20.2.12  Employment Taxes

20.2.12.1  (08-20-2010)
Employment Taxes Overview

  1. If more or less than the correct amount of tax is reported and paid with respect to employment taxes imposed by the Internal Revenue Code (IRC) sections referenced below, proper adjustment of the tax can be made without interest.

    • IRC 3101 — Federal Insurance Contribution Act (FICA) tax on employees

    • IRC 3111 — FICA tax on employers

    • IRC 3201 — Railroad Retirement Tax Act (RRTA) tax on employees

    • IRC 3221 — RRTA tax on employers

    • IRC 3402 — Income tax collected at source.

  2. Generally, overpayments of these taxes are adjusted without interest under IRC 6413(a) and underpayments are adjusted without interest under IRC 6205(a).

  3. In some circumstances, interest on an overpayment or underpayment of employment taxes will accrue:

    1. If a taxpayer does not qualify for an overpayment adjustment or an underpayment adjustment under IRC 6413(a) or IRC 6205, respectively.

    2. If a taxpayer qualifies for an underpayment adjustment but fails to timely pay the amount due (IRC 6205).

    3. If, in lieu of a request for overpayment adjustment, a taxpayer files a claim for credit or refund of overpayment of employment taxes under IRC 6402 and IRC 6414.

20.2.12.2  (08-20-2010)
Underpayment Adjustments

  1. An employer who has underreported and/or underpaid FICA tax, RRTA tax or income tax withholding will correct the error on the form that corresponds to the return being corrected (e.g., if the original return filed was a Form 941, Employer's QUARTERLY Federal Tax Return, corrections are reported on Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund). See Exhibit 20.2.12-1, Which Form to File. The adjusted return on which the correction is shown must provide:

    • A detailed explanation of the correction.

    • The date the error was ascertained.

    • The return period being corrected, and

    • Other information as prescribed in the regulations or instructions relating to the adjusted return.

  2. An error is ascertained when the employer has sufficient knowledge of the error to be able to correct it. See Treas. Reg. 31.6205-1(a)(5).

  3. If all of the above information is provided and the adjustment is reported by the due date of the return for the return period in which the error is ascertained, input the adjustment with Blocking Series 20X, using a Transaction Code (TC) 298/308 and an interest computation date of the received date ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ of the adjusted return. If the underpayment is paid in full by the time the adjusted return is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , no interest is due. If the underpayment is not paid in full by the time the adjusted return is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , interest will be computed from the interest computation date (INT-CMPTN-DT). ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    Example:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. When an adjusted return is not received by the due date for filing the return for the return period in which the employer ascertained the error, the adjustment is not considered to have been timely reported. In this circumstance, interest is due on the underpayment from the due date of the original return for the period in which the error occurred.

  5. No correction will be eligible for an interest-free underpayment adjustment after the earliest of the following:

    1. Receipt of notice and demand for payment based on an assessment.

    2. Receipt of a Notice of Determination of Worker Classification (Notice of Determination). In the case of a Notice of Determination, the taxpayer must file a petition with the Tax Court within 90 days or the amount will be assessed and due with interest.

    3. The due date of the period during which the error was ascertained.

    The amount must then be paid with normal interest as prescribed in IRC 6601. See Treas. Reg. 31.6205-1(a)(6).

    Note:

    The interest-free provisions of IRC 6205 and IRC 6413(a) do not apply to FUTA taxes.

20.2.12.3  (08-20-2010)
Combined Annual Wage Reporting (CAWR) Assessments

  1. Combined Annual Wage Reporting (CAWR) proposed assessments may result in an interest-free adjustment to Form 941 FICA tax.

