AccessibilitySkip to Top NavigationSkip to Main ContentHome  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

Part 21. Customer Account Services

Chapter 7. Business Tax Returns and Non-Master File Accounts

Section 2. Employment and Railroad Tax Returns

21.7.2  Employment and Railroad Tax Returns

All Official Use Only content has been replaced with ≡.

21.7.2.1  (01-01-2007)
Employment and Railroad Tax Returns Overview

  1. This section provides general information and adjustment procedures for employment tax returns and railroad tax returns. Both telephone inquiries and paper correspondence can be worked using this information. Included is information for items reported on current forms:

    • Form 941, Employer's QUARTERLY Federal Tax Return

    • Form 941c, Supporting Statement to Correct Information

    • Form 943, Employer's Annual Tax Return for Agricultural Employees

    • Form 944, Employer's ANNUAL Federal Tax Return

    • Form 945, Annual Return of Withheld Federal Income Tax

    • Form CT-1, Employer's Annual Railroad Retirement Tax Return

    • Form CT-2, Employees Representative's Quarterly Railroad Tax Return

  2. Information on Forms W-2 and W-3, and related inquiries, has been moved to IRM 21.3.6, Forms and Information Requests.

  3. Information originally contained in IRM 21.7.6, CT-1, CT-2 Railroad Tax Returns, is now included in this chapter. See IRM 21.7.2.4.24, CT-1, CT-2 Railroad Tax Returns.

  4. Form 944, Employer's ANNUAL Federal Tax Return, was new for tax year 2006. See IRM 21.7.2.4.14, Form 944 Employer's ANNUAL Federal Tax Return.

  5. Schedule D (Form 941), Report of Discrepancies Caused by Acquisitions, Statutory Mergers, or Consolidations, was new in 2005. Refer any loose forms received in Accounts Management to the CAWR unit at the Cincinnati Compliance Campus, Stop 815G. Refer any questions that cannot be answered on the toll-free line to CAWR on Form 4442/e-4442. Accounts Management answers simple questions about filing requirements and when to file.

21.7.2.2  (01-01-2007)
What Are Employment Tax Returns?

  1. Forms 941, 943 and 944 are filed by employers of individuals to report both the employer’s and the employees' share of social security and Medicare taxes, also known as FICA. They are also used to report the amount of federal income tax withheld from the employees’ wages. Employers use:

    1. Form 941c, Supporting Statement to Correct Information, to provide background information and certifications supporting adjustments to income, social security, and Medicare taxes reported on Form 941, Form 941-M, Form 941-SS, Form 943, Form 944, Form 944(SP), Form 944-SS and Form 945.

    2. Form 945, Annual Return of Withheld Federal Income Tax, to report income tax withheld from non-payroll items, such as pensions, annuities, IRA's and gambling winnings.

  2. Return due dates for Forms 941, 943, 944 and 945, are extended 10 days if timely deposits are made which full pay the amount of tax reported.

21.7.2.3  (01-01-2005)
Employment Tax Returns Research

  1. Research procedures are contained throughout this section within each type of form/tax.

  2. Refer to the appropriate reference material to research technical issues. These include instructions for each tax form, Publication 15, Circular E, Employer's Tax Guide, Publication 15-A, Employer's Supplemental Tax Guide, Publication 15-B, Employer's Tax Guide to Fringe Benefits, and Publication 51, Circular A, Agricultural Employer's Tax Guide.

21.7.2.3.1  (01-01-2007)
Reporting Agents File (RAF)

  1. This is a file of taxpayers and Reporting Agents who file Forms 940, 941 and/or 944 electronically (e-file). Taxpayer prepares and signs Form 8655, Reporting Agent Authorization, or Service Approved Form. This authorizes the Reporting Agent to:

    • File their Form 940, Form 941, and/or Form 944 electronically

    • Make EFTPS payments for them

    • File forms that can and/or cannot be filed electronically

    Note:

    Forms 945 cannot be filed electronically, but the reporting agent may have the authority to file the return on paper for the taxpayer. The reporting agent also has the authority to file amended forms on paper for any form they filed electronically for the taxpayer.

