive for an employer to attempt to be classified as a non-railroad, to classify workers as independent contractors, or to classify payments as something other than wages.
 
Filing Requirements, IRS

Forms

Because railroad employers do not come under the social security system, they file different employment tax returns from those used to report FICA wages.

The forms used to report railroad employment taxes are presented below.

Form CT-1

Employer's Annual Railroad Retirement Tax Return

A railroad employer files an annual CT-1 to report RRTA taxes.  All CT-1 returns are filed with the IRS Cincinnati Campus, and must be filed by the last day of the second month following the end of the calendar year (normally, by February 28th).

The IRS Cincinnati Campus provides information to the RRB to allow the RRB to reconcile railroad employer accounts.

Note: For any year in which the RURT is applicable, a separate entry is provided in order for the RURT to be reported on the Form CT-1.

Form CT-2

Employee Representative's Quarterly Railroad Tax Return

A CT-2 is filed on a quarterly basis by individuals subject to the Tax on Employee Representatives.

Form 941

Employer’s Quarterly Federal Tax Return

Although railroad employers are not subject to FICA, they are still required to withhold income tax on behalf of their railroad employees; there is no provision on Form CT-l to report the income tax withholding, so railroad employers use Form 941 for this purpose.

It is also conceivable that an employer could have some employees covered by FICA, and other employees covered by RRTA. In this situation the employer would be reporting FICA wages on the Form 941.  (This subject will be discussed in greater detail in the “Potential Issues” section of the guide.)

Form W-2

Wage and Tax Statement

Railroad employers use Form W-2 to report wage payments to employees and to SSA.  RRTA taxes are shown in Box 14, and Boxes 3, 4, 5, 6 and 7, relating to FICA and Medicare, should be blank.

Form W-3

Transmittal of Income and Tax Statements

Railroad employers use Form W-3 to transmit Forms W-2 to SSA.  Form W-3 provides a box to indicate that the employer is a railroad, alerting SSA to the fact that the information reported reflects RRTA rather than FICA and Medicare.

If an employer has some employees covered under FICA and Medicare as well as RRTA, the Form W-2's must be segregated by type, and separate Forms  W-3 prepared for each batch.

Filing Requirements, RRB

RRB Reports

A railroad employer is also required to submit numerous reports to the RRB which can be used by the examiner as a cross check of the amounts reported on the Form CT-1. Some of the reports are as follows:

RRB Report

Title

BA-3a

Annual Report of Creditable Compensation

BA-4

Report of Creditable Compensation Adjustments

BA-9

Report of Separation Allowance or Severance Pay

BA-10

Report of Miscellaneous Compensation and Sick Pay

Form G-241

Summary Statement of Quarterly Report of Railroad Retirement Supplemental Annuity Tax Liabilities

Form G-245

Summary Statement of Quarterly Report of Railroad Retirement Supplemental Tax Credits

Form G-440

Report Specifications Sheet

Deposit Requirements

Railroads are under the same rules as any other business or employer for determining deposit requirements for all types of tax.  RRTA taxes are also subject to deposit requirements.  The “Instructions for Form CT-1”, contain a detailed discussion of deposit rules for RRTA taxes. There were major changes made to the deposit requirements in 1999.  See News Release IR-1999-27 and Notice 99-20, 1999-17 I.R.B. 16.

In general RRTA taxes are deposited with an authorized financial institution or a Federal Reserve Bank by using Form 8109, Federal Tax Deposit Coupon.  Based on a dollar threshold there is a mandatory electronic deposit requirement.  That threshold has been increased from $50,000 to $200,000. If the total Federal tax deposits made in 2006 exceed $200,000 they must use the Electronic Federal Tax Payment System (EFTPS) or RRBLINK beginning January 1,2007.   

Back to top


3.  Interaction Between IRS and RRB

Agreement Between the Railroad Retirement Board and Internal Revenue Service

The Agreement between the Railroad Retirement Board and Internal Revenue Service (Agreement)  facilitates the sharing of information between the two agencies.

The terms of the Agreement call for each agency to share the results of its investigations with the other agency and to provide supporting work papers or documentation on an as needed basis, to the extent authorized under IRC § 6103(l)(1)(c) and other applicable federal laws.

On-site Information Exchange

On occasion, the IRS and RRB may be simultaneously involved in an audit of the same employer.  In such an event, each agency may share information with the other as permitted by applicable federal laws.  The LMSB Ground Transportation Technical Advisor should be contacted before any information is shared

IRS Reports

The Agreement calls for the IRS to furnish a copy of any examination report to the RRB.  For an agreed case, the report is furnished when the examiner is closing the case. Unagreed reports are furnished after Appeals action.

It is important to note that the RRB is NOT entitled to receive any information with respect to RURT taxes and/or social security taxes. If an examination results in changes to RURT and/or social security taxes, the report should be sanitized so that RURT and/or social security information is not included in the copy being provided to the RRB.  Such sanitizing should be coordinated with the local IRS disclosure officer.
 
RRB Determination of Coverage

The RRB conducts investigations with regard to whether or not an employer is an RRA employer, the results of which are referred to as determinations of coverage.

The RRB employs a legal staff charged with the responsibility of submitting a recommendation to the Board concerning questions of coverage.  The Board then makes the final determination of coverage after analyzing the recommendation of legal counsel.

The results of a determination of coverage can fall into three categories, and are forwarded to the IRS for appropriate action, as shown below.

Note that while the Board makes the determination of coverage, the IRS must conduct any follow-up action since the assessment and collection of applicable RRTA taxes are the responsibility of the IRS.

RRB Audit Report

The RRB also conducts audits of existing RRA employers.  During the course of such audits, the RRB may identify compensation that is not being reported as wages for RRTA purposes. The RRB forwards a copy of its report to the IRS for follow-up since the IRS is responsible for the assessment and collection of applicable RRTA taxes.

IRS Follow-up

With regard to both determinations of coverage and RRB audit reports, the IRS must decide what action is appropriate relative to assessment and collection of RRTA. This decision should take into account the relative size of the potential adjustment, the year(s) involved, other workload priorities, etc.

Back to top


4.  Definitions

Employer  RRA vs. RRTA

RRTA, RRA and RUIA each contain a definition of the term "employer". The IRS has endorsed the policy of construing and applying the term "employer" for RRTA purposes in the same manner as that term is construed and applied for RRA and RUIA purposes.  See Rev. Rul. 77-445, 1977-2 C.B. 357 and Rev. Rul. 74-121, 1974-1 C.B. 300.  See also City of Galveston by and Through Board of Trustees v. United States, 33 Fed. Cl. 685 (1995); Standard Office Bldg. Corp. v. United States, 819 F.2d 1371 (7th Cir. Ill. 1987); Galveston by and Through Board of Trustees v. United States, 22 Cl. Ct. 600 (1991); Carland, Inc. v. United States, 75 A.F.T.R.2d 1234 (W.D. Mo. 1995).

Employer

A RRTA "employer" is a railroad carrier or any company that: (1) is "directly or indirectly owned or controlled by" a railroad carrier or is "under common control" with such a carrier; and (2) "operates any equipment or facility or performs any service (except trucking service, casual service, and the casual operation of equipment or facilities) in connection with the transportation of passengers or property by railroad, or the receipt, delivery, elevation, transfer in transit, refrigeration or icing, storage, or handling of property transported by railroad. (see  IRC § 3231(a))

Owned Company

The Surface Transportation Board requires companies involved in the transportation industry to file reports and to list in these reports all affiliated companies.  These reports provide information regarding the principal business activity, the form of control, the percentage of control, along with information regarding any other company that may own a portion of the affiliated company.  Any company listed in these schedules will generally be railroad employers set out in Treas. Reg. § 31.3231(a)-1.

Controlled Companies

Companies that perform railroad service and are controlled by one or more carriers are employers.  Control may be by means of:

  • Stock ownership
  • Agreements
  • Licenses.
  • Any other devices which insure that the operation of the company is in the   interest of one or more carriers

Stock Ownership

If this is the form of control used, then the examiner should be able to show that a majority of the stock owners are also stock owners of one or more companies that control a carrier.  The examiner should request from the controlled company a list of their stock owners and other companies that they own stock in.

Licenses

If this is the form of control used, then the examiner should be able to show that the licensor of the controlled company has the same licenses with those of one or more companies that control a carrier.

Agreements

This means of control may be present through a contract or agreement. For example, when a carrier enters into a cost plus contract, the carrier may step in and control management action to prevent cost overruns. Another example of this means of control may occur when the right to control is set out in an agreement even though the company is designated as an independent contractor. Look for a separate agreement, like a union agreement, that simply states that the carrier will maintain the control necessary to determine whether workers are employees. Also a contract or agreement may spell out the control over the manner and method of accomplishing results. Such control may be found in an addendum to the contract or in the form of general specifications which set out the results and the manner and method of accomplishing the results.

The examiner is looking for a situation in which a result could be accomplished by one or more different methods. When the contract spells out the results to be achieved, as well as the method of accomplishing that result, the company is not free to use its own method, and is controlled.

Any Railroad Service

In addition to being owned or controlled, a company must also be performing a railroad service.  The service may be direct or indirect.

Direct Services

Direct services are those that involve the transportation by rail of:

  • Passengers
  • Property

Indirect Services

Indirect services involve those that are connected with, or supportive of rail transportation and/or essential to its proper functioning, but which are not casual or trucking services. The following list represents examples of services that are included in indirect services:

  • Accounting services
  • Bookkeeping
  • Bridge services
  • Building services
  • Construction
  • Engineering
  • Equipment leasing and rental
  • Loading and unloading freight
  • Maintenance of way
  • Office building rental
  • Piggyback trailer ramping, deramping and repair
  • Purchasing department
  • Repair services
  • Servicing overhead trolley lines
  • Stenographic services

Listed below are the kinds of companies that may provide indirect services:

  • Communications Company - Look for those that use microwave relays such as TV antenna (Cable TV) companies or other companies that may handle the railroad's communication, signal, and switching operations.
  • Computer Company - Look for those owned by a carrier that are performing accounting services or use computers to operate signals, keep track of shipments, rolling stock; and other rail activities. See Revenue Ruling 77-445, 1977-2 C.B. 357.  See also City of Galveston by and Through Board of Trustees v. United States, 33 Fed. Cl. 685 (1995); Galveston by and Through Board of Trustees v. United States, 22 Cl.Ct. 600 (1991).
  • Concrete Company - Look for those that pour pre-stressed concrete.  Check to see if they make concrete cross ties.
  • Dock Company - Look for all types of terminal companies, including potential subdivisions of a state such as port authorities which may also be subject to RRTA tax. See Revenue Ruling 77-386, 1977-2 C.B. 356 and Revenue Ruling 82-64, 1982-1 C.B. 154.
  • Financial Companies - Look for those that own or lease rolling stock.
  • Fuel Companies - Check to see if they are fueling, heating, or cooling units on cars or piggyback trailers. See Revenue Ruling 74-552, 1974-2 C.B. 338.  But See Missouri Pacific Lines, Inc. v. United States, 3 Cl. Ct. 14 (1983).
  • Gravel Companies – Look for those that furnish ballast including crushed slag.
  • Ice Companies - Icing boxcars generally have been replaced by refrigerator cars but sometimes ice companies fuel these cars. Revenue Ruling 69-306 1969-1 C.B. 267.
  • Lumber Companies - Look for those that furnish railroad ties or plywood cut to fit in railroad boxcars.
  • Manufacturing Companies - Look for those owned by a carrier that manufacture or remanufacture railroad pans, accessories, or other equipment used by a carrier. See Revenue Ruling 85-177, 1985-2 C.B. 203.  See also Trans-Serve, Inc. v. United States, 521 F.3d 462 (5th Cir. 2008).
  • Real Estate Company - Look for those owned by a carrier that own office buildings, warehouses, terminal tracks, and furnish or lease these to or on behalf of the railroad. See Revenue Ruling 74-121, 1974-1 C.B. 300.  See also Standard Office Bldg. Corp. v. United States, 819 F.2d 1371 (7th Cir. Ill. 1987); Carland, Inc. v. United States, 75 A.F.T.R.2d 1234 (W.D. Mo. 1995).
  • Steel Companies - Look for those that repair or build rolling stock. See Despatch Shops, Inc. v. Railroad Retirement Board, 153 F.2d 644 (D.C. Cir. 1946) regarding RUIA and Despatch Shops v. Railroad Retirement Board, 154 F.2d 417 (2d Cir. 1946) regarding RRA.
  • Warehouse Company - Look at each of these very carefully. Include any produce terminal company buildings, grain elevators, etc.

Casual Service

Treas. Reg. § 31.3231(a)-1(c) states that:

"... the term casual applies when the service rendered or the operation of equipment or facilities by a controlled company or person in connection with the transportation of passengers or property by railroad is so irregular or infrequent as to afford no substantial basis for an inference that such service or operation will be repeated, or whenever such service or operation is insubstantial."

The RRB regulations define “casual service” essentially the same: “…whenever such service or operation is so irregular or infrequent as to afford no substantial basis for an inference that such service or operation will be repeated, or whenever such service or operation is insubstantial.”  As a guideline in applying the definition of “insubstantial”, the RRB uses less than 10 percent of total revenue, employees, and output. This guideline, however, is not part of the RRB regulations. 20 CFR 202.6.

