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Part 21. Customer Account Services

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

Section 2. Employment and Railroad Tax Returns (Cont. 1)

21.7.2  Employment and Railroad Tax Returns (Cont. 1)

21.7.2.4 
Employment Tax Returns Procedures

21.7.2.4.15 
Form 945, Annual Return of Withheld Federal Income Tax

21.7.2.4.15.4  (01-01-2007)
Taxpayer Files Form 941 Indicating Non-Payroll Items

  1. A taxpayer may file a Form 941 reporting non-payroll items. C&E will identify these returns and correspond with the taxpayer to determine their intent.

  2. If the taxpayer's reply indicates they should have filed Form 945, C&E will forward a request to Accounts Management.

  3. To resolve these cases:

    1. C&E will forward the Form 941 to Accounts Management on Form 3465 indicating "Non-payroll on Form 941" .

    2. Delete the filing requirements for Form 941 and establish Form 945 filing requirements, if applicable.

    3. Return the Form 941 to the taxpayer using the appropriate "C" letter and inform the taxpayer of his correct filing requirements.

    4. Input the appropriate credit transfers to move the applicable credits from Form 941 to Form 945.

21.7.2.4.15.5  (10-01-2009)
BUWH Claims on Form 945

  1. For payments made from 1993 through August 6, 2001, BUWH was imposed at the rate of 31% on reportable payments of interest, dividends, patronage dividends, etc. See below for changes in rates.

    1. 30.5% for payments in 2002 that began August 7, 2001

    2. 30% for tax years 2002

    3. 28% for tax years 2003 through 2010

  2. Some payors withhold the tax from exempt recipients who are not otherwise required to file an income tax return, and advise them to secure refunds from IRS. Basically, a payor is not required to withhold on a payment made to a payee described in IRC Section 3406(g)(1), Backup Withholding.

  3. The following are exempt from withholding:

    1. An organization exempt from taxation under IRC 501(a) or an individual retirement plan

    2. The United States, its wholly owned agency or instrumentality

    3. A state, the District of Columbia, a possession of the United States, or any political subdivision

    4. A foreign government or political subdivision of a foreign government

    5. An international organization (e.g., the United Nations and the Organization of American States)

  4. If an organization is exempt under IRC 501(a) or an individual retirement plan, and has been erroneously subjected to BUWH, it must file Form 990-T, Exempt Organization Business Income Tax Return, to claim a refund of such withholding.

    Exception:

    A Private Foundation can claim erroneous BUWH on Form 990-PF, Return of Private Foundation, instead of Form 990-T.

    Note:

    See IRM 5.19.3, Backup Withholding Program and IRM 21.7.7.4.3.5, Backup Withholding, for additional information on BUWH.

21.7.2.4.15.5.1  (01-01-2005)
Form 945 BUWH Refunds for Exempt Entities

  1. The procedures listed below on issuing a refund from the employer’s Form 945 account apply only to the exempt entities listed in IRM 21.7.2.4.15.5(3) b-d above.

  2. If payor withholds on an exempt recipient, payor may treat the amount as erroneously withheld and refund it to the payee as long as the refund is made prior to the end of calendar year, and prior to the time the appropriate Form 1099, Statement for Recipient, is furnished.

    1. If payor makes a refund after having made last deposit for tax year, but before the Form 945 is filed, then only the correct amount of BUWH should be reported and the overpayment automatically refunded to taxpayer (payee).

    2. If payor makes a refund after last deposit has been made for tax year and the Form 945 has been filed, then a Form 843 claim must be filed to obtain a refund.

  3. If recipient is exempt from filing an income tax return, use the following procedure:

    1. The exempt recipient must file Form 843 or similar statement.

    2. Attach a statement to Form 843 from each payor who erroneously withheld tax, setting forth the amount of tax withheld, the date withheld, and a statement to the effect the payor did not repay or reimburse the recipient and will not claim an adjustment for the amount on Form 945.

    3. The statement must be signed by the person authorized to sign the payor’s Form 945, and list the TIN (Taxpayer Identification Number) of the account the BUWH was paid under. See the table below for processing instructions.

    If Then
    Payee files a Form 843 for tax withheld before the end of the tax year Advise payee to seek reimbursement from the payor.
    Tax year has ended and the required statement is attached Follow normal procedures to issue a manual refund to the exempt recipient from the payor’s Form 945. Include manual interest and verify posting of the manual refund.
    The tax year has ended and the required statement is not attached Advise the payee to obtain the required statement from the payor.

21.7.2.4.15.5.2  (01-01-2006)
BUWH Claims for Taxpayers Other Than Exempt Entities

  1. All other taxpayers must claim BUWH on a related income tax return. For example:

    1. An individual uses a Form 1040 series return (whether or not such individual has ever filed an income tax return).

    2. A trust uses Form 1041.

    3. A corporation uses Form 1120.

    4. An exempt organization uses Form 990-T. (Form 990-PF filers can use Form 990-PF and Form 990-C filers can use Form 990-C – Form 1120-C beginning in tax year 2006.)

    5. Form 1065 and Form 1120S filers must report their withholding when filing their Form 1040. The withholding is reported to them on their individual Schedule K-1 received from the business.

  2. The payor is required to issue a Form 1099 to the payee to substantiate the credit being claimed on the income tax return.

  3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. If a Form 843 claim is filed and an income tax return has not previously been filed for the year in which the BUWH was withheld, reject the claim and explain to taxpayer an income tax return must be filed to claim the credit.

21.7.2.4.16  (01-01-2005)
Tax Equity and Fiscal Responsibility Act (TEFRA)

  1. TEFRA requires pension trusts to report and pay withholding on pension income. This is reported and paid on Form 945. (Prior to 1994, Form 941, or 941E was used.)

  2. Taxpayers can request a separate EIN for the pension trust, however, it is not a requirement. Separate branches within a company may want a different EIN for internal purposes only.

  3. If multiple returns on pension trusts are filed, and taxpayer’s intent cannot be determined:

    1. Correspond to inform taxpayer to combine all the withholding from pension incomes on one Form 945, or to request separate EIN's for each pension trust.

    2. Inform taxpayer, if separate EIN's are assigned, they are responsible for all filing requirements and penalty assessments.


    If Then
    No reply, or taxpayer states they do not want separate EIN's Input TC 290 to assess any additional tax.
    Taxpayer requests separate EIN's Photocopy the case file and forward to Entity for assignment of EIN's. When EIN's are assigned, re-input the returns and transfer any credits to the new EIN's.
    Refunds were issued prior to the posting of the second return Contact taxpayer as stated in (3) above.