21.7.2.3.1.1  (01-01-2006)
Magnetic Tape Codes

  1. Information is stored on magnetic tape. Codes for the specific forms are listed below. All codes listed are valid for returns processed on or before February 10, 2004. See (6) below for more information on discontinuation of magnetic tape filing.

  2. The MAG–TAPE/FTD–CD= on CC ENMOD and the "MTC" on hard copy transcripts indicate which return is being filed on magnetic tape and whether research of the RAF should be performed.

    Mag–Tape Codes
    1 Files Form 941 on magnetic tape
    2 Files Form 940 on magnetic tape
    3 Files Form 940 and 941 on magnetic tape
    blank No returns filed on magnetic tape

  3. If code is 1-3, use CC RFINK to research the RAF with taxpayer’s EIN. (See IRM 2.3.16, Command Code RFINK.)

  4. Check the Notice Display Field.

    • A "Y" next to the Notice Display Field indicates taxpayer has given the authorization for the Reporting Agent to receive tax information for Forms 940/941.

    • An "N" or blank indicates no authorization was given to receive tax information. However, the agent is authorized to discuss the return and/or payment. See IRM 21.1.3.4, Reporting Agents File (RAF), IRM 21.3.9, Processing Reporting Agents Files Authorizations, and Form 8655 instructions for more information.

  5. The filing location, Tax Class and document codes for each employment MFT are shown below:

    Program MFT Code File Location Code Tax Class Code Document Code
    940 Mag Tape 10 08 ANSPC
    28 PSPC
    89 FSPC     		8 39
    941 Mag Tape 01 08 ANSPC
    28 PSPC
    89 FSPC     		1 39

  6. Form 941 for period ending December 31, 2003, and Form 940 for tax year 2003, were the final returns accepted using Magnetic Media. All magnetic tape filed employment returns were processed at either the Andover Submission Processing Campus or Fresno Submission Processing Campus for tax year 2003. Philadelphia Submission Processing Campus discontinued accepting Magnetic Media filed returns as of June, 2003.

21.7.2.4  (01-01-2005)
Employment Tax Returns Procedures

  1. The following are the procedures with the corresponding forms for the various tax returns.

21.7.2.4.1  (04-27-2007)
Reference Numbers (Employment Taxes)

  1. Use reference numbers to adjust tax, wages, and advance earned income tax credit (AEITC) on employment tax returns.

  2. The valid reference numbers for 2004 and prior Form 941 accounts and 2005 and subsequent are listed below, including Form 944.

    Item Reference Number Returns processed 2004 and prior Returns processed 2005 and subsequent Explanation
    003 X   Adjusted total of income tax withheld
    004 X X Taxable social security wages
    005 X X Taxable social security tips
    007 X   Adjusted total social security/Medicare tax
    072 X X Tips deemed to be wages ( IRC Section 3121 (q))
    073 X X Taxable Medicare wages & tips
    104   X Special additions to federal income tax ( IRC Section 3509)
    105   X Special additions to social security and Medicare tax ( IRC Section 3509)
    106   X Current quarter's fractions of cents (Form 941)/Current year's adjustments (Form 944)
    107   X Current quarter's sick pay (N/A for Form 944)
    108   X Current quarter's adjustment for tips and group life insurance (N/A for Form 944)
    109   X Current year's income tax withholding (Form 941)/Prior year's income tax withholding (Form 944)
    110   X Prior quarter's social security and Medicare taxes (Form 941)/Prior year's social security and Medicare taxes (Form 944)
    111   X Total income tax withheld
    112   X Total social security and Medicare tax
    113   X Total adjustments
    184 X   Total adjustments to withholding
    185 X   Total adjustments to social security/Medicare taxes
    CREDIT REFERENCE NUMBER (CRN)
    766 X X Advanced earned income credit (increase)
    767 X X Advanced earned income credit (decrease)

    Note:

    When adjusting an account, research any Computer Condition Codes (CCC "E" or "S" ) which may indicate a taxpayer's intent to receive a refund or credit elect. See Section 3 of Document 6209, IRS Processing Codes and Information.