When issuing its regulations, the IRS declined to implement a less than 10 percent rule.  The Service stated that situations can arise where one of the factors is less than 10 percent while the remaining factors are greater than 10 percent, (factors here refers to revenue, employees and output). It is not clear that the service or operation of equipment or facilities would be insubstantial in those situations.

Receiver or Trustee as Employer

The definition of employer, at IRC § 3231(a), also includes:

"...Any receiver, trustee, or other individual or body, judicial or otherwise, when in the possession of the property or operating all or any part of the business of any such employer;…”

This would only apply to individuals who would be employees if the property or business operation had continued in the possession of the preceding employer.  This situation could occur, for example, if a railroad sought protection through the bankruptcy court, and the bankruptcy court appointed a trustee to operate the company.  The trustee would be a railroad employer of the carrier's employees.

Railroad Associations

The definition of employer also includes railroad associations, tariff bureaus, demurrage bureaus, weighing and inspection bureaus, collection agencies, and other organizations that are:

  1. Controlled and maintained wholly or principally by two or more employers and
  2. Engaged in performing services in connection with or incidental to railroad transportation.  An organization is engaged in performing services incidental to railroad transportation when such function would normally, in the absence of the organization, be performed by the constituent employers.

Railway Labor Organizations

The term employer includes railway labor organizations that are national in scope and organized in accordance with the provisions of the Railway Labor Act. "Employer" also includes the following railway labor organization subordinate units established according to constitution and by laws:

  1. State and national legislative committees
  2. General committees
  3. Insurance departments
  4. Local lodges and divisions.

Exclusions From "Employer"

IRC § 3231(a) excludes certain companies from the definition of "employer".

  1. A street railway, or interurban or electric railway, unless it is operating as a part of a general steam-railroad system of transportation.  (This definition also includes a general rail transportation system operated by electric, diesel, or other means of power.)
  2. any company because it is engaged in mining coal, supplying coal to an employer if delivery is not beyond the mine tipple, and operating equipment or facilities therefore, or in any of these activities.

Employee

For purposes of RRTA, "employee” is defined at IRC § 3231(b), and Treas. Reg. § 31.3231(b)-1 provides that an employee includes any individual who is:

  1. In the service of one or more employers,
  2. An officer of an employer,
  3. An employee of a local lodge or division defined as an employer, or
  4. In the service of a general committee.

In the Service of One or More Employers

The definition of "employee”, for RRTA purposes, is very similar to the definition of an employee for FICA purposes.  Treas. Reg. § 31.3231(b)-1 defines a worker as an employee if he or she is:

  1. Subject to the continuing authority of the employer who supervises and directs the manner in which the employee's services are rendered,
  2. Rendering professional or technical services integrated into the staff of the employer
  3. Rendering other personal services on the property used in the operations of the employer which are an integral part of those operations.

With respect to 2 and 3 above, an individual performing services as an independent contractor may be, with regard to such services, in the service of an employer within the meaning of these paragraphs. See Treas. Reg. § 31.3231(b)-1(a)(3).

Treas. Reg. § 31.3231(b)-1 goes onto provide additional facts to be considered, including:

  • It is the right to control, not the actual exercise of this right, that is important
  • The right of the employer to discharge the worker is an important indication that the worker is subject to direction and control
  • The furnishing of tools and the furnishing of a place to work are important indications that the worker is subject to direction and control
  • If the worker is subject to control and direction merely as to the results to be achieved, and not as to the means for achieving those results, the worker would generally be considered an independent contractor
  • Whether or not a worker is an employee must be determined based upon an examination of the particular facts of the case
  • If a worker is an employee, it is of no consequence that the worker is designated as a partner, independent contractor, etc.
  • If a worker is an employee, it is of no consequence that the worker performs the services on a part-time basis.

Officer

Similar to the rules under FICA, an officer of an employer is one who performs the duties of his or her office for compensation.

Special Categories

The definition also includes provision to include as an employee those individuals performing services on behalf of a railway labor organization.  If you are involved in the examination of a labor organization, refer to the code and regulations for the rules to be applied.

Exclusions

The term "employee” excludes individuals engaged in certain coal mining operations, as follows:

  • Coal mining
  • Preparing coal
  • Loading coal at the tipple
  • Handling coal between the mine and the tipple, unless the handling consists of movement by rail with standard locomotives.

Compensation

Comparison of RRTA to FICA

The definition of compensation for RRTA purposes is found at IRC § 3231(e), and, while there are historical differences between the FICA and RRTA statutes, there are also significant similarities. Legislation enacted over the years has made the RRTA Tier I tax identical to the FICA tax as well as conforming the Tier I wage ceiling to the FICA wage ceiling.

Along with conforming the structure of the RRTA to parallel that of the FICA, the exclusions from the definition of compensation under RRTA, with few exceptions, mirror the exclusions from the definition of wages under FICA.  These exclusions from compensation include non-monetary benefits such as fringe benefits, meals and lodging excludable under IRC § 119, and employer-paid life insurance premiums for group-term life insurance under $50,000.

In amending RRTA, Congress often indicated the purpose was to provide conformity to FICA.  Congress has added references to FICA provisions in the RRTA definition of successor employer and the rules for non-qualified deferred compensation (IRC §§ 3231(e)(2)(C) and 3231(e)(8), respectively).  In addition, Tier I benefits are designed to be equivalent to social security benefits, and are subject to federal income taxation in the same manner as social security benefits.

For calendar years after December 31, 1992, Treas. Reg. § 31.3231(e)-1(a)(1) provides that "compensation" for computation of RRTA taxes has the same meaning as the term "wages" under IRC § 3121(a), except as specifically limited by the Railroad Retirement Act or regulations

Included and Excluded

The Code provides for the inclusion or exclusion of the following items:

  • IRC § 3231(e)(1) -

Include -
1. Money remuneration for services rendered 
Exclude -
2. Payment for health insurance plan
3. Tips (but see IRC 3231(e)(3) below)
4. Employee business expense advance or reimbursement

  • IRC § 321l(e)(2) - provides for the application of the Tier I and II wage base amounts
  • IRC § 3231(e)(3) -
    includes cash tips unless the amount of cash tips is less than $20 for any calendar month
  • IRC § 3231(e)(4) -
    excludes payments from Tier I taxes that are made on account of sickness or accident disability to the extent they are received under a workmen's compensation law or RUIA.
  • IRC § 3231(e)(5) -
    excludes amounts for employee achievement awards, scholarship and fringe benefits, if the employee will meet the requirements or IRC §§ 74(C), 117, and 132, respectively.
  • IRC § 3231(e)(6) -
    excludes educational assistance program payments if the employee will meet the requirements of IRC § l27,
  • IRC § 3231(e)(7) -
    excludes qualified group legal service plan if the employee will meet the requirements of IRC § 120.
  • IRC § 323l(e)(8) -
    includes amounts contributed to a 401(k) plan in general, conforms RRTA rules with FICA rules with respect to non-qualified deferred compensation.
  • IRC § 3231(e)(9) -
    excludes meals and lodging if the employee will meet the requirements of IRC § 119.

Earned vs. Paid

As a historical note, in prior years RRTA was computed at the time of payment using the tax rates in effect when the compensation was earned.  RRTA also used a monthly wage base limitation rather than an annual wage base.

The statute was eventually modified to bring RRTA into conformity with FICA. Since 1985, the tax has been computed using rates in effect at the time of payment, regardless of when the compensation was earned. In addition, RRTA uses the annual wage base limitations rather than monthly limits.

Back to top


5.  Audit Techniques

Audit Plan

This chapter provides a suggested audit plan for the examination of a railroad for employment tax purposes.  The audit plan presented would result in a fairly complete review of the employer for compliance with filing requirements, correct treatment of various types of payments, employee/independent contractor issues, etc.  Depending on the time allotted to your specific examination, or prior examination history, it may be necessary to tailor the plan to your case by eliminating certain steps.

  1. Preliminary
    • Request copies of the following reports from the taxpayer
    • ICC Form A & B
    • RRB Form BA-3a
    • RRB Form BA-4
    • RRB Form BA-9
    • RRB Form BA-10
  2. Request a listing of all payroll returns filed by company and by type (i.e. Forms CT-1, 941, 940).
  3. Establish which companies and/or employees are covered by each return.

Payroll System

  1. Ask the taxpayer the following questions:
    • Are there any known errors on the returns under examination?
    • Are there any outstanding amended/corrected returns in regard to the Forms CT-1/941 for the years under examination?
    • Are there any amended/corrected returns being prepared or contemplated by the taxpayer regarding the Forms CT-1/941?
    • Are there any work papers or summaries available reconciling the return to the books or showing the account summaries for reporting the various taxable components on the Form CT-1?
    • Are there any work papers or summaries relating to payroll from other sources, such as audits or examinations by Internal Audit, State Agencies, RRB, other internal/external sources?

      Follow-up to secure copies of any of the above information, as appropriate.
  2. Have the taxpayer explain the payroll and accounting process with regard to:
    • How the determination is made as to whether an employee is covered by RRTA or FICA.
    • Payroll payments that may be excluded from Tier I and Tier II tax.
    • Whether compensation is reported on an earned or paid basis.
    • How the work hours for the supplemental annuity tax are determined.

Computer Audit Specialist (CAS) Applications

  1. Obtain the following computer information:
    • Form W-2 tapes
    • Form 1099 tapes
    • RRB Forms BA-3a, BA-4, BA-9 and BA-10 tapes
    • Payroll master file or record layouts
  2. Have the CAS:
    • Reconcile the W-2's to the 1099's to identify the conversion of workers from employees to independent contractors and/or to identify payments being made to employees who have been excluded from RRTA taxation.
    • Reconcile the Form W-2 tape to the BA-3a tape, taking into account 401(k) contributions and group term life insurance calculations.  This may identify payments reported on the BA-3a but excluded from RRTA taxation.
    • Reconcile the W-2 tape to the BA-9 tape. Discrepancies may indicate severance or dismissal payments which have been excluded from RRTA taxation.
    • Reconcile the W-2 tape to the BA-3a tape. Discrepancies may indicate sick pay payments which have been excluded from RRTA taxation.

Reconciliation of CT-1's

Determine whether or not Tier I and Tier II wage and tax amounts have been correctly reported by conducting the following tests:

  • Reconcile CT-1, line 5, to BA-3a. (Tier I)
  • Reconcile CT-1, line 6, to BA-3a. (Tier I)
  • Reconcile CT-1, line 11, to BA-4. (Tier I)
  • Reconcile CT-1, line 11, to BA-4. (Tier II)
    Note: request all Forms BA-4 filed with the RRB during the year and identify the reason for each adjustment.  Consider only those adjustments with a RRTA tax affect.  Compare this total to the railroad’s supporting work papers for line 11 of the CT-1.  Watch for statute of limitations, cash vs. earned, correction of errors, and incorrectly reported compensation
  • Verify that the correct wage base and tax rates have been used.
  • Review the chart of accounts for account titles that are related to employee compensation.  If any are found, test to determine whether or not they were included in taxable compensation.  Be aware of payments being made through accounts payable or voucher accounts.

Supplemental Annuity Tax

Determine whether or not the Supplemental Annuity Tax (SAT) has been correctly reported.  A safe harbor method of computing SAT is available for years after 12-31-93.  See the Section on SAT in the "Definitions" section of this guide.

RURT

Railroad Unemployment Repayment Tax - This tax was terminated effective with respect to payments made on or after July 1, 1993.  However, in the event it is reinstated, the following audit techniques are suggested:

  • Ask the taxpayer how the tax was computed.
  • Reconcile CT-1 RURT wages to Form BA-3a RUIA wages.
  • Select a sample of employees from the Form BA-3a to test for proper RURT computation.
  • Determine the impact of any discrepancies found for Tier I and/or Tier II purposes for RURT purposes.

Fringe Benefits

  1. Review the chart of accounts for account titles that indicate which fringe benefits are being offered.
  2. Request policy statements for fringe benefits that are offered to employees.  The policy should describe the following:
    • The benefit.
    • Which employees or group of employees are entitled to the benefit.
    • The requirements any employee must satisfy to qualify for the benefit.
    • Any limitations that are placed on any employee or group of employees in regard to use of the benefit.
    • The accountability requirements, if any, an employee is required to follow.
    • The RRTA Tier I and Tier II treatment of the benefit.
    • The federal income tax withholding treatment of the benefit.
    • How the benefit is reported to the recipient (i.e W-2, Form 1099, no reporting, etc.).
  3. Determine whether the fringe benefits are being treated properly for RRTA Tier I, Tier II and income tax withholding purposes. Consider:
    • Is a nontaxable benefit being offered that is not covered by IRC § 3121(a)?  If so, pursue further.
    • Is a nontaxable benefit being offered that appears to discriminate in favor of highly compensated individuals?  If so, pursue further.
    • Is a nontaxable benefit being offered on a flat rate basis without proper accountability? If so, pursue further.

Backup Withholding

Backup withholding applies to a railroad employer just as to any other type of employer.