21.7.2.4.17  (10-01-2008)
Voluntary Compliance on Alien Withholding Program (VCAP)

  1. This section on VCAP has been removed. For additional information, see the archived copies of this IRM on SERP.

21.7.2.4.18  (10-01-2009)
Employment Tax Return Adjustments/Claims — including Form 941c/94XX

  1. A new set of multi-purpose forms for adjustments and claims is intended to reduce burden for employers. These forms include Form 941-X, 943-X, 944-X, 945-X, and CT-1X. The entire set of forms was made available January 2009 for use in correcting errors on previously filed employment tax returns. The effective date for the new forms and process is for errors ascertained on or after January 1, 2009. With the implementation of these new forms, Form 941c is now obsolete.

    Note:

    If past Form 941c procedures are needed, see the archived files on SERP.

21.7.2.4.18.1  (10-01-2009)
FICA Tax Adjustments

  1. FICA tax adjustments can be made for both current and prior years (providing the statute is still open).

  2. Taxpayers will file the applicable "X" form to either file an adjusted employment tax return or claim for refund.

  3. With the implementation of the new dual-purpose forms, employers no longer use Form 843 to submit a claim for refund of employment taxes. Instead, they file the applicable "X" form. However, employees who cannot get a refund from their employer still need to submit Form 843. See IRM 21.7.2.5 for additional information.

21.7.2.4.18.1.1  (01-01-2005)
Refund or Credit of Employer’s Portion of FICA

  1. For refund or credit of ONLY the employer portion of FICA tax, certification must be present indicating the employer has attempted to locate employee(s) involved to repay or reimburse them in the amount of the overcollection, or to obtain their consent to the filing of the claim, but:

    1. Was unsuccessful; or

    2. Employee(s) would not provide their consents.

  2. If employer has not attempted to locate employee(s) involved:

    1. Inform taxpayer of this requirement by Letter 916C. Phone contact can be made to explain the reason the claim cannot be processed, however, Letter 916C must be sent.

    2. Advise employer to send a letter to each former employee’s last known address advising of the right to repayment.

    3. For claims of overcollected FICA tax for prior years, employer must also include a statement that, if the individual wishes to be repaid, he/she must return a written statement to the employer stating the employee has not claimed a refund or credit of the amount of the over-collection, or, if so, such claim has been rejected. Employee’s statement must also state the employee will not claim refund or credit of such amount on his/her individual income tax return. Follow procedures in IRM 21.5.3.4.6.3 , No Consideration Procedures, and close case.

    4. If employer follows the above procedure and replies, employer is entitled to an adjustment of the employer’s share only, of FICA tax. Process the claim.

21.7.2.4.18.1.2  (10-29-2008)
Excess FICA Tax Withheld – Employee Claims for Refund

  1. IRC Section 6402 provides that employees may file claims for refund of excess FICA tax collected in error when the employer has not repaid or reimbursed the employee, nor has the employee authorized employer to file a claim for refund.

  2. Upon receipt of a claim:

    1. Review the employer’s Form 941 account for the last quarter of the year in which FICA wages were paid. If necessary, secure employee’s Form 1040 to verify claim information.

    2. Check for a signed statement from the employer indicating employee had not authorized employer to file a claim, nor had employee been repaid or reimbursed for amount over-withheld.

  3. Continue processing the claim using the table below:

    If Then
    Statement is not received Return claim to taxpayer using Letter 916C, no consideration, requesting they obtain required statement. See (2) step 2 above.
    No indication employee has contacted employer Encourage employee to obtain refund from employer.
    Employee is unable to obtain statement from employer Employee must make statement to the best of their knowledge and belief.
    Note: Statement must include explanation of employee’s inability to obtain the statement from employer.
    Claim is correctly filed with employer’s statement attached 1. Input TC 291 with HC 2 to Form 941 account for amount of decrease using IRN’s 004 for wages and 007 or 112 for tax.
    2. Prepare Form 5792, Request for IDRS Generated Refund, and compute interest from the Form 941 due date or payment date, whichever is later. Enter TC 770 for amount of allowable interest.
    3. Attach copy of claim to refund document and route to Accounting Function.
    4. Attach taxpayer’s claim to adjustment document.
    Claim must be disallowed 1. Input TC 290 .00 in BS 98/99 (99 if electronically filed with a TRPRT print) on individual's IMF account which contains period for which claim is filed.
    2. Send appropriate disallowance letter.
    Claim must be disallowed and return has not yet posted 1. Write claim disallowance letter. Push code document and copy of denial letter using TC 930. After return posts, the disallowed claim and original return is returned to the originator for input of the TC 290 for .00, BS 98/99 (99 if electronically filed with a TRPRT print).

    Note:

    These procedures also apply to Indian Fishing Claims citing IRC Section 7873 filed by individuals filing a claim for refund of FICA taxes. Refer to Alert 080092 for additional information.

21.7.2.4.18.1.2.1  (10-01-2007)
Agents

  1. A person can file Form 2678, Employer/Payer Appointment of Agent, to act as an agent.

  2. The agent can act as an agent for two or more employers, or can be an employer and act as an agent for another employer. If either situation applies, the agent has special reporting procedures on Form W-2.

    1. Agent is instructed to enter his/her EIN in box b of Form W-2.

    2. Agent files separate Forms W-2 reflecting the wages paid by each employer, however, each Form W-2 will have the agent’s EIN in box b.

    3. In box c of Forms W-2, agent should enter his/her name and address and "agent for" .

    4. Even though agent’s EIN is shown in box b of Form W-2, the Forms W-2 are considered as being issued from separate employers and the employee may be eligible for a refund of excess FICA.

    5. In addition, employer’s EIN should be entered in box h of Form W-3.

21.7.2.4.18.1.3  (10-01-2009)
Foreign Students – FICA Tax Erroneously Withheld

  1. Per IRC Section 3121(b)(19), certain foreign students and other non-resident visitors are exempt from FICA for services performed as specified in Section 101(a)(15)(F), (J), (M), or (Q) of the Immigration and Nationality Act. In order to substantiate this exemption, the individual holding the F, J, M, or Q visa must supply:

    1. Completed and signed Form 843 claim for each employer. If the claim is for more than one employer, but otherwise complete with all required documentation, process the claim.

    2. Form W-2 (If not provided, attempt to verify the withholding amount using CC IRPTR, attach a print and accept.) If the visa status changed, a copy of the pay stub is needed to verify the FICA amount claimed.