21.7.2.4.2  (01-28-2005)
Item Reference Numbers (IRN's) and Credit Reference Numbers (CRN's) — Employment Taxes

  1. The total of IRN's 003, 007, and 008 (and 184 for Form 945 only) must equal the TC 29X amount on Forms 941 posting prior to 2005 and all Forms 943 and 945 (regardless of when they posted). For 2005 and subsequent Forms 941, the total of IRN's 111, 112 and 113 must equal the TC 29X amount. The sum of IRN's 104 through IRN 110 must equal IRN 113.

21.7.2.4.2.1  (10-01-2007)
IRN 184/109 — Income Tax Withholding Adjustments

  1. Use IRN 184 with IRN 003 to show an adjustment made to income tax withheld for preceding quarters of the calendar year (or administrative error adjustments in prior years) on Form 941 accounts posting prior to 2005. On Form 941 accounts posting 2005 and subsequent, use IRN 109 with IRN 113 to report this adjustment. For Form 945, use IRN 184 with 003 or 008 regardless of when it posted.

21.7.2.4.2.2  (10-01-2007)
IRN 185/110 — FICA Tax Adjustments

  1. For Form 941 accounts processed prior to 2005, use IRN 185 with IRN 007 to indicate an adjustment made to FICA taxes for preceding quarters or an adjustment made to FICA taxes in prior years for Form 943 (regardless of when it posted). For Form 941 accounts posting 2005 and subsequent, use IRN 110 with IRN 113 to report this adjustment.

  2. Use IRN 185 along with IRN 007 to adjust third party sick pay and/or fractions of cents, on all Form 943 accounts (regardless of when it posted) and Form 941 accounts posting prior to 2005. On Forms 941 posting 2005 and subsequent, adjust third party sick pay using IRN 107 and fractions of cents using IRN 106 along with IRN 113.

21.7.2.4.2.3  (01-28-2005)
IRN's Do Not Equal TC 150

  1. If IRN amounts do not equal the TC 150, process as below:

    1. Input TC 290 .00 and correct the IRN amounts to agree with the posted TC 150. Use the appropriate HC.

      Note:

      You do not have to adjust if the total of the IRN's are ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ of the posted TC 150.

    2. On a second document, input any necessary adjustments.

    Note:

    Adjustments can be made without correcting the IRN(s), if the ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ of the posted amount (unpostable check is bypassed). However, the IRN's must equal the TC 29X input on IDRS.

    Example:

    If TC 150 posted as $39.00 (all FICA tax) and the FICA posted as $35.00, input TC 291 for $39.00 and IRN 007 for $39.00 for all Form 943 accounts and Form 941 accounts posted prior to 2005. On Form 941 accounts posting 2005 and subsequent, input a TC 291 for $39.00 and IRN 112 for 39.00.

21.7.2.4.3  (01-01-2005)
Circular A/Circular E

  1. See Publication 51, Circular A, Agricultural Employer’s Tax Guide, for information on agricultural employees, including types of agricultural work subject to social security and Medicare taxes.

  2. See Publication 15, Circular E, Employer’s Tax Guide, Publication 15-A, Employer’s Supplemental Tax Guide, and Publication 15-B, Employers Tax Guide to Fringe Benefits, for classes of employment and types of payments subject to social security and Medicare taxes. Publications 15, 15-A and 15-B, include information formerly contained in Publications 493, 937 and 952, which were eliminated.