The filed 1099's should be inspected, either by hard copy or tape, to determine whether or not any were filed with missing, incomplete, or obviously incorrect taxpayer identification numbers.  Take appropriate action with respect to any discrepancies discovered.

The taxpayer’s policies and procedures for determining when a 1099 must be issued should be reviewed and tested by comparison to accounts payable vendor listings.  The agent will have to make a decision on the necessity and/or depth of this compliance check based on such factors as prior audit history with the taxpayer, completeness and accuracy of policies and procedures, availability of computerized records for conducting the compliance test, etc.

Conversion Issues

Section 530 of the Revenue Act of 1978 applies to a railroad employer just as to any other type of employer, and must be considered prior to initiating any conversion issues.  This section, as amended through the years, provides an employer with relief from Federal employment taxes with respect to workers who have been reclassified as employees.  Section 530 relieves the employer from paying and withholding any employment taxes (including withholding on income tax) with respect to these employees not only for the period covered by the audit, but for future periods as well.

The Classification Settlement Program (CSP) is also available to railroad employers in the event of a reclassification issue.

The examiner should refer to the materials relating to worker classification that are included in this desk guide.

FICA vs. RRTA.

Determine whether the taxpayer has a group of employees who are covered by FICA rather than RRTA and if this is appropriate. Consider reclassifying for RRTA coverage under IRC Section 3231(a) and (b).

Determine whether the taxpayer owns or directly controls any entities that meet the definition of a carrier under IRC Section 3231(a) and has employees that are covered for FICA rather than RRTA.  Consider reclassifying for RRTA coverage under IRC Section 3231(a) and (b).

Back to top


6. Potential Issues

General

General Comments

Almost any issue that might be present in a FICA employment tax case may also be present with respect to a railroad employer.  Therefore, the examiner should consider current issues from other types of cases whenever examining a railroad employer.

Employee vs. Independent Contractor

The method of determining a worker to be an independent contractor or an employee is the same for a railroad employer as it is for any non-railroad employer.

Reference materials concerning worker classification have been included in this guide to assist the examiner in developing these issues.

The Classification Settlement Program would also apply to a railroad employer.

Section 530

Section 530 has the same application to a railroad employer as it does to any other type of employer.  The taxpayer should be provided the handout concerning Section 530 before beginning any conversion issues.

General Issues

Consider the following during the course of the employment tax examination:

  • Treatment of severance pay as non-qualified deferred compensation
  • Treatment of bonus and award payments as other-than compensation
  • Treatment of employees as independent contractors
  • Treatment of medical reimbursement plans
  • Treatment of employee relocation expense reimbursements
  • Treatment of related entities as FICA employers

This list is not meant to be all-inclusive.  It is only meant to demonstrate the fact that issues present in non-railroad employment tax cases may also be present, and should be considered, in a railroad employer examination.

Industry Specific Issues:

Severance Pay/ Termination Pay

Railroad employers have been very aggressive in attempts to treat severance pay and/or termination pay as not subject to RRTA.

Some of the arguments for this are...

  1. Severance/termination pay represents the buyout of a contract right, and is not taxable based on Revenue Ruling 58-301, 1958-1 C.B. 23.
  2. Severance payments are not subject to RRTA tax because the payments represent supplement unemployment benefit payments (SUB pay).  See CSX Corp. et. al v. United States, 518 F.3d 1328 (Fed. Cir. 2008).  
  3. Severance payments made after the year of termination constitute nonqualified deferred compensation under IRC § 3121(v)(2) as incorporated in IRC § 3231(e)(8)(B). 

With regard to the first argument, the government takes the position that Revenue Ruling 75-44, 1975-1 C.B. 15, is controlling, and that the payments represent compensation for past services rather than the buyout of contract rights.

With regard to the employer's secondary argument, there is no statutory provision for SUB-pay under IRC § 3221(e).  SUB-pay is excluded administratively from compensation for RRTA purposes as a result of the Service’s issuance of a series of FICA and FUTA revenue rulings dating back to 1956.  Revenue Ruling 56-249, 1956-1 C.B. 488, provides a limited exception from the definition of wages for FICA, FUTA and federal income tax withholding for certain payments made upon the involuntary separation of an employee from the service of the employer.  Rev. Rul. 56-249 sets forth eight criteria for determining if payments meet the limited exception. By extending the application of this revenue ruling to the railroad employer's severance/termination plan, it can usually be demonstrated that the plan fails most, if not all, of the eight criteria. Thus the payments made to the employees are not excludable from RRTA.

The third argument is that the payments are compensation in the form of periodic severance pay and if made beyond the year of termination constitutes nonqualified deferred compensation under IRC § 3121(v)(2) as incorporated in IRC § 3231(e)(8)(B). The Service’s position is that payments made under a severance plan are not deferred compensation (see Treas. Regs. § 31.3121(v)(2)-1, and Kraft Foods v. United States, 58 Fed. Cl. 507(2003))

Annual Productivity Fund Payments

In order to reduce costs, some railroad employers have negotiated agreements with their employees to reduce the size of the crew operating the train. In return for agreeing to reduce the size of the crew, the employees receive additional payments from the employer.

The employer agrees to set aside a certain amount of money throughout the course of the year, based on the number of trains operated with a reduced crew. Then, after year-end, each employee who participated in the operation of a train with a reduced crew receives a pro rata share of the funds set aside by the employer.

Employers have attempted to classify these payments as other than compensation for services, and therefore as not subject to RRTA. Employers generally base their position on Revenue Ruling 58-301, 1958-1 C.B. 23, modified and superseded by, Rev. Rul. 2004-110, 2004-2 C.B. 960.

The service has taken the position that these payments represent compensation for services rendered, and are subject to RRTA.  The service position is based on Revenue Ruling 75-44, 1975-1 C.B. 15.  In Rev. Rul. 75-44, the Service expressly distinguished the unexplained holding in Rev. Rul. 58-301 by pointing out that lump sum payments "for the past performance of services reflected in the employment rights [an employee] was giving up" are wages, whereas the relinquishment of a purely contractual right is not "wages."  STA of Baltimore – ILA Container Royalty Fund v. United States, 621 F. Supp. 1567 (1985), aff’d, 804 F.2d 296 (4th Cir. 1986).  This case held that payments made by employers into a “royalty fund” that were subsequently shared by eligible employees were “wages” for FICA and FUTA purposes.

If these types of payments are found, it is suggested that a request for Technical Advice be submitted because of the fact intensive nature of this issue.  Revenue Ruling 75-44, is not sufficient to support this type of issue.

Productivity Fund Buyouts

Some employers, having negotiated a productivity fund system, have subsequently offered employees a lump sum payment in exchange for the employees’ giving up any rights to receive future payments from the productivity fund.  These plans generally call for a payment to be made to the employee at the time the employee accepts the buyout, with an additional payment to be made to the employee at the time the employee leaves the service of the employer.

As with the issue presented above, employers have attempted to classify these payments as other than compensation for services, and therefore as not subject to RRTA, basing their position on Revenue Ruling 58-301.

The Service relies on Rev. Rul. 75-44 and Rev. Rul. 2004-110 to support its position that these payments represent compensation for services rendered, and are subject to RRTA.

Employee Achievement Awards

Employers frequently institute programs to recognize and reward employees for safety, perfect attendance, and other similar types of achievement.  In at least a few cases, railroads have chosen to give the employees shares of stock as the reward under these programs.  A dispute has arisen concerning the taxability of the stock for RRTA purposes.  The railroads are taking the position that stock does not meet the definition of compensation. (Other railroads may be taking this same position with respect to other forms of remuneration such as “reward points”, "bonus points”, etc.)

The argument of the railroad employers can be summarized as follows:

Both the RRA and RRTA define compensation as ”money remuneration". "Money" is a well defined term referring to coin and paper currency, and stock does not meet this definition.

For FICA purpose, compensation is defined as all remuneration, including the cash value of remuneration paid in some medium other than cash.  Stock would meet this broader definition of compensation.

Over the years Congress has had many opportunities to conform the definition of compensation for RRTA and FICA purposes, and in fact has done so with respect to some aspects of the definition.  However, Congress has never chosen to remove the term “money" from either the RRTA or RRA definition.

Since Congress included “money" in the definition of compensation, it must have had a reason for doing so, and the RRB and/or IRS cannot ignore the use of the word when issuing regulations.

Therefore, payments made to employees in the form of shares of stock are excludable from compensation for RRTA and RRA purposes.

The IRS and RRB position, on the other hand, is as follows:

While there are historical differences between the FICA and RRTA statutes, there are also significant similarities.  Legislation enacted over the years has made the RRTA Tier I tax identical to the FICA tax as well as conforming the Tier I wage ceiling to the FICA wage ceiling.  See, e.g., T.D. 8582, 1995-1 C.B. 187.

Along with conforming the structure of the RRTA to parallel that of the FICA, the exclusions from the definition of compensation under RRTA, with few exceptions, mirror the exclusions from the definition of wages under FICA.  These exclusions from compensation include non-monetary benefits such as fringe benefits, meals and lodging excludable under section 119 of the Internal Revenue Code, and employer-paid life insurance premiums for group-term life Insurance under $50,000.

In amending RRTA, Congress often indicated the purpose was to provide conformity to FICA.  Congress has added references to FICA provisions in the RRTA definition of successor employer and the rules for non-qualified deferred compensation (323l(e)(2)(C) and 323l(e)(8), respectively).  In addition, Tier I benefits are designed to be equivalent to social security benefits, and are subject to federal income taxation in the same manner as social security benefits.

Although the two statutes are not completely identical, the language of the regulations for RRTA indicates that the term compensation has the same meaning as the term wages for FICA.

It should be noted that new regulations regarding the definition of compensation were issued in 1994, clarifying that compensation for RRTA and FICA purposes was essentially the same. See Treas. Reg. § 31.3231(e)-1(a).

If you encounter this issue contact the Ground Transportation Technical Advisor for current information on our position.

Housing Allowances

See Rev. Rul. 69-391; 1969-2 C.B. 191, concerning of the value of housing provided to railroad employees.

Meals, Travel, Lodging

See Rev. Rul. 75-279, 1975-2 C.B. 409. Generally, allowances for travel expenses are not wages subject to RRTA taxes if the employee is required to take a period for substantial rest away from home, or if the employee is away from home overnight while on service, and made a full accounting for the allowance.

Other allowances for shorter trips when the employee does not require substantial rest away from home or is not away from home overnight are includible in wages subject to RRTA taxes.

Segregation

Segregation is a concept used for the separation of employees subject to FICA taxes from those subject to RRTA taxes.  Although the concept of segregation at one time was not present in the IRC or Regulations, the Service had used the concept in publishing rulings.  In 1994, Treas. Reg. § 31.3231(a)-1 was amended, by adding paragraph (f).  This new paragraph incorporated the concept of segregation into the regulations.

The purpose of segregation is to obtain a fair and reasonable application of law, but it cannot be used in all cases.  For example, it cannot be used if the records are inadequate or if the railroad and non-railroad work is so commingled that it cannot be separately identified.

Segregation is permitted only if the employer in question is principally engaged in non-railroad activities.  "Principally engaged," for this purpose, is 50 percent or more.  This determination requires consideration of relative revenues, number of employees, payrolls, output, facilities in use, and the character of customers.  Sound judgment will dictate the test or combination of tests to use for your determination.  You may want to incorporate into your determination process consideration of relative net profits and the amount of control over such profits exercised by the parent railroad; also, you may take into consideration the demonstrated purpose for creation of the company and the principal occupation and interest of company executives.

Excluded Companies

Segregation cannot be used for express companies, sleeping car companies, or carrier railroads.  Segregation can be used when, for example, a company has two different businesses and there is a definite separation between them.

Principally Engaged in Railroad Activities

Since, as stated, segregation is not applicable to a company that is principally engaged in railroad activities, you will have to determine the status of a given company by some or all of the following comparisons.

  • Revenues
  • Number of employees
  • Payrolls
  • Output
  • Facilities in use
  • Character of customers

Because the objective is to cover under RRTA all employees that perform some railroad services, it is important that the tests clearly reflect the business activities of the company.  The best tests to accomplish this purpose must be selected on a case-by-case basis.

  • Illustration - In the case of an office building, test by output (relative occupancy) and character of tenants (relative number of RRTA and non-RRTA employers).  It is immaterial to the latter test that non-RRTA employers include those owned or controlled by RRTA employers.  The ultimate test is whether the building primarily serves RRTA employers and if so, it is not eligible for segregation.

Separate, Identifiable Enterprise

Segregation can be applied only to a separate identifiable enterprise. Therefore, when a company's records are commingled so that the enterprise cannot be separately identified, segregation cannot be applied.

In some cases, the records for railroad activities and for non-railroad activities must, in order to meet the test, be kept as if the company were operating two separate divisions.  In other cases, the records do not need to be as separate.  In determining the extent to which records need to be separately maintained, consider the extent, scope, and inter-relationship of the railroad and non-railroad operations.  The larger the size of the company and the territory covered, and the more the railroad and non-railroad operations are related, the more independent the records should be in order for the railroad operation to quality as a separate identifiable enterprise for purposes of segregation.

