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.

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

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

An employer who has underreported and underpaid FICA tax, RRTA tax or income tax withholding shall 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:

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).

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 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 filed, no interest is due. If the underpayment is not paid in full by the time the adjusted return is filed, interest will be computed from the interest computation date (INT-CMPTN-DT). See LEM 20.2.12.2 .

If the adjustment is not reported timely (that is, 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.

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

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

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

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.

For complete instructions on inputting CAWR assessments, see IRM 4.19.4, CAWR Reconciliation Balancing.

The interest-free provisions for adjustments on BMF employment taxes also cover errors of household employment taxes reported on IMF Form 1040 , U.S. Individual Income Tax Return, Schedule H. If an employer discovers an error on a Form 1040 , Schedule H that was filed with Form 1040, 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.

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 filed. See LEM 20.2.12.2 and LEM 20.2.12.4.

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 filed, interest is computed from the received date of the corrected Form 1040, Schedule H. See LEM 20.2.12.2 and LEM 20.2.12.4.

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.

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.

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 by 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, 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.

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.

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).

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

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Corrections on a return prepared under IRC section 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 section 6020(b) gives the IRS the authority to file a tax return for a business when it does not file a required return.

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

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

Rev. Rul. 99-40 (i.e. May/Sequa), does not apply to employment taxes. This includes, but is not limited to Form 941, 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.

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.

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 valid for interest-free treatment if:

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 filed, NO INTEREST IS DUE on the underpayment. See Treas. Reg. 31.6205-1(c)(2) and LEM 20.2.12.2 .

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

If the over collection 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 section 6511. This " adjustment" is made without interest. See IRM 20.2.12.7 paragraph (6).

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)(v).

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.

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:

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

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 which full pay the amount of tax reported. See Treas. Reg. 31.6071(a)-1(a). These returns should not be considered "late filed" .

To file a claim for refund of an overpayment of FICA or RRTA, 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.

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.

The regulations under IRC section 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.

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 over collection, the employee can file a claim for refund using Form 843, Claim for Refund and Request for Abatement.

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, 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.

Domestic corporations that employ U.S. citizens or residents in their foreign affiliates may enter into agreements under IRC section 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 section 3101 and IRC section 3111. Whether the amount is overpaid or underpaid, adjustments are without interest.

Special Rule for Overpayment Not "Adjusted" —A domestic corporation may file a claim for refund of any overpayment made under an agreement under IRC section 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 section 3121(l)" on the applicable amended form. See Exhibit 20.2.12-1, Which Form to File. Adjustment documents for such overpayments should bear the same notation.

IRC section 3302(a) provides for the allowance of credit against the tax imposed by IRC section 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 section 3302(b).

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

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

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

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