    3. A copy of the entry and current visa.

    4. Form I-94, Arrival/Departure Record, or other documentation showing the dates of arrival and departure.

      Note:

      Overseas filers no longer have the Form I-94 since the USCIS keeps this document when the student/visitor leaves the United States.

    5. Form I-20 (for F-1/M-1 visa(s) only) or IAP-66/DS-2019 (for J-1 visa only).

    6. Form 8316 or signed claim/statement verifying that unsuccessful attempts have been made to obtain a refund from the employer. Statements in lieu of the Form 8316 must include all the information requested on the Form 8316.

      Note:

      For I-766 or I-688B (Employment Authorization Document) is issued by USCIS and is needed only if the student is engaged in optional practical training. See IRM 21.8.2.7.1.1, Optional Practical Training.

  2. Claims for Foreign Students are processed at the Philadelphia Campus. See IRM 21.8.2.7.1, Foreign Student/Nonresident Visitors — Exemption from FICA Tax. Route these claims to:

    Philadelphia Campus
    AM/Clerical Team 442/ADJ
    DP: N-441

21.7.2.4.18.1.3.1  (10-01-2009)
Procedures for Inquiries Received From Foreign Students

  1. Send Letter 513C to the claimant requesting he/she seek repayment or reimbursement from the employer. If the student is unable to obtain repayment or reimbursement from the employer, Letter 513C directs the student to file Form 843, Claim for Refund, with the following substantiation:

    • Copy of Form W-2 verifying the amount of FICA withheld

    • Copy of the appropriate visa

    • Completed Form 8316, Information Regarding Request for Refund of Social Security Tax Erroneously Withheld on Wages Received by a Nonresident Alien on an F, J, or M Type Visa, (enclosed with Letter 513C)

  2. Advise taxpayer in Letter 513C, that if a refund of the erroneously withheld taxes cannot be obtained from the employer, to send the completed claim to Philadelphia. Return taxpayer inquiry with Letter 513C.

  3. Send Letter 512C to the employer. Letter 512C advises the employer to:

    1. Reimburse the employee for any erroneously withheld FICA; and

    2. File Form 941-X.

  4. Any completed student claims received at any campus (other than Philadelphia), must be forwarded to Philadelphia and taxpayer advised of such.

  5. Any incomplete student claims received at any campus, follow the instructions in (1) and (2) above.

21.7.2.4.18.1.3.2  (01-13-2005)
Employer Claims Involving Foreign Students

  1. Employer claims are processed at the Cincinnati or Ogden Campuses.

  2. An employer is entitled to a refund of both the employer's and employee’s share of FICA, if the employer provides a written statement verifying:

    1. The employer has repaid or reimbursed the tax to such employee or has secured the written consent of such employee to the refund or credit of the FICA taxes; and

    2. If the claim relates to FICA taxes collected from an employee in a prior year, the claim for refund or credit includes a statement that the employee has not claimed refund or credit of the amount of the over-collection, or if so, such claim has been rejected and the employee will not claim refund or credit of such amount.

  3. When the employer is unable to repay or reimburse the employee or secure the employee's consent or statement regarding prior year claims, the employer is entitled to the employer portion only, of the FICA taxes.

21.7.2.4.18.1.4  (01-01-2007)
Miscellaneous FICA Adjustments - including new "X " forms

  1. This section provides information and adjustment procedures for miscellaneous FICA adjustments - including new adjusted employment tax returns and CP 175/875.

  2. FICA adjustments can be made for both current and prior years (providing the period of limitations is still open).

21.7.2.4.18.1.4.1  (10-01-2009)
Employer’s Wages Erroneously Reported on Form 941, 943 or 944

  1. An individual taxpayer may erroneously list personal withdrawals as being wages and pay FICA tax on Form 941, Form 943, or Form 944. When filing Form 1040, a credit was claimed for the FICA tax paid. Taxpayer was contacted and a Form 941-X was returned to IRS for processing.

  2. Action required:

    1. Review Form 941-X to ensure all required items are complete.

    2. Input TC 291 with IRN's 004 and 073 for wages and 112 for tax to each period involved. Use appropriate HC.

    3. If manual penalties (such as TC's 160, 180, or 270) are assessed for any periods being adjusted, re-compute penalties based on the portion of tax being decreased. Adjust any TC 186 as instructed in IRM 20.1.4.11.8.3, Amended or Supplemental Return.

    4. Input credit transfers to move credit from Form 941, 943 or 944 to taxpayer’s Form 1040.

    5. Attach a copy of Form 941-X to each adjustment document.

21.7.2.4.18.1.4.2  (10-01-2009)
Math Verified Forms 941c (Detached)

  1. A new set of multi-purpose forms for adjustments and claims has been developed for employers to correct previously filed employment tax returns. The effective date for these new forms and process is for errors ascertained on or after January 1, 2009. With the implementation of these new forms, the "line item adjustments" have been removed from the applicable employment tax returns and Form 941c has been made obsolete. See IRM 21.7.2.5.8, Exception Processing – Incorrect Filing, Forms Routed to AM from SP, for additional information.

    Note:

    See archived IRM 21.7.2 if info is needed on math verified Form 941c processing.

21.7.2.4.18.1.4.3  (10-01-2009)
CP 175/875– Unexplained Adjustment to Withholding, Tips, or FICA

  1. For tax periods beginning January 1, 2009 and subsequent, CP 175/875 will no longer be generated. A new set of multi-purpose forms for adjustments and claims has been developed for employers to correct previously filed employment tax returns. The effective date for these new forms and process is for errors ascertained on or after January 1, 2009.

    Note:

    See archived IRM 21.7.2 if info is needed on CP 175/875.

21.7.2.4.18.1.5  (01-01-2005)
FICA Adjustments on Exempt Organizations Pursuant to IRC Section 501(c)(3)

  1. Organizations exempt under IRC Section 501(c)(3) are liable for FICA taxes with few exceptions.

  2. Churches and qualified church-controlled organizations opposed to the payment of FICA taxes for religious reasons, are provided a method to elect exemption from the employer's share of FICA taxes.

21.7.2.4.18.1.5.1  (01-01-2005)
IRC Section 501(c) Definitions

  1. Church means a church described in IRC Section 501(c)(3) and IRC Section 170(b)(1)(A)(i) which includes conventions or associations of churches.