Court Cases

A number of court cases and revenue rulings have dealt with the issue of segregation.  See in general, the discussion that follows concerning related corporations.
Continued on next page
 
Employer Issues

Common Paymaster

The common paymaster rules apply when the total wages of an employee of two or more related RRTA employers are paid by one of the RRTA employers.  The common paymaster is treated as the sole employer for purposes of the RRTA taxes and the annual wages base.

The common paymaster rule, however, does not apply if the employers are not related, or if the employers are not all RRTA employers.  Thus, an RRTA employer cannot be a common paymaster for FICA purposes and a FICA employer cannot be a common paymaster for RRTA purposes.

Successor Employers

The RRTA adopts the successor provisions found under FICA at IRC § 3121(a)(1), allowing an employer that acquires and continues a business of another employer to include wages paid by the prior employer for purposes of determining the annual wage base limitation.  However, the RRTA requires that the terms "employer", "service" and "compensation" be given their meaning under RRTA.  As a result, successor employer issues involving FICA and RRTA employers cannot be commingled.
 
Related Corporations:

“Employer” is defined by IRC § 3231(a) for RRTA purposes as a company under some kind of control by a railroad that provides a railroad-related service that is not a trucking service, casual service, or the casual operation of equipment or facilities.  This definition has generated a long line of court cases dealing with the issue of whether or not a related company should be considered a railroad employer.  The courts have generally held that if an entity’s operations are related both “functionally” and “economically” to a carrier under common control with the entity, the entity is an “employer” within the meaning of the RRTA.

Some of the related corporation issues that have been considered by the courts are presented below.

Car Repair Shops

Car repair shops – Despatch Shops, Inc. v. Railroad Retirement Board, 153
F.2d 644 (D.C. Cir. 1946) regarding RUIA and Despatch Shops, Inc. v. Railroad Retirement Board, 154 F.2d 417 (2d Cir. 1946) regarding RRA.  The taxpayer argued that it should not be treated as a railroad employer because it was a separately incorporated manufacturing company distinct from its parent, a railroad, and because it was doing heavy repairs and manufacturing similar to that done by other, similar non-railroad companies.  The court rejected this argument, stating:

“If Despatch, in this situation, is not an 'employer' under the Act it can be readily seen that the railroads would be free to take from under the Act virtually all of their workers whose employment is in the ‘supporting’ activities, through the simple expedient of setting up wholly owned corporate affiliates to perform these services.  It is conceivable that everything from maintenance-of-way through engineering or bookkeeping might be done by so called 'independent' corporations.”

Warehousing and Warehouse Companies

Warehousing and warehouse companies - Railroad Retirement Board v. Duquesne Warehouse Co., 326 U.S. 446(1946).

Construction Companies

Construction companies - Southern Development Company v Railroad Retirement Board, 243 F.2d 351 (8th Cir. 1957).

Real Estate Companies

Real estate companies - Standard Office Building Corp. v. United States, 819 F.2d 1371 (7th Cir. 1987).  In this case, the position of the Service was that employees of Standard, owner and operator of an office building, were RRTA employees because the company was controlled by a railroad and the building was more than half occupied by offices of the railroad.

Although the position of the Service was sustained by the district court, that court was reversed by the appellate court on the basis that the taxpayer was not covered by RRTA because it was incorporated prior to the passage in 1937 of the RRTA, and because its employees would have secured a pension windfall if covered under RRTA. The portion of the building occupied by the railroad did not exceed 57 percent during the period in question.

By contrast, in the Southern Development case, cited earlier, Southern was controlled by a railroad and owned an office building, 64 percent of which was occupied by offices of the railroad.  The railroad paid 73 percent of the total rents of the building equal to 39 percent of Southern's total income.  Although Southern owned other properties all of its employees were engaged in the operation of the office building.  Based on these facts, Southern was held to be an RRTA employer. The rationale of Southern was adopted in Rev. Rul. 74-121, l974-l C.B. 300.

These contrasting decisions highlight the fact that it cannot be assumed that any subsidiary corporation performing a railroad related function will be held to be an RRTA employer, even though it appears to meet the two tests of IRC § 3231(a). The result will depend on how the subsidiary unit fits into the general scheme of corporate operations.  If its service is truly significant to transportation, a good case can be made and, if not, all attempts to classify it as an RRTA employer may be fruitless.

Data Processing Companies

Issues involving these companies do not markedly differ from the preceding ones, particularly if the data processing company is controlled by a railroad and appears to have little reason for coming into existence other than to take a group of employees out of RRTA and make them subject to the lesser FICA taxes.

However, assume for discussion that a subsidiary of a railroad conglomerate provides data processing services to the railroad while also providing such services to banks, mutual funds, and other non-railroad clients.  In addition, another subsidiary is formed to provide computer programmers and software to the first subsidiary to the extent of 3O percent of its services, with the balance being provided to non-railroad clients.

Taxability of the subsidiaries for RRTA purposes is not dependent on the percentage of service as much as it is dependent on the degree to which the services are integrated into the normal functions of the railroad.

It can be argued that computer programming and design of software is as essential to railroad operations as is the leasing of office space or the furnishing of accounting services.  It would follow then that employees of the subsidiaries who render such services are subject to RRTA taxes.  However, it does not necessarily follow that the companies are RRTA employers with respect to all of their operations or all of their employees.

Examination Techniques, Related Corporations

Most issues concerning a parent and subsidiary relationship can be developed in a similar fashion. The guidelines presented below present a suggested method that can be modified, as appropriate, to fit the circumstances of your specific case. Also remember that while a subsidiary of a railroad employer may also be a railroad employer, the parent of a railroad employer is not a railroad employer under Union Pacific Corporation v. United States, 26 Cl. Ct. 739 (1992), aff'd, 5 F.3d 523 (Fed. Cir. 1993).

Subsidiary Records

Review the subsidiary's corporate minute book and stock record book to ascertain:

  • The date of incorporation
  • The stated corporate purpose
  • The exact location of the subsidiary
  • The stock authorized and issued, including a complete stock history from inception to the present

Parent Records

Analyze the following schedules on Form R-1, Annual Report to the Surface Transportation Board, of the parent corporation:

  • Schedule A, Identity of Respondent with Affiliated Companies
  • Schedule 310, Investments in Affiliated Companies
  • Schedule 310A, Investments in Common Stock of Affiliated Companies
  • Schedules 352A to 352B, Road and Equipment Property (These schedules can help in reconciling and locating property used by the entity under examination)
  • Schedule 410, Railway Operating Expenses (Look for expenses paid to a subsidiary that is supposedly not an RRTA company)
  • Schedule 512, Transactions Between Respondent and Companies or Persons Affiliated with Respondent for Services Received or Provided

Review the corporate minute book for:

  • Advances from the parent to the affiliate (Note date, amount, terms and purpose)
  • Financial forecasts for the affiliate, including monthly, quarterly, semiannual, annual, and other long-range forecasts
  • Budgets, proposed and actual, prepared by or for the company

Contractual Relationship

Determine the contractual relationship between the parent and subsidiary by examining all intercorporate contracts.  Pay particular attention to those for services to be rendered by the parent company.  Compare the contracts with similar contracts between non-affiliated companies and ascertain:

  • Whether transactions were at arms length
  • The amount of income derived by the subsidiary from the parent as compared with income from other sources
  • Contractual amounts expended by the parent to its affiliate, compared with similar amounts expended to non-affiliated companies
  • Whether persons presently under contract with the affiliate were formerly employed by the parent

General Inquiries

Make the following general inquiries:

  • Were private letter rulings obtained with reference to the issue? (If so, obtain copies and determine whether or not the facts as presented were complete and accurate in their presentation of the situation in question.)
  • Was the entity in question ever subject to RRTA taxes? (If so, determine why and when it was removed from coverage.)
  • Were letter opinions obtained from the Railroad Retirement Board? (If so, obtain copies and determine whether or not the facts as presented were complete and accurate in their presentation of the situation in question.)

Note: Letter opinions on coverage were issued by the RRB’s General Counsel prior to 1992.  After 1991, the RRB’s Board Members made such coverage rulings referred to as Board Determinations on coverage.

  • Obtain a copy of the Employer Status Listing published by the RRB, and, if necessary, secure more specific information from the Board via the Ground Transportation Technical Advisor
  • Refer to Moody's Transportation manuals for other useful information
  • Compute the operating ratio of the company in question for several years, if possible, and make further studies if the ratio exceeds 100 for a sustained period

Other Considerations

Analyze any statistical, financial, profitability, and feasibility studies made by or on behalf of the parent company.  Such studies would generally provide a basis for important decisions that may affect the subsidiary in question.

Review the Authority for Expenditures (AFE's) or at least the AFE logbook for acquisitions that affect the subsidiary in question and, if found, determine if they were subsequently charged back to the parent.

Review correspondence and filed records if the company maintains an index or log of such documentation.

Back to top


7. Report Writing

General

Report writing for RRTA purposes is similar to report writing for any other type of employment tax examination.  However, certain forms must be modified  for differences between RRTA and FICA rates and tax categories.

Form 4665, Form 4666, Form 886A, Form 2504, Form 2297, Form 3363

The forms listed above are used in a similar fashion for an RRTA report as in any other type of employment tax report.  In an unagreed case the report should include a complete narrative write up of facts, law, and argument.  Refer to general employment tax report writing instructions when completing these forms.

Form 4668

Form 4668 must be modified to account for Tier I and Tier II taxes.

Care should be taken to ensure that the appropriate wage base and tax rate amounts are used when completing this form.

Form 4667

Since railroad employers are not subject to FUTA, Form 4667 is not used. However, if workers were treated by the employer as being subject to FUTA and those workers are being converted to railroad employees, the examiner should prepare a report reflecting the over assessment of FUTA.  The examiner should include a recommendation to transfer the FUTA to any RUIA liability. See IRM 4.23.8.6.2.

Conversion Case

If an employer treated certain workers as employees subject to FICA, and it is determined that the workers should correctly be treated as employees subject to RRTA, or vice versa, it may be necessary to prepare two reports: one to process the deficiency, and one to process the over assessment.

Refer in general to IRM 4.23.8.6.2 for special rules concerning this type of case.

Prior to making a conversion, consideration must be given to the statutory period of limitations. Some employers may already have filed 941 returns as well as CT-1 returns. Do not undertake a conversion issue unless the statute on the return for which additional tax is due has been protected.

Where the conversion case involves a delinquent return, follow the usual substitute for return/delinquent return procedures.

In an agreed conversion case, where wages are converted from FICA to RRTA, only the net additional tax due will be assessed.

If the conversion is unagreed, the taxpayer should be advised to file a claim under IRC § 3503 for the FICA.  The examiner will propose the assessment of the full amount of the RRTA taxes, and the claim will not be acted upon until the final resolution of the unagreed case.

IRC § 3509

The provisions of IRC § 3509 do not apply to RRTA taxes.
 
Computation of Tax

Tier I
Tier I tax is the equivalent of FICA and Medicare, and is computed in the same manner, using the same annual wage base and tax rates.  It is assessed equally on the employer and employee.

Tier II
Tier II tax uses a separate annual wage base and tax rate from those applicable for Tier I.  In addition, the tax is not assessed equally on the employer and employee. Instead, the employer pays a significantly greater share of this tax.

Back to top


8. Other Considerations

Statutory Period of Limitations

Form CT-1 is an annual return, due by the last day of the second month following the end of the calendar year (i.e., February 28th) see Treas. Reg.   § 31.6071(a)-1(b). The normal statutory period of limitations expires three years after the due date, or the date filed, whichever is later.

The presumptive filing date pertaining to Form 941, found at IRC § 6501(b)(2), DOES NOT apply to Form CT-1.

Various courts have considered the question of whether or not the filing of Form 941 starts the running of the statute of limitations with respect to Form CT-1. Although the IRS has been sustained in some courts in its position that the filing of a Form 941 does not start the running of the statutory period of limitations with respect to the CT-1 at least one court has ruled otherwise. The court found that the Form 941 provided sufficient information for the IRS to assess the RRTA taxes, and, therefore, the three year statute for the Form CT-1 had started with the filing of the Form 941. As a result, aggressive action should be taken to protect the statutory period of limitations in all situations.

Form SS-1O
The statutory period of limitations for RRTA purposes is extended using Form SS-10.

Form SS-10 must be modified in order to extend the statutory period of limitations with regard to RURT taxes.  Line 1(a), which is normally used to extend the statutory period of limitations with respect to FUTA taxes, will not be effective for extending the statute with respect to RURT taxes.  Since FUTA taxes do not normally apply to a railroad employer, Line (1)(a) on Form SS-l0 should be changed to state: "The Railroad Unemployment Repayment Tax for Calendar years".

Questions or concerns with regard to extending the RURT statute should be discussed with the Ground Transportation Technical Advisor.  The Ground Transportation Technical Advisor can assist in obtaining advice from Counsel.