    1. If the taxpayer agrees with the proposed CAWR increase (whether or not an adjusted return was filed or a payment was made), the adjustment is interest-free if the discrepancy is in income tax withholding, FICA tax or RRTA tax. Input the adjustment with a Blocking Series 55 and a TC 298/308, using as the interest computation date, the received date ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ of the CAWR Agreement whereon the taxpayer agreed to the tax increase. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Example:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    2. If the taxpayer does not pay the entire balance at the time of agreement ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ to the CAWR tax increase, interest will be computed from the date of agreement ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ forward on the unpaid balance. Whenever tax adjustments are made, corresponding adjustments to penalties and interest must be made.See IRM 20.2.12.2, Underpayment Adjustments.

  2. After receipt of notice and demand for payment based on a CAWR assessment, no interest-free adjustment of such tax can be made by filing an adjusted return or by agreeing to the assessment by signing Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment.

  3. For complete instructions on the input of CAWR assessments, see IRM 4.19.4, CAWR Reconciliation Balancing.

20.2.12.4  (08-20-2010)
Household Employment Taxes

  1. The interest-free provisions for adjustments on BMF employment taxes also cover errors of household employment taxes reported on IMF Form 1040 Schedule H, Household Employment Taxes. If an employer discovers an error on a Form 1040 Schedule H that was filed with Form 1040, U.S. Individual Income Tax Return, Form 1040NR, U.S. Nonresident Alien Income Tax Return, or Form 1040-SS, U.S. Self-Employment Tax Return, the employer will file a Form 1040X, Amended U.S. Individual Income Tax Return, and attach a corrected Form 1040 Schedule H. If an employer discovers an error on a Form 1040 Schedule H that was filed with Form 1041, U.S. Income Tax Return for Estates and Trusts, the employer will file an "amended" Form 1041 and attach a corrected Form 1040 Schedule H. If an employer discovers an error on a Form 1040 Schedule H that was filed as a stand-alone return, the employer will file another stand-alone Form 1040 Schedule H with the corrected information. See IRM 21.6.4.4.8, Schedule H, Household Employment Taxes, for more information.

    Note:

    The interest-free provisions of IRC 6205 and IRC 6413(a) do not apply to FUTA taxes.

  2. Underpayment adjustments are interest-free if reported by the due date of the return for the return period in which the error was ascertained and payment is made by the time the adjusted return is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    Exception:

    If withheld income tax is involved, See IRM 20.2.12.6 , Underpayments of Income Tax Withheld from Wages.

  3. If the corrected Form 1040 Schedule H is filed by the due date of the return for the period in which the error was ascertained, but payment is not made by the time the corrected Form 1040 Schedule H is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , interest is computed from the received date ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ of the corrected Form 1040 Schedule H. See IRM 20.2.12.2, Underpayment Adjustments.

  4. New employment tax regulations effective January 1, 2009, require payment of employment tax increases (including Form 1040 Schedule H ) for income tax withheld and social security and Medicare taxes at the time the adjusted return/Form 1040 Schedule H is filed (FUTA taxes are not affected). ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    Instructions for Form 1040 Schedule H state that the tax must be paid when the taxpayer files his/her corrected Form 1040 Schedule H. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

20.2.12.5  (08-20-2010)
Underpayments of FICA and RRTA Taxes

  1. If the employer ascertains the error before the return is filed, the employer shall report the correct amount of tax and pay the correct amount of tax with the return. THIS IS NOT AN ADJUSTMENT. If the employer does not report and pay the correct amount by the time the return is filed, he cannot later correct the error through an interest-free adjustment. Interest is computed from the due date of the original return for the tax period in which the error occurred.

  2. If the employer ascertains the error after the return is filed, the error can be corrected by reporting the additional amount due on an adjusted return for the period in which the error occurred. The adjusted return is made on the form that corresponds to the return being corrected. See Exhibit 20.2.12-1, Which Form to File.

    1. The adjusted return must be filed by the due date for filing the return for the return period in which the error was ascertained and within the statute of limitations as set forth in IRC 6501 for the return period being corrected.