21.7.2.4.4  (10-01-2007)
Deposits

  1. Taxpayers who file Forms 941, 943, 944, or 945 are required to pay the tax on these returns by making Federal Tax Deposits (FTD's), if the liability equals or exceeds a designated threshold amount during the tax period for which the return is filed. See the table below for the applicable thresholds:

    FTD Liability Thresholds
    Form Tax Period Ending $ Threshold
    941 200103 and subsequent 2,500
    941 199809 — 200012 1,000
    941 199806 and prior 500
    943 200112 and subsequent 2,500
    943 199912 and 200012 1,000
    943 199812 and prior 500
    944 200612 and subsequent 2,500
    945 200112 and subsequent 2,500
    945 199912 and 200012 1,000
    945 199812 and prior 500

    1. These deposits are paid to an authorized financial institution accompanied by an FTD coupon, or by EFTPS.

    2. Penalties are imposed if deposits are late, not made in sufficient amounts, made directly to the IRS or not made using EFTPS, if required. See IRM 20.1.4, Failure to Deposit Penalty, for more information.

    3. Input Computer Condition Code "J" if you are reprocessing a document and no penalty is to be assessed. Edit the "J" in the bottom middle margin of the return. Do not "J" code the re-input document unless IDRS is unable to correctly figure the penalty, or if reasonable cause is being allowed.

  2. Research IDRS to determine if a CP 194 or CP 207 was generated whenever tax or periodic liability information is being adjusted. If so, coordinate with the FTD Penalty Function, if necessary, to prevent erroneous FTD penalty assessments.

  3. For more information on deposits and penalties, see:

    • Publication 15, Circular E, Employer's Tax Guide

    • Publication 51, Circular A, Agricultural Employer's Tax Guide

    • IRM 20.1.4, Failure to Deposit Penalty

  4. Balance due payments for Form 941 (including balances that are up to ten years past due) and Form 944 can be made over the phone or by internet using a credit card. These payments can be made through either of two authorized third-party service providers who will obtain credit authorization during the transaction and provide a confirmation number as proof of payment. Taxpayers currently required to make FTD's, must still make deposits. FTD's cannot be paid by credit card. For specific information on business payments made by credit card, see IRM 21.2.1.51.4, Credit Card Payments (Pay by Phone or Internet).

21.7.2.4.5  (01-01-2007)
Sick Pay

  1. Generally, sick pay is any amount paid under a plan to an employee-participant because of the employee's temporary absence from work due to disability, sickness, or injury. This plan may be paid by the employer or a third party, such as an insurance company.

  2. Generally, sick pay is subject to:

    • FICA taxes (or railroad retirement taxes)

    • Federal unemployment taxes

    • Income tax withholding (unless paid by a third party who is not the employer's agent)

  3. Include total payments in taxable social security and Medicare wages paid on Form 941 and Form 944.

    Note:

    Reporting sick pay on Form 943 is EXTREMELY rare, but possible. Taxpayer reports sick pay on Form 943, using the adjustment line, same as on Form 941, and Form 941c to explain the adjustment. The information below refers to the Form 941 and Form 944 line items.

    1. If payments are made by a third party (e.g., an insurance company), the employer deducts the employee’s share of social security and Medicare taxes paid by the third party on line 9 for Forms 941 using pre-2005 revisions. Form 941, 2005 and subsequent revisions reflect the sick pay on line 7b. Form 944 reflects these amounts on line 6a.

    2. If the return is being filed by the third party payor, the employer’s share of social security and Medicare taxes on the sick pay is deducted on line 9 for Forms 941 using pre-2005 revisions. Form 941, 2005 and subsequent revisions reflect the sick pay on line 7b. Form 944 reflects these amounts on line 6a.

    3. Form 941c is not required to substantiate the sick pay adjustment on Form 941, line 9 or 7b or 6a on Form 944. Adjustments reported on line 9/7b can be filed electronically, however, TP's and reporting agents often file an additional Form 941 with Form 941c on paper indicating TPSP (Third Party Sick Pay) to report the adjustment. In this case IRN's 004, 073, 007 and 185 (pre 2005) or IRN's 004, 073, 107, 112 and 113 (2005 and subsequent) must all be corrected to report the adjustment. (See Publication 15-A, Employer's Supplemental Tax Guide, for more information on sick pay.)