Penalties, Interest Free Adjustments, Abatements

Penalties, the provisions for interest free adjustments, and abatements apply to RRTA cases in the same manner as in any other type of employment tax examination.
Back to top

Page Last Reviewed or Updated: 24-Jan-2014

The E File Tax Return

E file tax return Publication 516 - Main Content Table of Contents U. E file tax return S. E file tax return Tax ReturnFiling Information Foreign Bank Accounts U. E file tax return S. E file tax return Government Payments Foreign Earned Income Exclusion Tax Treaty Benefits Allowances, Differentials, and Special Pay Other Income Deductions and Credits — Business Expenses Deductions and Credits — Nonbusiness Expenses Foreign Taxes Local (Foreign) Tax ReturnTax Treaty Benefits Other Agreements Double Withholding How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). E file tax return U. E file tax return S. E file tax return Tax Return Filing Information If you are a U. E file tax return S. E file tax return citizen or green card holder living or traveling outside the United States, you are generally required to file income tax returns in the same way as those residing in the United States. E file tax return However, the special rules explained in the following discussions may apply to you. E file tax return See also Tax Treaty Benefits, later. E file tax return When To File and Pay Most individual tax returns cover a calendar year, January through December. E file tax return The regular due date for these tax returns is April 15 of the following year. E file tax return If April 15 falls on a Saturday, Sunday, or legal holiday, your tax return is considered timely filed if it is filed by the next business day that is not a Saturday, Sunday, or legal holiday. E file tax return If you get an extension, you are allowed additional time to file and, in some circumstances, pay your tax. E file tax return You must pay interest on any tax not paid by the regular due date. E file tax return Your return is considered filed on time if it is mailed from and officially postmarked in a foreign country on or before the due date (including extensions), or given to a designated international private delivery service before midnight of the last date prescribed for filing. E file tax return See your tax form instructions for a list of private delivery services that have been designated by the IRS to meet this “timely mailing as timely filing/paying” rule for tax returns and payments. E file tax return If your return is filed late, the postmark or delivery service date does not determine the date of filing. E file tax return In that case, your return is considered filed when it is received by the IRS. E file tax return Extensions You may be able to get an extension of time to file your return and pay your tax. E file tax return Automatic 2-month extension. E file tax return   You can get an automatic 2-month extension (to June 15, for a calendar year return) to file your return and pay your tax if you are a U. E file tax return S. E file tax return citizen or resident and, on the regular due date of your return, you are living outside the United States and Puerto Rico and your main place of business or post of duty is outside the United States and Puerto Rico. E file tax return To get this extension, you must attach a statement to your return explaining how you qualified. E file tax return You will owe interest on any tax not paid by the regular due date of your return. E file tax return Married taxpayers. E file tax return   If you file a joint return, either you or your spouse can qualify for the automatic extension. E file tax return If you and your spouse file separate returns, the extension applies only to the spouse who qualifies. E file tax return Additional extension. E file tax return   You can apply for an additional extension of time to file your return by filing Form 4868. E file tax return You must file Form 4868 by the due date for your income tax return. E file tax return   Generally, you must file it by April 15. E file tax return However, if you qualify for the automatic 2-month extension, you generally must file Form 4868 by June 15. E file tax return Check the box on line 8 of Form 4868. E file tax return Payment of tax. E file tax return   You should estimate and pay any additional tax you owe when you file Form 4868 to avoid being charged a late-payment penalty. E file tax return The late-payment penalty applies if, through withholding, etc. E file tax return , you paid less than 90% of your actual tax liability by the original due date of your income tax return. E file tax return Even if the late-payment penalty does not apply, you will be charged interest on any unpaid tax liability from the original due date of the return until the tax is paid. E file tax return Electronic filing. E file tax return   You can file for the additional extension by phone, using your home computer, or through a tax professional. E file tax return See Form 4868 for more information. E file tax return Limit on additional extensions. E file tax return   You generally cannot get a total extension of more than 6 months. E file tax return However, if you are outside the United States and meet certain tests, you may be able to get a longer extension. E file tax return   For more information, see Publication 54. E file tax return Foreign Bank Accounts You must file Form TD F 90-22. E file tax return 1 if at any time during the year you had an interest in, or signature or other authority over, a bank account, securities account, or other financial account in a foreign country. E file tax return This applies if the combined assets in the account(s) were more than $10,000. E file tax return Do not include accounts in a U. E file tax return S. E file tax return military banking facility operated by a U. E file tax return S. E file tax return financial institution. E file tax return File the completed form by June 30 of the following year with the Department of the Treasury at the address shown on that form. E file tax return Do not attach it to Form 1040. E file tax return If you are required to file Form TD F 90-22. E file tax return 1 but do not do so, you may have to pay a penalty of up to $10,000 (more if the failure to file is willful). E file tax return You also may be required to file Form 8938 with your U. E file tax return S. E file tax return income tax return to report your interest in foreign bank accounts and other specified foreign financial assets. E file tax return For taxpayers living abroad, you generally do not have to file Form 8938 unless the total value of your specified foreign financial assets is more than $200,000 ($400,000 if married filing jointly) on the last day of the tax year or more than $300,000 ($600,000 if married filing jointly) at any time during the tax year. E file tax return For more information, see Form 8938 and its instructions. E file tax return U. E file tax return S. E file tax return Government Payments Wages earned for performing services outside the United States is foreign income, regardless of your employer. E file tax return If you are a U. E file tax return S. E file tax return citizen or resident alien, you must report all income from worldwide sources on your tax return unless it is exempt by U. E file tax return S. E file tax return law. E file tax return This applies to earned income (such as wages) as well as unearned income (such as interest, dividends, and capital gains). E file tax return If you are a nonresident alien, your income from sources outside the United States is not subject to U. E file tax return S. E file tax return tax. E file tax return Foreign Earned Income Exclusion Employees of the U. E file tax return S. E file tax return Government are not entitled to the foreign earned income exclusion or the foreign housing exclusion/deduction under section 911 because “foreign earned income ”does not include amounts paid by the U. E file tax return S. E file tax return Government as an employee. E file tax return But see Other Employment, later. E file tax return Special Situations In the following two situations, your pay is from the U. E file tax return S. E file tax return Government and does not qualify for the foreign earned income exclusion. E file tax return U. E file tax return S. E file tax return agency reimbursed by foreign country. E file tax return   If you are a U. E file tax return S. E file tax return Government employee paid by a U. E file tax return S. E file tax return agency to perform services in a foreign country, your pay is from the U. E file tax return S. E file tax return Government and does not qualify the foreign earned income exclusion or the foreign housing exclusion/deduction. E file tax return This is true even if the U. E file tax return S. E file tax return agency is reimbursed by the foreign government. E file tax return Employees of post exchanges, etc. E file tax return   If you are an employee of an Armed Forces post exchange, officers' and enlisted personnel club, Embassy commissary, or similar instrumentality of the U. E file tax return S. E file tax return Government, the earnings you receive are paid by the U. E file tax return S. E file tax return Government. E file tax return This is true whether they are paid from appropriated or nonappropriated funds. E file tax return These earnings are not eligible for the foreign earned income exclusion or the foreign housing exclusion/deduction. E file tax return Tax Treaty Benefits Most income tax treaties contain an article relating to remuneration from government services. E file tax return Even if you are working in a foreign country with which the United States has an income tax treaty in force and the treaty article that applies to government services says that your government pay is taxable only in the foreign country, the treaty will likely contain a “saving clause”, which provides that the United States may tax its citizens and its residents as if the treaty had not come into effect. E file tax return In some treaties, the government service article is an exception to the saving clause, but often only for individuals who are not U. E file tax return S. E file tax return citizens or green card holders. E file tax return Consequently, if you are a U. E file tax return S. E file tax return citizen or green card holder, you will generally not be entitled to reduce your U. E file tax return S. E file tax return tax on your government pay. E file tax return If you are neither a U. E file tax return S. E file tax return citizen nor green card holder, and you are treated as a resident of the treaty country under the treaty residence article (after application of the so-called “tie-breaker” rule), then you may be entitled to benefits under the government service article. E file tax return Review the treaty text carefully. E file tax return U. E file tax return S. E file tax return citizens must always file Form 1040. E file tax return Non-U. E file tax return S. E file tax return citizens who are treated as a resident of a treaty country under the treaty residence article (after application of the so-called “tie-breaker” rule) may file Form 1040NR and attach Form 8833. E file tax return If you pay or accrue taxes to the foreign country on your pay, you may be able to relieve double taxation with a foreign tax credit. E file tax return Most income tax treaties contain an article providing relief from double taxation. E file tax return Many treaties contain special foreign tax credit rules for U. E file tax return S. E file tax return citizens who are residents of a treaty country. E file tax return For more information on the mechanics of the foreign tax credit, see Foreign Taxes, later. E file tax return Allowances, Differentials, and Special Pay Most payments received by U. E file tax return S. E file tax return Government civilian employees for working abroad, including pay differentials, are taxable. E file tax return However, certain foreign areas allowances, cost of living allowances, and travel allowances are tax free. E file tax return The following discussions explain the tax treatment of allowances, differentials, and other special pay you receive for employment abroad. E file tax return Pay differentials. E file tax return   Pay differentials you receive as financial incentives for employment abroad are taxable. E file tax return Your employer should have included these differentials as wages on your Form W-2, Wage and Tax Statement. E file tax return   Generally, pay differentials are given for employment under adverse conditions (such as severe climate) or because the post of duty is located in a hazardous or isolated area that may be outside the United States. E file tax return The area does not have to be a qualified hazardous duty area as discussed in Publication 3. E file tax return Pay differentials include: Post differentials, Special incentive differentials, and Danger pay. E file tax return Foreign areas allowances. E file tax return   Certain foreign areas allowances are tax free. E file tax return Your employer should not have included these allowances as wages on your Form W-2. E file tax return   Tax-free foreign areas allowances are allowances (other than post differentials) received under the following laws. E file tax return Title I, chapter 9, of the Foreign Service Act of 1980. E file tax return Section 4 of the Central Intelligence Agency Act of 1949, as amended. E file tax return Title II of the Overseas Differentials and Allowances Act. E file tax return Subsection (e) or (f) of the first section of the Administrative Expenses Act of 1946, as amended, or section 22 of that Act. E file tax return These allowances cover such expenses as: Certain repairs to a leased home, Education of dependents in special situations, Motor vehicle shipment, Separate maintenance for dependents, Temporary quarters, Transportation for medical treatment, and Travel, moving, and storage. E file tax return Allowances received by foreign service employees for representation expenses are also tax free under the above provisions. E file tax return Cost-of-living allowances. E file tax return   If you are stationed outside the continental United States or in Alaska, your gross income does not include cost-of-living allowances (other than amounts received under Title II of the Overseas Differentials and Allowances Act) granted by regulations approved by the President of the United States. E file tax return The cost-of-living portion of any other allowance (for example, a living and quarters allowance) is not included even if the underlying allowance is included in gross income. E file tax return Cost-of-living allowances are not included on your Form W-2. E file tax return Federal court employees. E file tax return   If you are a federal court employee, the preceding paragraph also applies to you. E file tax return The cost-of-living allowance must be granted by rules similar to regulations approved by the President. E file tax return American Institute in Taiwan. E file tax return   If you are an employee of the American Institute in Taiwan, allowances you receive are exempt from U. E file tax return S. E file tax return tax if they are equivalent to tax-exempt allowances received by civilian employees of the U. E file tax return S. E file tax return Government. E file tax return Federal reemployment payments after serving with an international organization. E file tax return   If you are a federal employee who is reemployed by a federal agency after serving with an international organization, you must include in income any reemployment payments you receive. E file tax return These payments are equal to the difference between the pay, allowances, post differential, and other monetary benefits paid by the international organization and the pay and other benefits that would have been paid by the federal agency had you been detailed to the international agency. E file tax return Allowances or reimbursements for travel and transportation expenses. E file tax return   See How To Report Business Expenses, later, for a discussion on whether a reimbursement or allowance for travel or transportation is included in your income. E file tax return Lodging furnished to a principal representative of the United States. E file tax return   If you are a principal representative of the United States stationed in a foreign country, you do not have to include in income the value of lodging (including utilities) provided to you as an official residence. E file tax return However, amounts paid by the U. E file tax return S. E file tax return government for your usual costs of operating and maintaining your household are taxable. E file tax return If amounts are withheld from your pay to cover these expenses, you cannot exclude or deduct those amounts from your income. E file tax return Peace Corps. E file tax return   If you are a Peace Corps volunteer or volunteer leader, some allowances you receive are taxable and others are not. E file tax return Taxable allowances. E file tax return   The following allowances must be included on your Form W-2 and reported on your return as wages. E file tax return If you are a volunteer leader, allowances paid to your spouse and minor children while you are training in the United States. E file tax return The part of living allowances designated by the Director of the Peace Corps as basic compensation. E file tax return This is the part for personal items such as domestic help, laundry and clothing maintenance, entertainment and recreation, transportation, and other miscellaneous expenses. E file tax return Leave allowances. E file tax return Readjustment allowances or “termination payments. E file tax return ” Taxable allowances are considered received by you when credited to your account. E file tax return Example. E file tax return Gary Carpenter, a Peace Corps volunteer, gets $175 a month during his period of service, to be paid to him in a lump sum at the end of his tour of