    2. If full payment is made by the time the adjusted return is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , then no interest is due. See Treas. Reg. 31.6205-1(b)(2). The underpayment can be paid using the Electronic Federal Tax Payment System (EFTPS) or by sending a check with the adjusted return. Credit card payments will be accepted for certain adjusted returns (e.g., Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund).

  3. If the adjusted return is filed timely (by the due date for filing the return for the return period in which the employer ascertained the error), but payment is not made at the time of filing ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ,interest is computed on any unpaid amount from the received date≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ of the adjusted return until paid in full. If the proper interest computation date (INT-CMPTN-DT) is used with TC 298/308, Master File will correctly compute the interest unless debit interest on the module is otherwise restricted. The interest computation date is the received date of the adjusted return ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ for the period in which the error occurred. See IRM 20.2.12.2, Underpayment Adjustments.

    Note:

    The interest-free provision of IRC 6205does not apply to penalties. Interest on any penalties is due and will generate from the return due date, extended return due date, or assessment date, whichever is applicable.

  4. If the adjusted return is not filed by the due date for filing the return for the return period in which the employer ascertained the error, interest is due on the underpayment from the due date of the original return for the period in which the error occurred.

    Example:

    The taxpayer submitted a Form 941-X reporting an increase to FICA taxes for the tax period ending March 31, 2008. He indicated that the errors were "discovered" on September 25, 2009 (during the 3rd quarter of 2009). His Form 941-X was filed on November 30, 2009. Because the return was not filed by the due date for filing the return for the return period in which the error was ascertained (i.e., October 31, 2009), interest is computed from April 30, 2008, the due date of the original return. The adjustment will be input with a TC 290/300 and the interest need not be restricted unless another condition(s) warrants it.

  5. Generally, the correction of an error may be made under the above procedures during an audit of the return, provided the employer corrects the error before notice and demand or a Notice of Determination is issued. See Treas. Reg. 31.6205-1(a)(6).

    1. Interest-free adjustments will not be allowed in cases in which the taxpayer's returns for prior years were audited and additional tax was found to be due with respect to the same issue involved in the current audit.

    2. Interest-free adjustments will not be allowed in cases in which the taxpayer knowingly underreports an employment tax liability in subsequent years.

    Interest will be assessed on such adjustments in accordance with IRC 6601.

    Note:

    Unless otherwise excepted, Form 2504, Form 2504-WC, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification Cases, and Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (including section 530 statement), and such other forms as may be prescribed, are considered to be adjusted returns for purposes of an interest-free adjustment

    . See Treas. Reg. 31.6205–1(a)(7).

  6. Corrections on a return prepared under IRC 6020(b) do not typically qualify for an interest-free adjustment. Interest on this type of return is computed from the due date of the original return. IRC 6020(b) gives the IRS the authority to file a tax return for a business when it does not file a required return.

    Exception:

    Interest-free adjustments can apply to IRC 6020(b) modules if the taxpayer signs the prepared IRC 6020(b) return or signs an agreement (such as Form 2504) and files a return. See IRM 4.4.9, AIMS/Processing Handbook, Delinquent and Substitute for Return Processing.

  7. An original return that was previously not filed may qualify for the interest-free provisions of IRC 6205 if:

    • An employer erroneously filed a return reporting FICA tax, but was instead required to file a return reporting RRTA tax.

    • An employer erroneously filed a return reporting RRTA tax, but was instead required to file a return reporting FICA tax, or

    • A return was not filed because of failure to treat any individual(s) as an employee(s).

    See Treas. Reg. 31.6205-1(b)(ii) and (iii).

  8. Rev. Rul. 99-40 (i.e., May/Sequa), does not apply to employment taxes. This includes, but is not limited to Form 941, Employer's QUARTERLY Federal Tax Return, Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, Form 944, Employer’s ANNUAL Federal Tax Return, and Form 945, Annual Return of Withheld Federal Income Tax.

