Fiscal Note
This resolution would authorize payments to the Internal Revenue Service and the Wisconsin Department of Revenue for back taxes associated with underreporting of wages due to a misinterpretation of federal tax law as it relates to life insurance premiums for coverage above $50,000. Over many years, the city had been interpreting the federal tax law to mean that employee wages paid for premiums for life insurance, regardless of coverage level, were exempt from taxes if the city had a section 529 (“cafeteria”) plan in place. This interpretation was incorrect. As a result, employees were not taxed on wages allocated to pay for premiums on life insurance for coverage amounts above $50,000, and, therefore, had higher take-home pay than would have otherwise occurred if taxes on these wages had been withheld.
The estimated payment to the Internal Revenue Service is $582,000. The amount to be paid to the Wisconsin Department of Revenue is yet to be finalized but is estimated at $250,000 for financial statement purposes. The City has also engaged its auditor, Baker Tilly, to assist with reviewing the calculations of taxable income and liability, reviewing applicable federal tax laws, and working with the Internal Revenue Service and Department of Revenue to establish a settlement agreement. The maximum expected cost for professional services assistance is $60,000. The entire liability is expected to be less than $900,000, but could change depending on final resolution of the state tax liability.
This agreement absolves the city and its employees for any further tax and reporting requirements associated with this wage underreporting. The city has avoided any future tax liability by treating wages allocated toward employer-sponsored life insurance premiums as taxable income.
The respective expenditures and liabilities were recorded with the 2013 Financial Statements. There is sufficient expenditure authority in the fringe benefits accounts appropriate...
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