duty. E file tax return Although the allowance is not available to him until the end of his service, Gary must include it in his income on a monthly basis as it is credited to his account. E file tax return Nontaxable allowances. E file tax return   These generally include travel allowances and the part of living allowances for housing, utilities, food, clothing, and household supplies. E file tax return These allowances should not be included on your Form W-2. E file tax return These allowances are tax free whether paid by the U. E file tax return S. E file tax return Government or the foreign country in which you are stationed. E file tax return Other Income Other employment. E file tax return   If, in addition to your U. E file tax return S. E file tax return government pay, you receive income from a private employer or self-employment, you may qualify to claim the foreign earned income exclusion and the foreign housing exclusion and deduction under section 911 based on this other income provided you meet either the bona fide residence test or the physical presence test. E file tax return In addition, if your spouse is a U. E file tax return S. E file tax return citizen or resident alien who earns income in a foreign country that is paid by a private employer or is from self-employment, he or she may also qualify for the exclusion or the deduction. E file tax return For more information, see Publication 54. E file tax return The tax treaty rules relating to income from personal services generally apply to income from private employment. E file tax return As discussed above, the saving clause applies to you if you are a U. E file tax return S. E file tax return citizen or if you are a resident of the United States under the treaty residence article (after application of the so-called “tie-breaker” rule). E file tax return Sale of personal property. E file tax return   If you have a gain from the sale of your personal property (such as an automobile or a home appliance), whether directly or through a favorable exchange rate in converting the proceeds to U. E file tax return S. E file tax return dollars, the excess of the amount received in U. E file tax return S. E file tax return dollars over the cost or other basis of the property is a capital gain. E file tax return Capital gains are reported on Schedule D (Form 1040), Capital Gains and Losses. E file tax return However, losses from sales of your personal property, whether directly or through an unfavorable exchange rate, are not deductible. E file tax return Sale of your home. E file tax return   All or part of the gain on the sale of your main home, within or outside the United States, may be taxable. E file tax return Losses are not deductible. E file tax return   You may be able to exclude from income any gain up to $250,000 ($500,000 on a joint return). E file tax return Generally, you must have owned and used the home as your main residence for two of the five years preceding the date of sale. E file tax return   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse is serving on qualified official extended duty as a member of the Foreign Service of the United States, as an employee of the intelligence community, or as an employee or volunteer of the Peace Corps. E file tax return   For detailed information on selling your home, see Publication 523. E file tax return Deductions and Credits — Business Expenses You may deduct certain expenses such as travel expenses, transportation expenses, and other expenses connected to your employment. E file tax return Travel Expenses Subject to certain limits, you can deduct your unreimbursed ordinary and necessary expenses of traveling away from home in connection with the performance of your official duties. E file tax return These expenses include such items as travel costs, meals, lodging, baggage charges, local transportation costs (such as taxi fares), tips, and dry cleaning and laundry fees. E file tax return Your home for tax purposes (tax home) is your regular post of duty regardless of where you maintain your family home. E file tax return Your tax home is not limited to the Embassy, consulate, or duty station. E file tax return It includes the entire city or general area in which your principal place of employment is located. E file tax return Traveling away from home. E file tax return   You are traveling away from home if you meet both of the following requirements. E file tax return Your duties require you to be away from the general area of your tax home substantially longer than an ordinary day's work. E file tax return You need to get sleep or rest to meet the demands of your work while away from home. E file tax return This requirement is not satisfied by merely napping in your car. E file tax return You do not have to be away from your tax home for a whole day or from dusk to dawn as long as your relief from duty is long enough to get necessary sleep or rest. E file tax return Temporary assignment. E file tax return   If your assignment or job away from your tax home is temporary, your tax home does not change. E file tax return You are considered to be away from home for the whole period, and your travel expenses are deductible. E file tax return Generally, a temporary assignment in a single location is one that is realistically expected to last (and does in fact last) for one year or less. E file tax return   However, if your assignment or job is indefinite, the location of the assignment or job becomes your new tax home and you cannot deduct your travel expenses while there. E file tax return An assignment or job in a single location is considered indefinite if it is realistically expected to last for more than one year, whether or not it actually lasts for more than one year. E file tax return   You must determine whether your assignment is temporary or indefinite when you start work. E file tax return If you expect employment to last for one year or less, it is temporary unless there are facts and circumstances that indicate otherwise. E file tax return Employment that is initially temporary may become indefinite due to changed circumstances. E file tax return A series of assignments to the same location, all for short periods but that together cover a long period, may be considered an indefinite assignment. E file tax return Exception for federal crime investigations or prosecutions. E file tax return   If you are a federal employee participating in a federal crime investigation or prosecution, you may be able to deduct travel expenses even if you are away from your tax home for more than one year. E file tax return This exception to the one-year rule applies if the Attorney General certifies that you are traveling for the federal government in a temporary duty status to prosecute, or provide support services for the investigation or prosecution of, a federal crime. E file tax return Limit on meals and entertainment. E file tax return   You can generally deduct only 50% of the cost of your unreimbursed business-related meals and entertainment. E file tax return However, the limit does not apply to expenses reimbursed under a U. E file tax return S. E file tax return Government expense allowance arrangement. E file tax return Individuals subject to hours of service limits. E file tax return   You can deduct 80% of your unreimbursed business-related meal expenses if the meals take place during or incident to any period subject to the Department of Transportation's hours of service limits. E file tax return   Individuals subject to the Department of Transportation's “hours of service” limits include the following. E file tax return Certain air transportation workers (such as pilots, crew, dispatchers, mechanics, and control tower operators) who are under Federal Aviation Administration regulations. E file tax return Interstate truck operators and bus drivers who are under Department of Transportation regulations. E file tax return Certain railroad employees (such as engineers, conductors, train crews, dispatchers, and control operations personnel) who are under Federal Railroad Administration regulations. E file tax return Certain merchant mariners who are under Coast Guard regulations. E file tax return Primary purpose of trip must be for business. E file tax return   If your trip was entirely for business, your unreimbursed travel expenses are generally deductible. E file tax return However, if you spend some of your time on nonbusiness activities, part of your expenses may not be deductible. E file tax return   If your trip was mainly personal, you cannot deduct your travel expenses to and from your destination. E file tax return This applies even if you engage in business activities while there. E file tax return However, you can deduct any expenses while at your destination that are directly related to your business. E file tax return Expenses paid for others. E file tax return   You generally cannot deduct travel expenses of your spouse, dependents, or other individuals who go with you on a trip. E file tax return Home leave. E file tax return   The Foreign Service Act requires U. E file tax return S. E file tax return citizens who are members of the foreign service to take a leave of absence after completing 3 years of continuous service abroad. E file tax return This period is called “home leave” and can be used to take care of certain personal matters such as medical and dental checkups, buying a new wardrobe, and visiting relatives. E file tax return   The amounts paid for your travel, meals, and lodging while on home leave are deductible as travel or business expenses subject to the rules and limits discussed earlier. E file tax return You must be able to verify these amounts in order to claim them. E file tax return Amounts paid on behalf of your family while on home leave are personal living expenses and are not deductible. E file tax return More information. E file tax return   See chapter 1 of Publication 463 for more information on travel expenses. E file tax return Transportation Expenses You can deduct allowable transportation expenses that are directly related to your official duties. E file tax return Transportation expenses include the cost of transportation by air, rail, bus, or taxi, and the cost of driving and maintaining your car. E file tax return They do not include expenses you have when traveling away from home overnight. E file tax return Those expenses are deductible as travel expenses and are discussed earlier. E file tax return Commuting. E file tax return   You cannot deduct your transportation costs of going between your home and your regular business location. E file tax return These costs are personal commuting expenses. E file tax return   If you have one or more regular business locations but must work at a temporary location, you can deduct the costs of commuting to that temporary place of work. E file tax return   If you work at two or more places in the same day, you can deduct your expenses of getting from one place of work to the other. E file tax return More information. E file tax return   For more information on transportation expenses, see chapter 4 of Publication 463. E file tax return Other Employee Business Expenses You may be able to deduct other unreimbursed expenses that are connected with your employment. E file tax return Membership dues. E file tax return   You can deduct membership dues you pay to professional societies that relate to your business or profession. E file tax return Subscriptions. E file tax return   You can deduct subscriptions to professional publications that relate to your business or profession. E file tax return Educational expenses. E file tax return   Generally, educational expenses are considered to be personal expenses and are not deductible. E file tax return However, under some circumstances, educational expenses are deductible as business expenses. E file tax return   You can deduct educational expenses as business expenses if the education: Maintains or improves skills needed in your present position, or Meets the express requirements of your agency to keep your present position, salary, or status. E file tax return   You cannot deduct educational expenses as business expenses if the education: Is needed to enable you to meet minimum educational requirements for qualification in your present position, Is a part of a program of study that can qualify you for a new position, or Is for travel as a form of education. E file tax return These rules apply even if the education is required by your agency or it maintains or improves skills required in your work. E file tax return   See Publication 970, Tax Benefits for Education, for more information on educational expenses. E file tax return    Educational expenses that are not work related, such as costs of sending children to college, are personal expenses that you cannot deduct. E file tax return However, you may be eligible for other tax benefits such as the American opportunity and lifetime learning credits; contributions to a Coverdell education savings account or qualified tuition program; deduction for student loan interest; and exclusion from income of certain savings bond interest. E file tax return These benefits are explained in Publication 970. E file tax return Foreign service representation expenses. E file tax return   If you are an employee of the U. E file tax return S. E file tax return Foreign Service and your position requires you to establish and maintain favorable relations in foreign countries, you may receive a nontaxable allowance for representation expenses. E file tax return If your expenses are more than the allowance you receive, you can deduct the excess expenses as an itemized deduction on Schedule A (Form 1040) if you meet one of the following conditions. E file tax return You have a certificate from the Secretary of State attesting that the expenses were incurred for the benefit of the United States, and would be reimbursable under appropriate legislation if the agency had sufficient funds for these reimbursements. E file tax return The expenses, while specifically not reimbursable under State Department regulations, were ordinary and necessary business expenses incurred in the performance of your official duties. E file tax return    To deduct any expenses for travel, entertainment, and gifts, including those certified by the Secretary of State, you must meet the rules for recordkeeping and accounting to your employer. E file tax return These rules are explained in Publication 463. E file tax return Representation expenses. E file tax return   These are expenses that further the interest of the United States abroad. E file tax return They include certain entertainment, gifts, costs of official functions, and rental of ceremonial dress. E file tax return They generally do not include costs of passenger vehicles (such as cars or aircraft), printing or engraving, membership fees, or amounts a principal representative must pay personally to cover the usual costs of operating and maintaining an official residence. E file tax return   Chapters 300 and 400 of the Standardized Regulations (Government Civilians, Foreign Area) provide more detail on what expenses are allowable as representation expenses. E file tax return These regulations are available on the Internet at www. E file tax return state. E file tax return gov/m/a/als. E file tax return Look under “Standardized Regulations (DSSR)” and click on “DSSR Table of Contents. E file tax return ” Publication 463 and Publication 529, Miscellaneous Deductions, provide more detail on what expenses are allowable as ordinary and necessary business expenses. E file tax return Impairment-related work expenses. E file tax return   If you are an employee with a physical or mental disability, you can deduct attendant-care services at your place of work and other expenses in connection with work that are necessary for you to be able to work. E file tax return Attendant care includes a reader for a blind person and a helper for a person with a physical disability. E file tax return These expenses are reported on Form 2106 or 2106-EZ and carried to Schedule A (Form 1040). E file tax return They are not subject to the 2%-of-adjusted- gross-income limit on miscellaneous itemized deductions. E file tax return Loss on conversion of U. E file tax return S. E file tax return dollars into foreign currency. E file tax return   The conversion of U. E file tax return S. E file tax return dollars into foreign currency at an official rate of exchange that is not as favorable as the free market rate does not result in a deductible loss. E file tax return Recordkeeping Rules If you claim a deduction for unreimbursed business expenses, you must keep timely and adequate records of all your business expenses. E file tax return For example, you must keep records and supporting evidence to prove the following elements about deductions for travel expenses (including meals and lodging while away from home). E file tax return The amount of each separate expense for travel away from home, such as the cost of your transportation, lodging, or meals. E file tax return You may total your incidental expenses if you list them in reasonable categories such as daily meals, gasoline and oil, and taxi fares. E file tax return For each trip away from home, the dates you left and returned and the number of days spent on business. E file tax return The destination or area of your travel, described by the name of the city, town, or similar designation. E file tax return The business reason for your travel or the business benefit gained or expected to be gained from your travel. E file tax return How to record your expenses. E file tax return   Records for proof of your expenses should be kept in an account book, diary, statement of expense, or similar record. E file tax return They should be supported by other records, such as receipts or canceled checks, in sufficient detail to establish the elements for these expenses. E file tax