    Reminder:

    Rev. Rul. 99-40 states interest on an underpayment can only be charged when the tax is both due and unpaid. See IRM 20.2.5.7, Revenue Ruling 99-40 (Modifies and Supersedes Revenue-Ruling 88-98) Use of Money, for more information on Rev. Rul. 99-40.

20.2.12.6  (08-20-2010)
Underpayments of Income Tax Withheld from Wages

  1. If no income tax or less than the correct amount of income tax is withheld and the error is ascertained before the return is filed for the period in which the wages were paid, the employer shall report and pay the correct amount of tax required to be withheld on the return. THIS IS NOT AN ADJUSTMENT. If the employer does not report and pay the correct amount of tax by the time the return is filed, he cannot later correct the error through an interest-free adjustment. Interest is computed from the due date of the original return for the period in which the error occurred.

    Example:

    Prior to filling out his Form 941 for the period ending June 30, 2009, an employer realizes that he should have withheld federal income tax on certain taxable fringe benefits. Since the employer ascertained the error prior to filing his Form 941, the employer must report and pay the correct amount of tax on his second quarter Form 941 due July 31, 2009. This is NOT an adjustment.

  2. If the under withholding of income tax is discovered after the return has been filed, the error can be corrected by reporting the additional amount due on an adjusted return (e.g., Form 941-X), for the return period in which the wages were paid. The adjusted return is eligible for interest-free treatment if:

    • The adjusted return is filed by the due date for filing the return for the return period in which the error is ascertained, and

    • The error is ascertained within the same calendar year that the wages were paid.

      Note:

      Income tax withholding cannot be corrected for prior year returns unless it involves an administrative error, IRC 3509 applies, or the adjustment is reported on Form 2504 or Form 2504-WC. See IRM 20.2.12.6:(3)(b) below.

  3. If the employer discovers an error resulting in an underpayment of income tax withheld in the same calendar year in which the wages or compensation was paid, reports the underpayment by the due date of the return for the quarter in which the error is discovered, and all required tax is paid by the time the adjusted return is received ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , NO INTEREST IS DUE on the underpayment. See Treas. Reg. 31.6205-1(c)(2).

    Example:

    The taxpayer submitted a Form 941-X reporting increases of both FICA tax and income tax withholding for the 1st quarter 2009. He indicated the error was "discovered" on May 5, 2009, (during the 2nd quarter of 2009). His Form 941-X and his payment of tax were received June 22, 2009. Since the additional tax was reported by the 2nd quarter due date of July 31, 2009, the entire additional tax is assessed on the 1st quarter tax module with Blocking Series 20X and TC 298 or Blocking Series 47X and TC 308 with June 22, 2009 ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ entered in the Interest Computation Date (INT-CMPTN-DT) field. NO DEBIT INTEREST IS DUE because the tax was paid by June 22, 2009, (≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ the received date of Form 941-X).

    1. If the underpayment is reported timely (by the due date of the return for the period in which the error was "discovered" ), but the amount of tax due on the return is not paid by the time of filing ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , interest is computed from the received date of the adjusted return ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

      Example:

      The same underpayment occurs as in the example above. The Form 941-X reporting the underpayment was filed on June 22, 2009, but the additional tax was not paid. Interest is computed from June 22, 2009, the received date of the adjusted return ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . The entire additional tax is assessed on the 1st quarter tax module with Blocking Series 20X, TC 298/308 and 06222009≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ is entered in the INT-CMPTN-DT field.

    2. If an underpayment of income tax withholding is not reported on an adjusted return by the due date of the return for the period in which the error was ascertained, interest is computed from the due date of the original return for the quarter in which the wages were paid unless it is an administrative error, IRC 3509 applies, or the adjustment is reported on Form 2504, Form 2504-WC, Form 2504-S, or prescribed agreement form.