  2. It also includes elementary or secondary schools controlled, operated, or principally supported by a church.

  3. IRC Section 3121(w)(3)(B) provides that a qualified church-controlled organization includes any church-controlled tax-exempt organization described in IRC Section 501(c)(3), except if the organization:

    1. Offers goods, services, or facilities for sale to the general public, other than on an incidental basis or other than for a nominal charge

    2. Normally receives more than 25% of its support from governmental sources or receipts from admissions, sales of merchandise, performance of services, or finishing of facilities in related trade or business activities, or both.

21.7.2.4.18.1.5.2  (01-01-2005)
Churches Making the Election for Exemption From FICA

  1. The election is made by filing Form 8274, Certification by Churches and Qualified Church-Controlled Organizations Electing Exemption From Employer Social Security and Medicare Taxes.

  2. Form 8274 is filed after the electing organization has hired employees, but before the first date on which Form 941 is due, or would otherwise be due, except for this election.

  3. Form 8274 is processed by Entity Control Function. See IRM 3.13.2, BMF Account Numbers.

  4. Form 8274 can be recognized by Employment Code (EC) "C" .

  5. The election applies to services performed by all current and future employees of the electing organization. The election does not apply to:

    • Service as minister of a church

    • Members of a religious order

    • Service performed in unrelated trade or business of the church or qualified church-controlled organization

21.7.2.4.18.1.5.3  (01-01-2005)
Filing Form 941 – Churches Which Are Exempt From FICA

  1. The electing organization is required to continue to withhold federal income tax on wages, tips, and other compensation. Forms W-2 and 941 must be filed.

  2. Form 941 must be filed if the organization has employees, such as those engaged in unrelated business activities.

  3. By filing Form 941 and paying FICA taxes, the election can be permanently revoked.

21.7.2.4.18.1.5.4  (01-01-2005)
Claims (IRC Section 501(c))

  1. Allow the claim if the TC 070 establishment date is within, or prior to, the quarter for which the claim is filed, and either of the conditions below exist:

    1. The claim is filed under one of the exceptions from wages under IRC Section 3121(a).

    2. There is a miscalculation of tax on a previously filed return.

  2. Do not allow the claim if any of the conditions below exist:

    1. A nonprofit organization requests a refund based on "constitutional rights" .

    2. It is filed for refund of FICA taxes and the establishment date posted with TC 070 is after the quarter for which it is filed.

    3. The Form 8274 election was revoked by IRS (TC 071).

    4. The exempt Status under IRC Section 501(c)(3) was revoked (EO Status Code 22) or denied (EO Status Code 70). See IRM 3.13.12.6.18.2, EO Status Codes.

  3. Also, see IRM 21.5.3, General Claims Procedures, for Category A issues.

21.7.2.4.18.1.5.5  (01-01-2005)
State and Local Government FICA Under Section 218

  1. Both the employer and employee share of FICA taxes are collected and reported to IRS by state and local government employers if an agreement was made under Section 218 of the Social Security Act.

    1. Section 218 provides a state may enter into a voluntary agreement with the Secretary of Health and Human Services to provide social security coverage for its employees and the employees of local governments within the state.

    2. Employers under Section 218 agreements are identified by Employment Code (EC) "T" . See section 3, Document 6209, IRS Processing Codes and Information, for additional information on Employment Codes.

  2. If taxpayer states they are not liable for FICA:

    If Then
    EC is " T" Inform taxpayer they are liable for FICA.
    EC is not"T" Abate any FICA taxes assessed.
    Taxpayer states they did not have any employees during the period Abate any FICA taxes assessed.
    TC 150 shows zero tax and no FICA taxes or wages are shown No adjustment action is necessary.
    There are any discrepancies concerning the agreement Advise taxpayer to contact SSA.

  3. If taxpayer writes concerning payments made to the State, advise taxpayer to contact the State.

21.7.2.4.18.1.5.6  (01-01-2005)
Internally Generated Transcripts (IRC Section 218 Coverage)

  1. Transcripts may be received from Accounting which involve EC "T" or EC "G" issues.

  2. If it can be determined taxpayer has elected Section 218 coverage, take the following action:

    1. Change EC to "T" with a filing requirement of "01" , if not already posted on the entity module.

    2. After input of the EC, or if EC " T" has already posted, input TC 29X (see IRM 21.5.2.4.17, Posting Delay Codes (PDC)) with IRN's 004, 007, and 073 to assess FICA taxes based on the wages shown on the return.

    3. Advise taxpayer of action taken.

    4. If no wages are reflected on return, correspond with taxpayer to obtain correct wages.

  3. If you cannot determine taxpayer coverage, verify with appropriate State Social Security Office whether entity has entered into a Section 218 agreement.

    1. See IRM 3.13.12.6.29.11, Employment Code T, for contact information.

    2. If Section 218 coverage is elected, process as in (2) above.

    3. If Section 218 coverage is not elected, correspond with taxpayer to resolve issues regarding social security coverage status.

21.7.2.4.18.1.6  (10-01-2009)
IRC Section 127, Educational Exclusions

  1. Under IRC Section 127, an employer can exclude from gross income up to $5,250 per employee for educational assistance benefits. The Economic Growth and Tax Relief Reconciliation Act of 2001 permanently extended IRC 127. It also reinstated its applicability to graduate courses beginning after December 31, 2001.

    Note:

    The exclusion for graduate courses does not apply to courses beginning June 30, 1996 - December 31, 2001

    .

  2. The SBJPA (Small Business Job Protection Act) provides for expedited refund procedures involving claims for 1995 and 1996.

    1. Employer is not required to obtain the certification required for refund of FICA taxes contained on Form 941-X. (Do not reject claims for 1995 and 1996 if certification is not provided.)

    2. Employer must include a statement verifying he has notified the employees for which he is claiming a refund on their behalf, and has informed them they should not file a claim.

    3. Employer must state he has refunded over-collected taxes to employees.

    Note:

    If employer does not include statements in b) and c) above, contact employer to obtain them. Fax copies are acceptable.

  3. Claims can only be returned when it is impossible for them to be processed with the information provided. Make every possible attempt to contact taxpayer to obtain the necessary information before they are returned.

    Note:

    See IRM 21.7.3.4.14, for information on FUTA claims involving IRC Section 127.

21.7.2.4.18.1.6.1  (01-01-2005)
IRC Section 127 Claims From Employees

  1. SBJPA provides for employees unable to obtain refunds from their employer, to file Form 843 to obtain a refund. A statement from the employer must be attached listing any amount which has been reimbursed by employer. If employee is unable to obtain this statement, he/she must provide this information to the best of his/her ability. (If taxpayer does not provide either, contact taxpayer. Fax copies are acceptable.)