return You do not need to duplicate information in an account book or diary that is shown on a receipt as long as your records and receipts complement each other in an orderly manner. E file tax return   Each expense should be recorded separately in your records. E file tax return However, some items can be totaled in reasonable categories. E file tax return You can make one daily entry for categories such as taxi fares, telephone calls, meals while away from home, gas and oil, and other incidental costs of travel. E file tax return You may record tips separately or with the cost of the service. E file tax return    Documentary evidence generally is required to support all lodging expenses while traveling away from home. E file tax return It is also required for any other expense of $75 or more, except transportation charges if the evidence is not readily available. E file tax return Documentary evidence is a receipt, paid bill, or similar proof sufficient to support an expense. E file tax return It ordinarily will be considered adequate if it shows the amount, date, place, and essential business character of the expense. E file tax return    A canceled check by itself does not prove a business cost. E file tax return You must have other evidence to show that the check was used for a business purpose. E file tax return Your records must be timely. E file tax return   Record the elements for the expense in your account book or other record at or near the time of the expense. E file tax return A timely-kept record has more value than statements prepared later when, generally, there is a lack of accurate recall. E file tax return Confidential information. E file tax return   You do not need to put confidential information relating to an element of a deductible expense (such as the place, business purpose, or business relationship) in your account book, diary, or other record. E file tax return However, you do have to record the information elsewhere at or near the time of the expense and have it available to fully prove that element of the expense. E file tax return How To Report Business Expenses As a U. E file tax return S. E file tax return Government employee, your business expense reimbursements are generally paid under an accountable plan and are not included in your wages on your Form W-2. E file tax return If your expenses are not more than the reimbursements, you do not need to show your expenses or reimbursements on your return. E file tax return However, if you do not account to your employer for a travel advance or if you do not return any excess advance within a reasonable period of time, the advance (or excess) will be included in your wages on your Form W-2. E file tax return If you are entitled to a reimbursement from your employer but you do not claim it, you cannot deduct the expenses to which that unclaimed reimbursement applies. E file tax return Form 2106 or Form 2106-EZ. E file tax return   You must complete Form 2106 or 2106-EZ to deduct your expenses. E file tax return Also, if your actual expenses are more than your reimbursements, you can complete Form 2106 or 2106-EZ to deduct your excess expenses. E file tax return Generally, you must include all of your expenses and reimbursements on Form 2106 or 2106-EZ and carry your allowable expense to Schedule A (Form 1040). E file tax return Your allowable expense is then generally subject to the 2%-of-adjusted-gross-income limit. E file tax return Form 2106-EZ. E file tax return   You may be able to use Form 2106-EZ instead of the more complex Form 2106 for reporting unreimbursed employee business expenses. E file tax return You can use Form 2106-EZ if you meet both of the following conditions. E file tax return You are not reimbursed by your employer for any expenses. E file tax return (Amounts your employer included in your wages on your Form W-2 are not considered reimbursements. E file tax return ) If you claim car expenses, you use the standard mileage rate. E file tax return Deductions and Credits — Nonbusiness Expenses In addition to deductible business expenses, you may be entitled to deduct certain other expenses. E file tax return Moving Expenses If you changed job locations or started a new job, you may be able to deduct the reasonable expenses of moving yourself, your family, and your household goods and personal effects to your new home. E file tax return However, you cannot deduct any expenses for which you received a tax-free allowance as a U. E file tax return S. E file tax return Government employee. E file tax return To deduct moving expenses, your move must be closely related to the start of work and you must meet the distance test and the time test. E file tax return Closely related to the start of work. E file tax return   The move must be closely related, both in time and in place, to the start of work at the new location. E file tax return In general, you must have incurred your moving expenses within one year from the time you first report to your new job or business. E file tax return   A move generally is not considered closely related in place to the start of work if the distance from your new home to the new job location is more than the distance from your former home to the new job location. E file tax return A move that does not meet this requirement may qualify if you can show that you must live at the new home as a condition of employment, or you will spend less time or money commuting from the new home to the new job. E file tax return Distance test. E file tax return   Your new main job location must be at least 50 miles farther from your former home than your old main job location was. E file tax return If you did not have an old job location, your new job location must be at least 50 miles from your former home. E file tax return Time test. E file tax return   If you are an employee, you must work full time for at least 39 weeks during the first 12 months after you arrive in the general area of your new job location. E file tax return Deductible moving expenses. E file tax return   Moving expenses that can be deducted include the reasonable costs of: Moving household goods and personal effects (including packing, crating, in-transit storage, and insurance) of both you and members of your household, and Transportation and lodging for yourself and members of your household for one trip from your former home to your new home (including costs of getting passports). E file tax return    The cost of your meals is not a deductible moving expense. E file tax return   The costs of moving household goods include the reasonable expenses of moving household goods and personal effects to and from storage. E file tax return For a foreign move, the costs also include expenses of storing the goods and effects for part or all of the period that your new job location abroad continues to be your main job location. E file tax return Expenses must be reasonable. E file tax return   You can deduct only those expenses that are reasonable for the circumstances of your move. E file tax return For example, the costs of traveling from your former home to your new one should be by the shortest, most direct route available by conventional transportation. E file tax return Members of your household. E file tax return   A member of your household includes anyone who has both your former home and new home as his or her home. E file tax return It does not include a tenant or employee unless you can claim that person as a dependent. E file tax return Retirees. E file tax return   You can deduct the costs of moving to the United States when you permanently retire if both your former main job location and former home were outside the United States and its possessions. E file tax return You do not have to meet the time test described earlier. E file tax return Survivors. E file tax return   You can deduct moving expenses for a move to the United States if you are the spouse or dependent of a person whose main job location at the time of death was outside the United States and its possessions. E file tax return The move must begin within 6 months after the decedent's death. E file tax return It must be from the decedent's former home outside the United States, and that home must also have been your home. E file tax return You do not have to meet the time test described earlier. E file tax return How to report moving expenses. E file tax return   Use Form 3903 to report your moving expenses and figure your allowable deduction. E file tax return Claim the deduction as an adjustment to income on Form 1040. E file tax return (You cannot deduct moving expenses on Form 1040A or Form 1040EZ. E file tax return ) Reimbursements. E file tax return   Generally, you must include reimbursements of, or payments for, nondeductible moving expenses in gross income for the year paid. E file tax return You also must include in gross income reimbursements paid to you under a nonaccountable plan. E file tax return However, there is an exception for the tax-free foreign areas allowances described earlier under Allowances, Differentials, and Special Pay. E file tax return Additional information. E file tax return   For additional information about moving expenses, see Publication 521. E file tax return Other Itemized Deductions You may be able to claim other itemized deductions not connected to your employment. E file tax return Contributions. E file tax return   You can deduct contributions to qualified organizations created or organized in or under the laws of the United States or its possessions. E file tax return You cannot deduct contributions you make directly to foreign organizations (except for certain Canadian, Israeli, and Mexican charities), churches, and governments. E file tax return For more information, see Publication 526, Charitable Contributions. E file tax return Real estate tax and home mortgage interest. E file tax return   If you receive a tax-free housing allowance, your itemized deductions for real estate taxes and home mortgage interest are limited. E file tax return You must reduce the amount of each deduction that would otherwise be allowable by the amount of each expense that is related to the tax-free allowance. E file tax return Example. E file tax return Adam is an IRS employee working overseas who receives a $6,300 tax-free housing and utility allowance. E file tax return During the year, Adam used the allowance, with other funds, to provide a home for himself. E file tax return His expenses for this home totaled $8,400 and consisted of mortgage principal ($500), insurance ($400), real estate taxes ($1,400), mortgage interest ($4,000), and utility costs ($2,100). E file tax return Adam did not have any other expenses related to providing a home for himself. E file tax return Adam must reduce his deductions for home mortgage interest and real estate taxes. E file tax return He figures a reasonable way to reduce them is to multiply them by a fraction: its numerator is $6,300 (the total housing and utility allowance) and its denominator is $8,400 (the total of all payments to which the housing and utility allowance applies). E file tax return The result is 3/4. E file tax return Adam reduces his otherwise allowable home mortgage interest deduction by $3,000 (the $4,000 he paid ×3/4) and his otherwise allowable real estate tax deduction by $1,050 (the $1,400 he paid × 3/4). E file tax return He can deduct $1,000 of his mortgage interest ($4,000 − $3,000) and $350 of his real estate taxes ($1,400 − $1,050) when he itemizes his deductions. E file tax return Exception to the reduction. E file tax return   If you receive a tax-free housing allowance as a member of the military or the clergy, you do not have to reduce your deductions for real estate tax and home mortgage interest expenses you are otherwise entitled to deduct. E file tax return Required statement. E file tax return   If you receive a tax-free housing allowance and have real estate tax or home mortgage interest expenses, attach a statement to your tax return. E file tax return The statement must contain all of the following information. E file tax return The amount of each type of tax-free income you received, such as a tax-free housing allowance or tax-free representation allowance. E file tax return The amount of otherwise deductible expenses attributable to each type of tax-free income. E file tax return The amount attributable to each type of tax-free income that was not directly attributable to that type of tax-free income. E file tax return An explanation of how you determined the amounts not directly attributable to each type of tax-free income. E file tax return   The statement must also indicate that none of the amounts deducted on your return are in any way attributable to tax-free income. E file tax return Foreign Taxes If you pay or accrue taxes to a foreign government, you generally can choose to either claim them as a credit against your U. E file tax return S. E file tax return income tax liability or deduct them as an itemized deduction when figuring your taxable income. E file tax return Do not include the foreign taxes paid or accrued as withheld income taxes in the Payments section of Form 1040. E file tax return Foreign tax credit. E file tax return   Your foreign tax credit is subject to a limit based on your taxable income from foreign sources. E file tax return If you choose to figure a credit against your U. E file tax return S. E file tax return tax liability for the foreign taxes, you generally must complete Form 1116 and attach it to your U. E file tax return S. E file tax return income tax return. E file tax return    You cannot claim a credit for foreign taxes paid on amounts excluded from gross income under the foreign earned income or housing exclusions. E file tax return If all your foreign income is exempt from U. E file tax return S. E file tax return tax, you will not be able to claim a foreign tax credit. E file tax return   If, because of the limit on the credit, you cannot use the full amount of qualified foreign taxes paid or accrued in the tax year, you are allowed to carry the excess back 1 year and then forward 10 years. E file tax return Exemption from limit. E file tax return   You can elect to not be subject to the foreign tax limit if you meet all the following conditions. E file tax return Your only foreign income is passive income, such as interest, dividends, and royalties. E file tax return The total of all your foreign taxes is not more than $300 ($600 for joint tax returns). E file tax return The foreign income and taxes are reported to you on a payee statement, such as Form 1099-DIV, Dividends and Distributions, or 1099-INT, Interest Income. E file tax return If you make the election, you can claim a foreign tax credit without filing Form 1116. E file tax return However, you cannot carry back or carry over any unused foreign tax to or from this year. E file tax return See the instructions for the appropriate line in the Tax and Credits section of Form 1040. E file tax return Foreign tax deduction. E file tax return   If you choose to deduct all foreign income taxes on your U. E file tax return S. E file tax return income tax return, itemize the deduction on Schedule A (Form 1040). E file tax return You cannot deduct foreign taxes paid on income you exclude under the foreign earned income or housing exclusions. E file tax return Example. E file tax return Dennis and Christina are married and live and work in Country X. E file tax return Dennis works for the U. E file tax return S. E file tax return Government and Christina is employed by a private company. E file tax return They pay income tax to Country X on Christina's income only. E file tax return Dennis and Christina file a joint tax return and exclude all of Christina's income. E file tax return They cannot claim a foreign tax credit or take a deduction for the taxes paid to Country X. E file tax return Deduction for other foreign taxes. E file tax return   The deduction for foreign taxes other than foreign income taxes is not related to the foreign tax credit. E file tax return You can take deductions for these miscellaneous foreign taxes and also claim the foreign tax credit for income taxes paid to a foreign country. E file tax return   You can deduct real property taxes you pay that are imposed on you by a foreign country. E file tax return You take this deduction on Schedule A (Form 1040). E file tax return You cannot deduct other foreign taxes, such as personal property taxes, unless you incurred the expenses in a trade or business or in the production of income. E file tax return More information. E file tax return   The foreign tax credit and deduction, their limits, and carryback and carryover provisions are discussed in detail in Publication 514. E file tax return Local (Foreign) Tax Return As a U. E file tax return S. E file tax return Government employee, you are expected to observe and fulfill all tax obligations imposed by the host country government. E file tax return Check with local tax authorities to determine whether you are considered a tax resident of your host country, whether you are required to file a host country tax return and whether you owe taxes to the host country. E file tax return Tax Treaty Benefits As discussed earlier, most income tax treaties contain an article relating to remuneration from government services. E file tax return Review the treaty text carefully to determine whether your U. E file tax return S. E file tax return Government remuneration is taxable in the host country. E file tax return You will first have to determine whether you are a resident of your host country under the treaty residence article (after application of the so-called “tie-breaker” rule). E file tax return If you or your spouse receives income from a private employer or self-employment, review the tax treaty rules relating to income from personal services to determine whether that income is taxable in the host country. E file tax return If you pay or accrue