      Example:

      The same underpayment occurs as in the above example but the underpayment is not reported and paid until August 14, 2009. Because it was not reported by the due date of the 2nd quarter (July 31, 2009), interest is computed from the due date of the 1st quarter, April 30, 2009. The entire additional tax is assessed with a TC 290 on the 1st quarter tax module. No interest restriction is necessary unless the module was previously restricted or otherwise requires restriction.

  4. The adjustment is made on the form that corresponds to the return being corrected. See Exhibit 20.2.12-1, Which Form to File.

20.2.12.6.1  (08-20-2010)
Underpayments of Federal Income Tax Due to an Administrative Error

  1. If a taxpayer reported less federal income tax withholding on a return than was actually withheld, he may correct the error as an interest-free adjustment under IRC 6205. This applies to errors found on returns for the current calendar year as well as to errors found on returns for prior calendar years. This is known as a correction of an administrative error. The rules for qualifying for an interest-free adjustment are the same as for correcting underpayments of FICA tax and RRTA tax. See IRM 20.2.12.5, Underpayments of FICA and RRTA Taxes.

20.2.12.6.2  (08-20-2010)
Income Tax Overwithheld

  1. If an employer discovers that income tax was overwithheld from an employee's wages and paid to IRS, the employer may correct the error by making an adjustment to correct the overpayment if, the error was discovered in the same calendar year in which the wages were paid. The employer must repay or reimburse the employee for the overcollection in any subsequent quarter during the same calendar year.

    If Then
    Repaid The employer must obtain and keep, as part of his records, a receipt from the employee. See Treas. Reg. 31.6413(a)-1(b)(ii).
    Not repaid The employer can reimburse the employee by applying the overcollection against subsequent tax required to be withheld from wages paid during the same calendar year in which the overcollection occurred.
       
  2. Once the employer repays or reimburses the employee for the overcollection, the employer may "adjust," without interest, the overcollection on an adjusted return for the quarter in the calendar year in which the overcollection occurred. The amount of the adjustment will be applied without interest to the current quarter or current yearly return as applicable. Since interest is not allowable, input a TC 770 with a zero amount.

    Note:

    Adjustment of income tax withholding is applicable only if the employer has repaid or reimbursed the employee during the same calendar year in which the wages were paid or if the adjustment is made to correct an administrative error (i.e., the amount reported on the prior return was not actually withheld from the employees' wages).

  3. The adjustment is made on the form that corresponds to the return being corrected. See Exhibit 20.2.12-1, Which Form to File. No refund to the employer is allowed under IRC 6414 for the amount of any overpayment of income tax which the employer withheld from an employee.

  4. An employer may file a claim for refund with interest, instead of making an adjustment for an overpayment of income tax withholding for a quarter in the current calendar year or a prior calendar year, only if the amount reported on the prior year return exceeded the amount actually withheld from the employee's wages.

  5. The claim for refund is made on the form that corresponds to the return being corrected. See Exhibit 20.2.12-1,Which Form to File.

  6. The regulations under IRC 6413 provide a new 90-day rule under which an overpayment adjustment is not permitted if the adjusted return would be filed within 90 days of the expiration of the period of limitations. See Treas. Reg. 31.6413(a)-2(d)(2).

20.2.12.7  (08-20-2010)
Overpayments of FICA and RRTA Taxes

  1. If the overcollection and overpayment is discovered after the return is filed, the employer (after repaying or reimbursing the employee) may correct the overpayment of both the employer and the employee's share of the FICA tax or RRTA tax by filing an adjusted return for the period in which the error occurred. The overpayment will be applied as a credit to the current tax period. The adjusted return must be filed before the expiration of the period of limitations as described in IRC 6511. This "adjustment" is made without interest. See IRM 20.2.12.7, Overpayments of FICA and RRTA Taxes , paragraph (6).

  2. An error is ascertained when the employer has sufficient knowledge of the error to be able to correct it. See Treas. Reg. 31.6413(a)-1(a)(2)(4).