  2. When the required documentation is secured, follow procedures in IRM 21.7.2.4.18.1.2 under "Claim is correctly filed with employer's statement attached" , in the "If/Then" table.

21.7.2.4.18.1.7  (10-01-2009)
IRC Section 3121(q) Adjustments

  1. IRC section 3121(q) provides that the employers pay their share of FICA taxes on tips reported by their employees. Such remuneration is deemed to have been paid at a time a written statement including such tips is furnished to the employer. If no such statement is furnished (or to the extent the statement is incomplete or inaccurate) such remuneration shall be deemed paid on the date on which notice and demand for such taxes is made to the employer.

  2. Following a tip examination, taxpayers must pay the employer portion of FICA taxes on unreported tips shown on the 3121(q) Notice and Demand. See Letter 3263 for more information. They are instructed to:

    1. Include taxes on their Form 941 for the quarter in which Section 3121(q) Notice and Demand is made.

    2. Note "3121(q)" next to line 7c (2005 and subsequent) of Form 941.

    3. Attach a copy of the Notice and Demand letter to explain the adjustment.

    Note:

    If returns are submitted voluntarily by taxpayer without a tip examination being performed, a Section 3121(q) Notice and Demand will not be attached.

  3. The statute of limitations for assessment is three years after April 15 of the calendar year following the Section 3121(q) Notice and Demand date.

21.7.2.4.18.1.7.1  (10-01-2009)
Procedures for Adjustments on Section 3121(q) — Forms 941-X

  1. Even though taxpayers are instructed to file a 3121(q) adjustment on their original Form 941, Forms 941-X may be filed.

  2. If Form 941-X is received, verify all applicable sections are complete.

    Note:

    IRC Section 3121(q) adjustments must be reported on the tax period in which the Notice and Demand letter was dated.

    Example:

    Notice and Demand was dated January 20, 2009. If Form 941-X is filed, adjustment must be input on the 200903 tax period.

  3. Total Tips subject to increase.

    1. Use IRN 072 and 073 to adjust total tips subject to increase. If amount not reported on Form 941-X and a copy of the Notice and Demand is attached, obtain total tips from Notice and Demand.

    2. Input IRN 072 and 073 on the quarter in which the Notice and Demand was sent.

    3. Ensure all applicable deposits have been applied.

  4. Employer's share of social security and Medicare tax adjustment.

    1. If Form 941-X reflects the employee and employer share of the social security and Medicare tax adjustment, adjust accordingly and inform taxpayer. If Form 941-X does not contain the employer's share and a copy of the Notice and Demand is attached, then obtain the amount from the notice.

    2. Use IRN 112 to adjust the employer's share of social security and Medicare tax.

    3. Input IRN 112 on the quarter in which the Notice and Demand was sent.

    4. Ensure all applicable deposits have been applied.

21.7.2.4.18.1.7.2  (10-01-2009)
Ascertained Date on Section 3121(q) Adjustments

  1. Use the date of the Section 3121(q) Notice and Demand as the ascertained date. The ascertained date is the due date of the quarter which contains the date of the Notice and Demand.

    Example:

    The Notice and Demand is dated April 21, 2009. The ascertained date is July 31, 2009.

    Note:

    Since taxpayers are instructed to file 3121(q) adjustments on original returns, this is an exception to normal Form 941-X processing.

  2. If no Notice and Demand is attached, check for an ascertained date.

  3. If neither is available, input TC 290 for the amount of the increase.

21.7.2.4.18.1.7.3  (10-01-2009)
Taxpayer Reports Other Adjustments In Addition to Section 3121(q) Adjustments

  1. Even though taxpayers are instructed to file a 3121(q) adjustment on their original Form 941, Form 941-X may be filed. If a taxpayer reports a 3121(q) adjustment on Form 941-X, it is possible he may also report other adjustments as well.

  2. If 3121(q) adjustments and other adjustments are reported on the same Form 941-X, IRC Section 3121(q) adjustments must be processed separately. See IRM 21.7.2.4.18.6.7.2, Ascertained Date on Section 3121(q) Adjustments — Form 941-X, for more information. Refer to IRM 21.7.2.5, Adjusted Employer's Federal Tax Return or Claim for Refund, for procedures on processing the other adjustments reported on Form 941-X.

21.7.2.4.18.1.8  (12-10-2008)
IRC Section 3509

  1. For misclassified workers discovered on or after January 1, 2009, see IRM 21.7.2.5.11, IRC Section 3509.

  2. IRC Section 3509 provides for reduced employer liability for employment tax if a worker is reclassified. Amount of the assessment depends on whether the employer filed the applicable information returns (e.g., Form 1099–MISC). (Generally, the assessment under IRC 3509 is made by the Service, but the employer may self-assess, under IRC 3509, if he/she discovers the worker was mis-classified and all requirements are satisfied. An assessment by the Service can be identified by IRN 079.)

  3. The employer pays his/her share of FICA tax and either 20% or 40% of employee’s share. Income tax withholding is either 1.5% or 3% of the wages.

    1. Since FICA is not assessed at the regular rate, the taxpayer must prepare a Form 941c and enter the FICA portion on line 9 or line 7g, Form 941 (depending on tax year). Any income tax withholding must be reported on line 4 or line 7f (depending on tax year), Form 941.

    2. Taxpayer attaches a statement to return showing how the tax was computed.

    3. Do not question or change the FICA tax computed, as long as it is mathematically correct.

    4. Assess interest from the ascertained date to the payment received date.

  4. If there is an ascertained date and the Form 941c was filed late (after the due date of the ascertained date quarter), assess the tax separately using TC 290 for each quarter wages are being corrected.

  5. Apply the payment(s) to the appropriate tax period(s), if tax was paid with Form 941c.

21.7.2.4.18.1.9  (05-19-2009)
Medical/Dental Residents Excess FICA Claims (United States vs. Mayo Foundation or Minnesota vs. Apfel)

  1. In the court case Minnesota vs. Apfel, 151 F.3d 742 (8th Cir. 1998), the court ruled that certain medical/dental residents may be considered students and, therefore, not subject to FICA taxes.

  2. All of these claims are CATA, regardless of the amount. The claim does not have to specify Minnesota vs. Apfel. If claims reference medical or dental residents, "NRSA" Grant excludability under Section 117, or similar wording, forward as CATA. However, do not forward as CATA until the taxpayer supplies the necessary supporting statements. Close your base before referring to Exam indicating 'CATAMEDDEN' as your action. Follow procedures in subsections 21.7.2.4.18.1.9.1 (employer claims) and 21.7.2.4.18.1.9.2 (employee claims) below.