taxes to both the host country and the United States, you may be able to relieve double taxation with a foreign tax credit. E file tax return Most income tax treaties contain an article providing relief from double taxation. E file tax return Many treaties contain special foreign tax credit rules for U. E file tax return S. E file tax return citizens who are residents of a treaty country. E file tax return For more information about the foreign tax credit, see Foreign Taxes, earlier. E file tax return Other Agreements The United States may be a party to agreements other than income tax treaties that may affect your tax obligations to the host country. E file tax return For example, consular employees may be exempt from host country tax under the Vienna Convention on Consular Relations or bilateral consular agreements. E file tax return Similarly, certain diplomatic staff may be exempt from host country tax under the Vienna Convention on Diplomatic Relations. E file tax return Check with the appropriate U. E file tax return S. E file tax return Embassy for more information. E file tax return Double Withholding If your U. E file tax return S. E file tax return government pay is subject to withholding in both the United States and the foreign country, you may reduce the amount of U. E file tax return S. E file tax return tax that is withheld from your pay if you expect to be entitled to a foreign tax credit on your U. E file tax return S. E file tax return income tax return on this income. E file tax return Complete Worksheet 1-6 in Publication 505, Tax Withholding and Estimated Tax, to determine how to revise Form W-4, Employee’s Withholding Allowance Certificate. E file tax return How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get information from the IRS in several ways. E file tax return By selecting the method that is best for you, you will have quick and easy access to tax help. E file tax return Free help with your tax return. E file tax return   Free help in preparing your return is available nationwide from IRS-certified volunteers. E file tax return The Volunteer Income Tax Assistance (VITA) program is designed to help low-moderate income, elderly, disabled, and limited English proficient taxpayers. E file tax return The Tax Counseling for the Elderly (TCE) program is designed to assist taxpayers age 60 and older with their tax returns. E file tax return Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. E file tax return Some VITA and TCE sites provide taxpayers the opportunity to prepare their return with the assistance of an IRS-certified volunteer. E file tax return To find the nearest VITA or TCE site, visit IRS. E file tax return gov or call 1-800-906-9887 or 1-800-829-1040. E file tax return   As part of the TCE program, AARP offers the Tax-Aide counseling program. E file tax return To find the nearest AARP Tax-Aide site, visit AARP's website at www. E file tax return aarp. E file tax return org/money/taxaide or call 1-888-227-7669. E file tax return   For more information on these programs, go to IRS. E file tax return gov and enter “VITA” in the search box. E file tax return Internet. E file tax return You can access the IRS website at IRS. E file tax return gov 24 hours a day, 7 days a week to: E-file your return. E file tax return Find out about commercial tax preparation and e-file services available free to eligible taxpayers. E file tax return Check the status of your 2012 refund. E file tax return Go to IRS. E file tax return gov and click on Where’s My Refund. E file tax return Information about your return will generally be available within 24 hours after the IRS receives your e-filed return, or 4 weeks after you mail your paper return. E file tax return If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). E file tax return Have your 2012 tax return handy so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. E file tax return Where's My Refund? has a new look this year! The tool will include a tracker that displays progress through three stages: (1) return received, (2) refund approved, and (3) refund sent. E file tax return Where's My Refund? will provide an actual personalized refund date as soon as the IRS processes your tax return and approves your refund. E file tax return So in a change from previous filing seasons, you won't get an estimated refund date right away. E file tax return Where's My Refund? includes information for the most recent return filed in the current year and does not include information about amended returns. E file tax return You can obtain a free transcript online at IRS. E file tax return gov by clicking on Order a Return or Account Transcript under “Tools. E file tax return ” For a transcript by phone, call 1-800-908-9946 and follow the prompts in the recorded message. E file tax return You will be prompted to provide your SSN or Individual Taxpayer Identification Number (ITIN), date of birth, street address and ZIP code. E file tax return Download forms, including talking tax forms, instructions, and publications. E file tax return Order IRS products. E file tax return Research your tax questions. E file tax return Search publications by topic or keyword. E file tax return Use the Internal Revenue Code, regulations, or other official guidance. E file tax return View Internal Revenue Bulletins (IRBs) published in the last few years. E file tax return Figure your withholding allowances using the IRS Withholding Calculator at www. E file tax return irs. E file tax return gov/individuals. E file tax return Determine if Form 6251 (Alternative Minimum Tax— Individuals), must be filed by using our Alternative Minimum Tax (AMT) Assistant available at IRS. E file tax return gov by typing Alternative Minimum Tax Assistant in the search box. E file tax return Sign up to receive local and national tax news by email. E file tax return Get information on starting and operating a small business. E file tax return Phone. E file tax return Many services are available by phone. E file tax return   Ordering forms, instructions, and publications. E file tax return Call 1-800-TAX-FORM (1-800-829-3676) to order current-year forms, instructions, and publications, and prior-year forms and instructions (limited to 5 years). E file tax return You should receive your order within 10 days. E file tax return Asking tax questions. E file tax return Call the IRS with your tax questions at 1-800-829-1040. E file tax return Solving problems. E file tax return You can get face-to-face help solving tax problems most business days in IRS Taxpayer Assistance Centers (TAC). E file tax return An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. E file tax return Call your local Taxpayer Assistance Center for an appointment. E file tax return To find the number, go to www. E file tax return irs. E file tax return gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. E file tax return TTY/TDD equipment. E file tax return If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications. E file tax return The TTY/TDD telephone number is for individuals who are deaf, hard of hearing, or have a speech disability. E file tax return These individuals can also access the IRS through relay services such as the Federal Relay Service at www. E file tax return gsa. E file tax return gov/fedrelay. E file tax return TeleTax topics. E file tax return Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics. E file tax return Checking the status of your 2012 refund. E file tax return To check the status of your 2012 refund, call 1-800-829-1954 or 1-800-829-4477 (automated Where's My Refund? information 24 hours a day, 7 days a week). E file tax return Information about your return will generally be available within 24 hours after the IRS receives your e-filed return, or 4 weeks after you mail your paper return. E file tax return If you filed Form 8379 with your return, wait 14 weeks (11 weeks if you filed electronically). E file tax return Have your 2012 tax return handy so you can provide your social security number, your filing status, and the exact whole dollar amount of your refund. E file tax return Where's My Refund? will provide an actual personalized refund date as soon as the IRS processes your tax return and approves your refund. E file tax return Where's My Refund? includes information for the most recent return filed in the current year and does not include information about amended returns. E file tax return Outside the U. E file tax return S. E file tax return If you are outside the United States, taxpayer assistance is available at the following U. E file tax return S Embassies or consulate. E file tax return Beijing, China (86) (10) 8531-3983 Frankfurt, Germany (49) (69) 7535-3834 London, England (44) (20) 7894-0476 Paris, France (33) (1) 4312-2555 Please contact the office for times when assistance will be available. E file tax return If you cannot get to one of these offices, taxpayer assistance is available at (267) 941-1000 (not a toll free call). E file tax return If you are in a U. E file tax return S. E file tax return territory (American Samoa, Guam, Northern Mariana Islands, Puerto Rico, and U. E file tax return S. E file tax return Virgin Islands) and have a tax question, you can call 1-800-829-1040. E file tax return Evaluating the quality of our telephone services. E file tax return To ensure IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. E file tax return One method is for a second IRS representative to listen in on or record random telephone calls. E file tax return Another is to ask some callers to complete a short survey at the end of the call. E file tax return Walk-in. E file tax return Some products and services are available on a walk-in basis. E file tax return   Products. E file tax return You can walk in to some post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. E file tax return Some IRS offices, libraries, and city and county government offices have a collection of products available to photocopy from reproducible proofs. E file tax return Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes. E file tax return Services. E file tax return You can walk in to your local TAC most business days for personal, face-to-face tax help. E file tax return An employee can explain IRS letters, request adjustments to your tax account, or help you set up a payment plan. E file tax return If you need to resolve a tax problem, have questions about how the tax law applies to your individual tax return, or you are more comfortable talking with someone in person, visit your local TAC where you can talk with an IRS representative face-to-face. E file tax return No appointment is necessary—just walk in. E file tax return Before visiting, check www. E file tax return irs. E file tax return gov/localcontacts for hours of operation and services provided. E file tax return If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment can be requested by calling your local TAC. E file tax return You can leave a message and a representative will call you back within 2 business days. E file tax return All other issues will be handled without an appointment. E file tax return To call your local TAC, go to  www. E file tax return irs. E file tax return gov/localcontacts or look in the phone book under United States Government, Internal Revenue Service. E file tax return Outside the U. E file tax return S. E file tax return If you are outside the United States during the filing period (January to mid-June), you can get the necessary federal tax forms and publications from most U. E file tax return S. E file tax return Embassies and consulates. E file tax return Mail. E file tax return You can send your order for forms, instructions, and publications to the address below. E file tax return You should receive a response within 10 days after your request is received. E file tax return  Internal Revenue Service 1201 N. E file tax return Mitsubishi Motorway Bloomington, IL 61705-6613 Outside the U. E file tax return S. E file tax return If you are outside the United States, you can get tax assistance by writing to the address below. E file tax return  Internal Revenue Service International Accounts Philadelphia, PA 19255-0725 Taxpayer Advocate Service. E file tax return   The Taxpayer Advocate Service (TAS) is your voice at the IRS. E file tax return Its job is to ensure that every taxpayer is treated fairly, and that you know and understand your rights. E file tax return TAS offers free help to guide you through the often-confusing process of resolving tax problems that you haven’t been able to solve on your own. E file tax return Remember, the worst thing you can do is nothing at all. E file tax return   TAS can help if you can’t resolve your problem with the IRS and: Your problem is causing financial difficulties for you, your family, or your business. E file tax return You face (or your business is facing) an immediate threat of adverse action. E file tax return You have tried repeatedly to contact the IRS but no one has responded, or the IRS has not responded to you by the date promised. E file tax return   If you qualify for help, they will do everything they can to get your problem resolved. E file tax return You will be assigned to one advocate who will be with you at every turn. E file tax return TAS has offices in every state, the District of Columbia, and Puerto Rico. E file tax return Although TAS is independent within the IRS, their advocates know how to work with the IRS to get your problems resolved. E file tax return And its services are always free. E file tax return   As a taxpayer, you have rights that the IRS must abide by in its dealings with you. E file tax return The TAS tax toolkit at www. E file tax return TaxpayerAdvocate. E file tax return irs. E file tax return gov can help you understand these rights. E file tax return   If you think TAS might be able to help you, call your local advocate, whose number is in your phone book and on our website at www. E file tax return irs. E file tax return gov/advocate. E file tax return You can also call the toll-free number at 1-877-777-4778. E file tax return Deaf and hard of hearing individuals who have access to TTY/TDD equipment can call 1-800-829-4059. E file tax return These individuals can also access the IRS through relay services such as the Federal Relay Service at www. E file tax return gsa. E file tax return gov/fedrelay. E file tax return   TAS also handles large-scale or systemic problems that affect many taxpayers. E file tax return If you know of one of these broad issues, please report it through the Systemic Advocacy Management System at www. E file tax return irs. E file tax return gov/advocate. E file tax return    Outside the U. E file tax return S. E file tax return If you live outside of the United States, you can call the Taxpayer Advocate at (787) 522-8601 in English or (787) 522-8600 in Spanish. E file tax return You can contact the Taxpayer Advocate at: Internal Revenue Service Taxpayer Advocate Service City View Plaza, 48 Carr 165, Suite 2000 Guaynabo, P. E file tax return R. E file tax return 00968-8000 Low Income Taxpayer Clinics (LITCs). E file tax return   Low Income Taxpayer Clinics (LITCs) are independent from the IRS. E file tax return Some clinics serve individuals whose income is below a certain level and who need to resolve a tax problem. E file tax return These clinics provide professional representation before the IRS or in court on audits, appeals, tax collection disputes, and other issues for free or for a small fee. E file tax return Some clinics can provide information about taxpayer rights and responsibilities in many different languages for individuals who speak English as a second language. E file tax return For more information and to find a clinic near you, see the LITC page on www. E file tax return irs. E file tax return gov/advocate or IRS Publication 4134, Low Income Taxpayer Clinic List. E file tax return This publication is also available by calling 1-800-TAX-FORM (1-800-829-3676) or at your local IRS office. E file tax return Free tax services. E file tax return   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. E file tax return Learn about free tax information from the IRS, including publications, services, and education and assistance programs. E file tax return The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. E file tax return The majority of the information and services listed in this publication are available to you free of charge. E file tax return If there is a fee associated with a resource or service, it is listed in the publication. E file tax return   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with disabilities. E file tax return DVD for tax products. E file tax return You can order Publication 1796, IRS Tax Products DVD, and obtain: Current-year forms, instructions, and publications. E file tax return Prior-year forms, instructions, and publications. E file tax return Tax Map: an electronic research tool and finding aid. E file tax return Tax law frequently asked questions. E file tax return Tax Topics from the IRS telephone response system. E file tax return Internal Revenue Code—Title 26 of the U. E file tax return S. E file tax return Code. E file tax return Links to other Internet-based tax research materials. E file tax return Fill-in, print, and save features for most tax forms. E file tax return Internal Revenue Bulletins. E file tax return Toll-free and email technical support. E file tax return Two releases during the year. E file tax return  – The first release will ship the beginning of January 2013. E file tax return  – The final release will ship the beginning of March 2013. E file tax return Purchase the DVD from National Technical Information Service (NTIS) at www. E file tax return irs. E file tax return gov/cdorders for $30 (no handling fee) or call 1-877-233-6767 toll free to buy the DVD for $30 (plus a $6 handling fee). E file tax return Prev  Up  Next   Home   More Online Publications