    Note:

    Often the TP becomes confused and believes the Third Party (Insurance Company) made the payment of tax for them, and that the payment needs to be applied to the employer's account. In this case, explain how the Third Party ( Insurance Company) reports the amount of FICA and WH withheld from the employees' sick pay and reports that portion on their own Form 941. The employer need only report the wages paid in full and deduct the employee's share of FICA (reported and paid by Third Party) on line 9 or 7b, Form 941. Adjustments for TPSP reflect changes to both IRN's 007 and 185. Provide the TP with Publication 15-A, which explains Sick Pay Reporting.

21.7.2.4.6  (01-01-2006)
Advance Earned Income Tax Credit (AEITC) – Forms 941, 943, 944, and Schedule H

  1. Employees who expect to be eligible to claim EITC can choose to receive advance payments (AEITC) during the year from their employer.

    1. The employer pays the EITC directly to the employees from income tax and FICA taxes withheld.

    2. The employer then claims a credit for these payments on Form 941, 943, 944 or Schedule H.

  2. If AEITC is claimed on amended returns, and:

    • Employer made no FTD's (verify payments), and

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    • ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡

  3. Do not allow a credit for payments which exceed ≡ ≡ ≡ ≡ of the total cash wages for 1994 and ≡ ≡ for 1995 and subsequent.

  4. If the adjustment to AEITC is allowable:

    1. Calculate correction by comparing posted AEITC to amount claimed on amended return.

    2. Input TC 290 .00 with CRN 766 to increase credit or CRN 767 to decrease credit.

      Note:

      TC 290 or TC 291 with a significant amount can be used in addition to CRN 766/767, if other tax items are also being adjusted.

21.7.2.4.7  (01-04-2007)
FICA Taxes

  1. FICA taxes are social security and Medicare.

  2. Social security taxes are withheld at the rate of 12.4% (6.2% contributed by the employer and 6.2% contributed by the employee). However, it is withheld from wages and tips only within a set maximum amount. The table below details the set maximum amount from year to year.

    Year Maximum Amount of Wages
    1998 68,400
    1999 72,600
    2000 76,200
    2001 80,400
    2002 84,900
    2003 87,000
    2004 87,900
    2005 90,000
    2006 94,200
    2007 97,500

  3. Medicare taxes (since 1994) are withheld on all wages and tips.

    1. There is no set maximum amount.

    2. The rate is 2.9% (1.45% contributed by employer and 1.45% contributed by employee).

    3. IRN 004, is used to adjust taxable social security wages and IRN 073, taxable Medicare wages and tips.

  4. You can also:

    • See IRM 21.7.2.4.18, under Form 941c, for specific information on FICA adjustments

    • See IRM 21.7.2.4.18.6, for FICA claims such as foreign students, excess FICA, etc.

21.7.2.4.7.1  (01-01-2005)
Individuals Employed by Parent or Spouse

  1. FICA must be paid on services performed by:

    • A child who is 18 or older employed by a parent in the course of the parent’s business

    • A spouse in the course of the employer spouse's trade or business

21.7.2.4.7.2  (01-01-2007)
Employees Receiving or Paid Tips

  1. Employers with employees who receive tips must pay FICA on the total amount of cash and charge tips reported. All cash and charge tips subject to employee FICA are considered wages, making these tips subject to the employer portion of FICA.

  2. For cash and charge tips of $20 or more in a month received from one employer, an employee must report the total amount of these tips to the employer by the 10th of the following month.

  3. Employers withhold income, FICA, or railroad retirement tax only on tips reported by employees, not on allocated tips. Allocated tips are not reported on Form 941, but must be added to income on the employee’s tax return.

    Note:

    See Publication 531, Reporting Tip Income, and Publication 1244, Employee's Daily Record of Tips and Report of Tips to Employer. (It also contains Form 4070, Employee’s Report of Tips to Employer, and Form 4070 A, Employee's Daily Record of Tips.)