    Exception:

    Do not send excess FICA claims citing the Mayo Foundation decision CATA. See paragraph 4.

  3. Two explanations frequently used by taxpayers when attempting to claim exemption from FICA (social security and Medicare) taxes are:

    1. "Amounts paid to residents in training are scholarship grants for training. Such training grants are not payments for services within the meaning of IRC Section 117(c) or Section 3121(b)(10). Consequently, these training grants are not subject to FICA taxes."

    2. "Amounts paid to residents in training were originally included in the FICA (Social Security and Medicare) wages for periods included in this Form 941-X. We are adjusting the FICA (Social Security and Medicare) wages to exclude the amounts paid to residents in training since these amounts are not subject to FICA taxes."

  4. Handle any claim received at any site requesting excess FICA refunds citing the Mayo Foundation decision, as follows:

    1. If an individual files a claim for refund of excess FICA for tax year 2004 and/or first quarter 2005 and states they were an employee of the Mayo Foundation, forward expeditiously (do not send CATA) to the Cincinnati Accounts Management Campus at:
      IRS
      201 W Rivercenter Blvd
      Stop 5111G Team B108
      Covington, KY 41011

    2. If an individual files a claim for excess FICA and is NOT an employee or former employee of the Mayo Foundation, but is basing their claim on the Mayo Foundation decision, See IRM 21.7.2.4.18.1.9.2.

    3. If an employer files a claim for excess FICA and is basing the claim on the Mayo Foundation decision, forward (do not send CATA) directly to:
      IRS
      TE/GE EO Classification
      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
      MC 4910
      1100 Commerce St
      Dallas, TX 75242

  5. Rev. Proc. 2005-11 was published January 10, 2005, and clarified who can be considered a student for exemption from FICA tax. Both the final regulations and this revenue procedure are applicable with respect to services performed on or after April 1, 2005.

    Note:

    This revenue procedure disallows almost all medical residents and interns as well as postdoctoral students and fellows from being considered "students" , and therefore, all wages earned by these employees are considered wages subject to all FICA taxes.

21.7.2.4.18.1.9.1  (04-15-2004)
Employer Claims (Medical/Dental Residents)

  1. Follow the instructions in the table below.

    If And Then
    A claim (Form 941-X) is received from an employer claiming a refund for both the employer and employee portions The claim contains the necessary certification Forward as CATA and notate case as 'CATAMEDDEN'.
    A claim is received from an employer claiming a refund of both the employer and employee portions The necessary information is NOT attached 1. Attempt to contact the taxpayer (employer) for the necessary information. (The information can be faxed as long as the original claim contains a signature.) Upon receipt, follow instructions above.
    2. If unable to contact taxpayer, return claim using Letter 916C. Inform taxpayer of information needed and to resubmit claim when the necessary information is obtained. If claim is received within 180 days of RSED, follow procedures in IRM 21.5.3.4.3, Tax Decrease and Statute Consideration.
    A claim is received from an employer requesting refund of the employer's portion only A statement is attached as described in IRM 21.7.2.4.18.1.1(1) Forward as CATA and notate case as 'CATAMEDDEN'.
    A claim is received from an employer requesting refund of the employer's portion only A statement is NOT attached as described in IRM 21.7.2.4.18.1.1(1) Follow procedures in the second "Then" box above.

  2. Line item adjustments identified in Code & Edit are also forwarded to Exam. The same procedures are followed as with IRC Section 3121(v) cases. See the table in IRM 21.7.2.4.7.4.1(5).

21.7.2.4.18.1.9.2  (04-15-2004)
Employee Claims (Medical/Dental Residents)

  1. Follow instructions in the table below.

    If And Then
    A claim is received from an employee (even on Form 1040X)

    Note:

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

    		A statement is attached as described in IRM 21.7.2.4.18.1.2(2), Step 2, or the employee makes a statement to the best of their knowledge and belief (including a statement of the employees inability to obtain the statement from their employer) Forward as CATA and notate case 'CATAMEDDEN'.
    A claim is received from an employee Neither of the statements described in the "Then" box directly above, are attached Follow procedures in the second "Then" box in IRM 21.7.2.4.18.1.9.1(1). See Note below.

    Note:

    If the claim is filed on a Form 1040X and you are rejecting the claim back to the employee, you must advise the employee that Form 843 (rather than Form 1040X) must be used when/if the claim is resubmitted with the necessary information.

21.7.2.4.18.1.10  (01-01-2005)
Refund Claims/Major League Baseball

  1. Alert S02163 dated 03/25/2002 provided instructions for referring claims for refunds of excess FICA or FUTA tax, received from Major League Baseball Clubs or players. No future claims are expected. If a claim is received, contact the author for this IRM through proper channels.

21.7.2.4.18.1.11  (10-01-2009)
CSX Claims

  1. Claims for refunds or adjustments of FICA, RRTA (Railroad Retirement Tax Act), or FUTA based on CSX Corp. litigation are being filed. These claims are based on the Court of Federal Claim's opinion in CSX Corp. v. United States which addressed whether certain payments made pursuant to reduction in force programs are considered wages for purposes of FICA and FUTA taxes and compensation for purposes of RRTA taxes.

  2. Most of these claims are being filed on Form 843 with an attached Form 941c, but adjustments may also be seen on Form 941-X, a Form 941 with the words "amended return" written in, or as a line adjustment on Form 941, or on a Form 941c filed alone. With respect to RRTA tax, the claims may be also claimed on Forms CT-1 X or amended Forms CT-1 or Forms CT-2. With respect to FUTA tax, the claims may be made on amended Forms 940. Forms affected include CT-1, CT-2, 940, 941, and possibly 943. These claims can be received at any campus.

  3. Not all claims reference CSX Corp. v. United States. However, if any of the related items in the list below are referenced, treat them as a CSX claim.

    • "Involuntary Separation Plans"

    • "Involuntary Termination Benefits"

    • "SUCB" or "SUB-pay"

    • "Reduction in Force"

    • "Severance pay"

  4. All of these claims must be disallowed.

    1. Input TC 290 .00 with appropriate blocking series.

    2. Send Letter 105c and include the following paragraph:

      "Your claim is being denied because of the decision in CSX Corp. v. United States, 518 F.3d 1328 (Fed. Cir. 2008). In that case, the Court of Appeals held that all of the payments were wages and thus were subject to FICA tax."