  3. The adjusted return is made on the form that corresponds to the return being corrected. See Exhibit 20.2.12-1, Which Form to File.

  4. If the employer elects to file a "claim for refund" instead of an adjusted return and apply the credit to the current tax period, credit interest is allowed from:

    • The due date of the return for the period in which the overpayment occurred,

    • The date the return is filed in processible form (IRC 6611(g)), or

    • The date the tax is paid

    (whichever is later), to the refund schedule date minus any applicable back-off periods. See IRM 20.2.4.7, Refunds.

  5. When allowing credit interest on employment tax returns, take into consideration the special return due date rule. Form 941, Form 943, Form 944, and Form 945 may be filed on or before the 10th day of the second calendar month following the end of the tax period, if timely deposits are made in full payment of the amount of tax reported. See Treas. Reg. 31.6071(a)-1(a). These returns should not be considered "late filed."

    Example:

    An employer timely deposits the full amount of tax reported on his original Form 941 for the first quarter (in order for deposits to be timely they must be deposited on or before January 31st). His return is received for processing on February 9th. Based on the special return due date rule, the return is considered timely filed. He later files a Form 941-X as a "claim for refund" and because the original return was timely filed, he receives overpayment interest from January 31st, the normal return due date for the first quarter.

  6. To file a claim for refund of an overpayment of FICA or RRTA tax, the employer must repay or reimburse the employee's share of FICA or RRTA tax to the employee or secure the written consent of the employee for allowance of the refund or credit. However, the employer is not required to repay or reimburse the employee or obtain written consent of the employee to the extent that the overpayment does not include taxes withheld from the employee or if, after reasonable efforts, the employer cannot locate the employee or the employee, once contacted, will not provide the requested consent. If the employer cannot locate the employee or if the employee, once contacted, will not provide the requested consent, the employer can file a claim only for the employer’s share of FICA or RRTA taxes.

  7. The claim for refund is made on the form that corresponds to the return being corrected (e.g., Form 941-X). See Exhibit 20.2.12-1, Which Form to File.

  8. The regulations under IRC 6413 provide a new 90-day rule under which an overpayment adjustment is not permitted if the adjusted return would be filed within 90 days of the expiration of the period of limitations. See Treas. Reg. 31.6413(a)-2(d)(2). The employer must choose the claim for refund option on the appropriate "X" form. See Exhibit 20.2.12-1, Which Form to File.

20.2.12.8  (08-20-2010)
Employee FICA Tax or RRTA Tax Withheld

  1. If an employee worked for two or more employers during a year, the employee may have had too much social security or Tier 1 RRTA tax withheld. The employee can claim the excess social security or Tier 1 RRTA tax as a credit against the employee’s income tax on Form 1040. If any one employer withheld too much social security or Tier 1 RRTA tax, an employee cannot take the excess as a credit against the employee’s income tax. The employer should adjust the tax for the employee. If the employer does not adjust the overcollection, the employee can file a claim for refund using Form 843, Claim for Refund and Request for Abatement.

  2. If a non-resident alien receives a refund of erroneously withheld FICA taxes (e.g., students arriving on F, J or M visas who may be exempt from paying FICA taxes), refer to IRM 21.8.1, IMF International Adjustments, IRM 21.8.2, BMF International Adjustments, and/or IRM 21.8.3, International, NMF International Adjustments. IRS is required to withhold taxes at the source at the applicable treaty rate from any interest allowed on a refund to a non-resident alien before the refund is issued. This means that the net interest amount is refunded.

20.2.12.9  (08-20-2010)
Employment Taxes and the Trust Fund Recovery Penalty (TFRP)

  1. The Trust Fund Recovery Penalty (TFRP) was created to encourage prompt payment of withheld income and employment taxes. This includes payment of social security taxes, railroad retirement taxes, or collected excise taxes. These taxes are called trust fund taxes because the employer actually holds the employee's money in trust until it is deposited. This penalty is imposed when trust fund taxes cannot be immediately collected from the employer. See IRC 6672.