  4. At times, the employee may not have sufficient funds to cover their share of the FICA tax on tips. In this instance, adjustments to the portion uncollected from the employee must be reported on line 7c, Form 941 or line 6a, Form 944. The employer is still liable for the employer portion of FICA on the tips reported. Prior to 2005, employers would report the uncollected employee FICA on line 9 of the Form 941. The employer is not required to have backup for this reduction in tax.

21.7.2.4.7.3  (01-01-2005)
Reporting FICA to SSA

  1. FICA information is reported directly to SSA at the end of the year by the employer on Form W-3 along with Copy A of all Forms W-2 (or on the equivalent electronically filed forms).

21.7.2.4.7.4  (01-01-2005)
IRC Section 3121(v)

  1. FICA tax is generally imposed at the time wages are actually or constructively paid. However, IRC Section 3121(v)(2)(A), contains a special timing rule. This special timing rule usually results in imposition of FICA tax before benefit payments under the plan begin. The rule provides that any amount deferred under a non-qualified deferred compensation (NQDC) plan must be taken into account as wages for FICA tax purposes the later of:

    • When the services are performed; or

    • When there is no substantial risk of forfeiture of the rights to such amount

  2. Section 31.3121(v)(2)-1, of the employment tax regulations provides guidance as to when amounts deferred under, or paid from, an NQDC plan are taken into account as wages for purposes of FICA tax. The regulations at this section are applicable January 1, 2000 and subsequent. They also contain transitional rules which provide relief for actions taken before the effective date of the regulations based on a reasonable good faith interpretation of the statute.

  3. Treasury Decision 8814 provided final regulations under IRC Section 3121(v).

21.7.2.4.7.4.1  (01-01-2005)
IRC Section 3121(v) Claims and Requests for Adjustments

  1. Claims and requests for adjustments may be received for current years as well as prior years. Treasury Decision 8814 contained a provision where affected taxpayers could make adjustments for tax years 1994 and 1995 as long as they were made by March 31, 2000. (Form 941 filers should have reported these on their first quarter 2000 return.) Since that period has already passed, these adjustments can no longer be made. Therefore, normal statute implications now apply.

  2. Most adjustments are reported as line 9 or line 7e adjustments on Form 941 and Form 941c attached. Forms 843 may also be received. Forms 943 and CT-1 (volume would be extremely small) could also be affected.

  3. Any claims or requests for adjustments received (including increases) that indicate any of the following must be routed as CATA. (If there is any other indication you believe pertains to IRC Section 3121(v) not listed below, route as CATA also.)

    • 3121(v)

    • Regulations Section 31.3121(v)

    • Non-qualified deferred compensation (or NQDC)

    • Deferred compensation

    • Transitional rules

    • Treasury Decision 8814

  4. These cases must be recontrolled to Exam. If Exam returns the case, instructions are included.

    Note:

    If a claim is received on Form 843 and Exam provides instructions to disallow the claim, follow normal claim disallowance procedures.

  5. Line item adjustments identified in Code & Edit are also forwarded to Exam. The adjustment is allowed on initial processing and the return is NOT "C" coded. Code & Edit photocopies the Form 941 (or other return), Form 941c, and any correspondence and routes to Exam with the notation "3121(v) — Detached in Code & Edit" .

    If Then
    Exam determines the adjustment is allowable Nothing is forwarded to Accounts Management.
    Exam determines the adjustment is not allowable 1. Exam routes the photocopies to Accounts Management with instructions for disposition.
    2. Accounts Management inputs the adjustment on the period indicated on Form 941 (or other form). For example, if the Form 941 was filed for period ending March 31, 2008 and the line item adjustment attempted to correct period ending June 30, 2006, input the adjustment on period ending March 31, 2008. (That is the period on which the adjustment was allowed on initial processing.)