    Note:

    Ensure all applicable years are addressed in the disallowance process.

    Note:

    Refer to IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns, for additional information.

21.7.2.4.18.1.12  (01-13-2005)
Railroad Retirement Board (RRB) Determinations

  1. If a Form 941-X mentions RRB determinations or transferring overpaid FICA taxes to Form CT-1, see IRM 21.7.2.4.24.5.8 .

21.7.2.4.18.1.13  (01-01-2005)
Frivolous Employment Tax Claims

  1. Claims citing IRC Section 861 are frivolous claims and must be sent to the Ogden Compliance Campus Frivolous Return Program as outlined in IRM 21.5.3.4.16.8, Identifying Frivolous Returns/Correspondence and Responding to Frivolous Arguments. Do not, under any circumstances, adjust the account prior to sending to Ogden.

  2. Some claims may be received that don't indicate this section. However, they may also be considered frivolous. See (3) for examples.

  3. There may be a Form 941c, or Form 941 annotated across the top "Amended or Corrected" , or Form 941-X filed to reduce all the payroll taxes to zero for all open payroll tax quarters. Most of these returns have been prepared by hand.

    • The explanation generally states "see attached..." which is generally a cover letter. The letters do not state a specific reason for filing the amended return, or they provide a general explanation such as "I have enclosed a corrected Form 941c as required by law when the filer discovers any error made on such return." Often the cover letter contains a cc: to a congressperson.

    • The TP only cites "Administrative Error" and does not indicate further why they are reducing the tax to zero.

  4. If doubt exists as to whether the claim is frivolous, do not send the claim to Ogden. Reject the claim back to the TP following "No Consideration" procedures outlined in IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns. Inform the taxpayer sufficient information was not received to consider the claim at this time and that a detailed explanation is necessary. If the claim received is a numbered return, or statute is imminent, contact the TP for a complete explanation before adjusting the account.

21.7.2.4.18.1.14  (10-01-2009)
Fiscal/Employer Agents Operating in Accordance with IRC Section 3504

  1. An employer may designate an agent under IRC Section 3504 to withhold, report and pay Federal employment taxes. All provisions of law applicable to an employer apply jointly to both the agent and the employer. For example, a corporation may designate another entity to handle its Federal employment tax obligations. For claims for refund of employment taxes made by the agent, treat the agent as an employer for purposes of employment tax deposits and payments made by the agent.

    Note:

    Agents cannot obtain refunds of taxes paid for periods for which the agent was not authorized and therefore the taxes were paid under the employer's (or another agent's) EIN.

  2. Specific rules apply to an IRC 3504 agent acting on behalf of disabled and elderly welfare recipients who hire persons to provide home care services (home care service recipients). The home care service recipient is generally treated as the employer, since they have the right to direct and control the provision of services by the home care service provider. These home care service recipients receive funds from a Federal, state, or local government agency for the home-care services. The home care service recipients may designate, and the IRS may approve, an IRC 3504 agent to act on behalf of the home care service recipients to withhold, report, and pay the federal employment taxes for the workers they hire to provide the home care services.

  3. There are two types of IRC 3504 agents that act on behalf of home care service recipients. Both types of agents may elect to perform the agent tasks themselves or to further contract with a reporting agent or subagent.

    • State or local government agency (operating in accordance with Revenue Procedure 80-4 and Notice 2003-70), or

    • Any other entity (third-party agent) that is engaged by the state or local government agency to provide these services directly to the home care service recipients.

21.7.2.4.18.1.14.1  (10-01-2009)
State or Local Government Agency Acting as IRC 3504 Agent

  1. A state or local government agency may be approved to act as an IRC 3504 agent on behalf of home care service recipients who hire home care service providers.

  2. If the government agency operates according to Rev. Proc. 80-4 and Notice 2003-70, then several special procedures apply:

    • The agency does not need to file a Form 2678, Employer/Payer Appointment of Agent, for each of the home care service recipients. The agency may develop an internal form to procure the necessary authorization to act as IRC 3504 agent from the home care service recipients.

    • The agency may obtain a second Employer Identification Number (EIN) that is used to file employment taxes for the sole purpose of acting as an IRC 3504 agent for these home care service recipients. See Notice 2003-70, Q&A 11.

    • The agency may file Forms 941 and 940 in the aggregate using the agency’s second EIN to report all wages paid on behalf of the home care service recipients.

    • The agency may file and pay all Federal employment taxes in full when they file the Form 940 or 941. Agencies are not required to follow the ordinary deposit schedules applicable to other employers.

    • If the agency hires a reporting agent to perform the employment tax obligations of the home care service recipients, the reporting agent may use these same procedures. However, if the agency engages another IRC 3504 agent to perform the employment tax obligations of the home care service recipients (called a "subagent" ), that subagent must use the procedures applicable to other types of IRC 3504 agents, including being authorized through submission of Form 2678, set out in IRM 21.7.2.4.18.1.14.2 .

21.7.2.4.18.1.14.2  (10-01-2009)
Third-Party Agent that Contracts with a State or Local Government Agency to be an IRC 3504 Agent for Home Care Service Recipients

  1. A state or local government agency may engage one or more other entities (third-party agents) to act as an IRC 3504 agent on behalf of home care service recipients who hire home care service providers. The state or local government agency may also contract with the third-party agents to provide other services to the home care service recipients outside of reporting, withholding, and paying Federal employment taxes. The home care service recipients typically choose the third party agent they will use.

  2. Third-party agents may be for-profit or non-profit entities. Industry terms for these types of agents include: Fiscal/Employer Agents, Vendor Fiscal/Employer Agents, or Agent for Home Health Care Service Recipients.

  3. The third-party agent must receive authorization to act as IRC 3504 agent by filing a completed Form 2678, Employer/Payer Appointment of Agent, for each of the home care service recipients for whom it acts.

  4. Third-party agents may have an existing Employer Identification Number (EIN) that is used to file employment taxes for the entity’s own employees. The third-party agent must include the employment taxes reported on behalf of the home care service recipients with any employment taxes that it reports for its own employees.

  5. The third-party agent may file a Form 941, aggregately reporting any withheld income tax and FICA taxes for its own employees as well as for home care service recipients. As an exception to the general rule that agents may not aggregately file a Form 940 on behalf of their clients, the IRS will currently accept an aggregate Form 940 filed by a third-party agent if the return shows that it is filed on behalf of home care service recipients. See IRM 21.7.3.4.6, Limited Exception for Aggregate Returns.