  2. The TFRP is assessed on MFT 55 and posts as a Transaction Code (TC) 240, Reference Number 618. Any abatements of this penalty will post to the module with a TC 241, Reference Number 618 and will carry the same 23C Date as the TC 240.

  3. Payments posting to the module may be posted with a TC 241, Reference Number 697 or 699. Payments may also be posted with TC 670, 680 or 70X.

20.2.12.9.1  (08-20-2010)
Interest on TFRP

  1. Underpayment interest on the TFRP is charged from the 23C Date of the TC 240, Reference Number 618, until paid in full.

  2. Underpayment and overpayment interest is computed at the rates established under IRC 6621 .

    Note:

    Master file is capable of making the correct interest calculation under most circumstances. Do not restrict the module unnecessarily.

20.2.12.10  (08-20-2010)
Foreign Affiliates of Domestic Corporations

  1. Domestic corporations that employ U.S. citizens or residents in their foreign affiliates may enter into agreements under IRC 3121(l) whereby FICA coverage is extended to those citizens or residents. Under these agreements, the corporations pay the amounts equivalent to FICA taxes imposed by IRC 3101 and IRC 3111. Whether the amount is overpaid or underpaid, adjustments are without interest.

  2. Special Rule for Overpayment Not "Adjusted" — A domestic corporation may file a claim for refund of any overpayment made under an agreement under IRC 3121(l). The law provides a special two-year limit from the date of the overpayment for claiming such a refund. The claim must be plainly marked "Claim under IRC 3121(l)" on the applicable amended form. See Exhibit 20.2.12-1, Which Form to File. Adjustment documents for such overpayments should bear a similar notation.

20.2.12.11  (03-27-2009)
Federal Unemployment Tax

  1. IRC 3302(a) provides for the allowance of credit against the tax imposed by IRC 3301 for the amount of contributions paid by the employer into a state unemployment fund in any taxable year. An additional credit is also allowable under IRC 3302(b).

  2. Credits allowable under IRC 3302, to the extent not previously allowed, are considered an overpayment.

  3. No interest is allowed or paid on such an overpayment. See IRC 6413(d).

  4. When the taxpayer reduces his/her tax as a result of an increase in state credits, input TC 770 with a zero amount.

  5. Returns for prior periods reporting FUTA tax cannot otherwise be adjusted interest-free. IRC 6205 and IRC 6413(a) do not apply to FUTA tax.

Exhibit 20.2.12-1 
Which Form to File

If the return originally filed was - To make corrections, the employer (payer) will file -
Form 940 Form 940, Annual Federal Unemployment Tax Act (FUTA) Tax Return (check box "amended" under Type of Return)
Form 941 or Form 941-SS Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund
Form 943 Form 943-X, Adjusted Employer's Annual Tax Return for Agricultural Employees or Claim for Refund
Form 944 or Form 944-SS Form 944-X, Adjusted Employer’s ANNUAL Federal Tax Return or Claim for Refund
Form 945 Form 945-X, Adjusted Annual Return of Withheld Federal Income Tax or Claim for Refund
Form 941-PR Form 941-X (PR), Ajuste a la Declaración Federal TRIMESTRAL del Patrono o Reclamo de Reembolso
Form 943-PR Form 943-X (PR), Ajuste a la Declaración Federal Anual del Patrono de Empleados Agrícolas o Reclamo de
Form 944-PR Form 944-X (PR), Ajuste a la Declaración Federal ANUAL del Patrono o Reclamo de Reembolso
Form 944-SP Form 944-X (SP), Ajuste a la Declaración Federal ANUAL de Impuestos del Patrono o Reclamo de Reembolso
Form CT-1 Form CT-1 X, Adjusted Employer's Annual Railroad Retirement Tax Return or Claim for Refund

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