21.7.2.4.8  (01-01-2006)
Income Tax Withholding (Employment Tax Returns)

  1. For withholding, when unable to determine proper tax correction on Form 941, and cases involving Forms 4668, 4669, and 4670, see IRM 21.7.2.4.18.5.1 and IRM 21.7.2.4.19.1, respectively.

  2. Amount of income tax withheld from wages is based on the following information shown on Form W-4, Employee’s Withholding Allowance Certificate:

    • Marital Status

    • Number of allowances to be used in computing the income tax withheld

    • Any additional amount the employee requests to be withheld

  3. All wages (except household employment wages now reported on Schedule H) which are subject to FICA are also generally subject to withholding tax. (See IRM 21.7.4.4.1.11, Social Security Domestic Employment Reform Act (SSDERA) of 1994 and BMF Schedule H, for information on household employees.)

21.7.2.4.9  (10-01-2007)
Interest Free Adjustments (Employment Tax Returns)

  1. An employer can make an interest free adjustment if he has made an undercollection or underpayment of FICA, income, or railroad retirement tax. (See Regulation 31.6205-1.)

    1. The adjustment must be reported by the due date of the return for the period taxpayer ascertained the error. The "ascertained date" is the due date of the tax return for the period in which the taxpayer discovered the reporting error. ( See IRM 21.7.2.4.9.2 for more information.)

    2. An error is ascertained when the employer has sufficient knowledge of the error to be able to correct it.

    3. A statement (usually Form 941c) must be attached to return on which the underpayment is reported explaining the correction, designating the return period in which error was ascertained, and the return period to which the error relates.

    If Then
    Return is filed and paid by due date of the period error was ascertained No interest is due.
    Return is filed by due date of period the error was ascertained but not paid by that date Interest is computed from due date of the period error was ascertained.

    Note:

    See IRM 21.7.2.4.18.3.1 for additional information on ascertained date and TC 298.

  2. Adjustment of income tax is applicable only if the adjustment is made before the end of the calendar year in which wages were paid, unless it is the result of an administrative error. ( See IRM 21.7.2.4.9.1, Administrative Errors.)

  3. No underpayment can be reported as an interest free adjustment after receipt of the earlier of either:

    1. Notice and demand based on the assessment

    2. Notice of Determination Concerning Worker Classification Under IRC Section 7436

  4. Proposed regulations under Section 31.6205-1 make it possible for employers to pay interest free employment taxes on original returns when the employer did not file a return for the period in question because the employer did not believe the individual(s) met criteria to be classified as employee(s).

    1. Instruct employer to write "Mis-classified Employees" at the top of the return.

    2. CCC "M" is entered on these returns. This restricts interest by generating a TC 340 .00.

      Note:

      The same rules apply for filing and paying as those described above. See IRM 20.2.12, Employment Taxes, for additional information on interest free adjustments.

21.7.2.4.9.1  (01-01-2005)
Administrative Errors

  1. This is an error which does not change the amount of income tax or BUWH actually withheld, e.g., a mathematical computation or transposition error. If the taxpayer does not explain why they are adjusting withholding, but checked the box "None of this refund or credit was withheld from employee wages" , on Form 941c, consider it an administrative error. Even if income tax or BUWH was erroneously withheld, it cannot be corrected in a subsequent year.

  2. Chief Counsel has also deemed income tax or BUWH on payments such as lump sum distributions, where tax was withheld and reported in one year but payment was mailed to an individual who did not have the ability or legal right to receive the payment in the year the tax was withheld, as an administrative error:

    1. This rule applies if payment was returned as undeliverable in the subsequent year.

    2. Income tax or BUWH withheld and the payment received by the individual must both be reported in the year the individual actually receives the payment.

21.7.2.4.9.2  (01-01-2005)
Ascertained Date

  1. This is the due date of the tax return for the period in which taxpayer discovered the reporting error. (Also see IRM 21.7.2.4.9, Interest Free Adjustments, Employment Tax Returns.)