  6. The third-party agent must follow the regular deposit schedules applicable to all employers. The third-party agent may generally not pay employment taxes when it files a Form 940 or Form 941.

21.7.2.4.19  (04-15-2004)
Section 3402(d), Employment Tax Case Requiring Forms 4668, 4669, and 4670

  1. If, during the course of an examination, it is determined an employer/employee relationship exists, IRS may propose the assessment of tax, penalty, and interest against the employer for the amount of income taxes which should have been withheld from employees.

    1. IRC Section 3402(d) relieves the employer of these taxes, if the employee has filed income tax returns and paid the tax due.

    2. Employers are required to use Form 4670, Request for Relief From Payment of Income Tax Withholding, along with one or more Forms 4669, Statement of Payments Received, to obtain this relief.

    3. If the employer has paid the tax, Form 843 is required.

  2. Tax assessed under IRC Section 3509 is not subject to abatement. See IRM 21.7.2.5.11 for more information on IRC Section 3509.

  3. Employer must secure signed Forms 4669 from employees covered by the examination.

    1. The employer then prepares and signs Form 4670 indicating the tax year and number of statements (Forms 4669) secured.

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  4. Form 4668, Employment Tax Examination Change Report, is the basic report used for all Forms 941 and 943 examinations.

    1. It is used to show the additional tax, over-assessment, or delinquent tax proposed by the examiner.

    2. It should be attached to the last quarter return examined as part of the Revenue Agents Report.

21.7.2.4.19.1  (01-01-2005)
Processing Procedures (Forms 4668, 4669, 4670)

  1. The revenue agent/officer provides taxpayer with an extra copy of the Form 4668, along with Forms 4669/4670. Taxpayer is instructed to file the copy of the Form 4668, along with Forms 4669/4670, with the appropriate campus. If the Forms 4669/4670 are received without the Form 4668 copy:

    1. Request last quarter return for last calendar year shown on Form 4670. (If return is charged to Examination, suspend case and request again in 30 days.)

    2. If document cannot be secured after the 30 day period, return Form 4669 or Form 4670 to the taxpayer with instructions to resubmit them after a bill is received.

  2. Form 2504, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment , and Form 2504-WC, Agreement to Assessment and Collection of Additional Employment Tax and Acceptance of Overassessment in Worker Classification, are used to obtain a taxpayer’s agreement to the proposed assessment of employment tax or over-assessment.

    1. An error is considered ascertained on the date taxpayer signs Form 2504. Therefore, to receive complete interest free treatment, the additional liability must be paid at the time the Form 2504 is signed.

    2. Form 2504 should be attached to the same period’s return as Form 4668.

      Note:

      If Form 2504 is unavailable, and there is a TC 308 on the module, it can be assumed the interest computation date used with the TC 308 is the due date of the return in which taxpayer discovered the error. If there is no TC 308, contact taxpayer to provide a copy of the Form 2504. Fax copies are acceptable.

  3. When the claim can be processed, adjust module for proper amount using TC 29X and IRN 003:

    If Then
    Interest is not restricted on module Input TC 299 with an "interest from" date using the date the Form 2504 was signed.
    Interest is restricted on module Input TC 291 along with appropriate TC 34X amount. Correct amount of interest due is figured by using the date the From 2504 was signed as the interest start date.

  4. Use Forms 4668 and 4669 to determine amount to be adjusted:

    1. Compare line 17 of Form 4668, Maximum tax available for abatement under IRC Section 3402 (d), to line 5 of Form(s) 4669, Amount of Wages …on Which Income Tax and Social Security Tax Were Not Withheld.

    2. Limit the amount of tax adjustment to 31%.

    3. If sum of the line 5 wage amounts on Form(s) 4669 exceed wage amount on line 17, Form 4668, limit amount of tax adjustment to 31%.

    4. If line 17, Form 4668, is zero, blank or "none" , do not make any adjustment.

  5. Area Office Forms 3870, Request for Adjustment, do not need to be verified against Form 4668.

  6. Attach Forms 4669 and 4670 to the Revenue Agents Report which is used as the adjustment backup document.

    Note:

    Employer is liable for all penalties as a result of the examination, and they should not be decreased when tax is adjusted.

  7. Restrict any penalty assessments on module if tax decrease would cause penalties to recompute.

  8. Section 3402(d) cases are not Exam criteria even though they were previously examined.

21.7.2.4.20  (12-10-2008)
Federal Labor Laws – Wage Payments Made by Federal Agencies

  1. Certain government agencies are empowered to collect, from employers, wages erroneously not paid to employees (or former employees). Agencies are allowed to disburse these wages to the employees concerned, and withhold income taxes and employee’s share of FICA tax. Agencies allowed to take this action and the provisions which allow such action are:

    • Department of Labor – Fair Labor Standards Act

    • Government Accountability Office – Davis-Bacon Act

    • Government Accountability Office, Housing and Urban Development – Davis-Bacon Act

    • National Labor Relations Board – Labor Management Relations Act

    Note:

    An extensive investigation is performed to determine if claim for back wages or unfair labor practices is valid, therefore, a relatively long period of time may elapse between the time employees become entitled to the wages and the time they actually receive payment from the agency involved.

  2. It was recently discovered the Department of Labor installed a new system which generates Forms 941c to the Service. This system has generated erroneous Forms 941c which require no action from the Service. If one of these erroneous forms are received, treat as classified waste. The following are a few examples (not all inclusive):

    • Negative wages and negative tax.

    • Negative wages and no tax.

    • Zero wages and zero tax

    • Positive wages and no tax.

21.7.2.4.20.1  (04-28-2008)
Processing of Returns (Wage Payments Made by Federal Agencies)

  1. Returns are processed at the campus of receipt.

  2. A consolidated Form 941c reporting wages for all employees and the tax withheld from all employees should be attached to Form 941, Form 943, or Form 944.

    1. Form 941c is prepared with entries in the taxable wages and tax adjustment columns.

    2. In the explanation area, the agency indicates the name of the agency and the Act which authorizes them to collect and pay back wages.

    3. Form 941c is stamped "Do Not Transmit to SSA" .

  3. Wages are reported on line 5a of Form 941 and the full amount of tax computed. Form 941c tax adjustment is reported on line 7e of Form 941 (wages may also be reported on Form 943 or 944).

  4. Agency prepares two copies of Form 941c and sends them to the Correspondence Section of the Campus serving the area in which the employer is located.

    1. A separate form is prepared for each employer.

    2. They are used to inform the employers of the liability and to make the necessary adjustments to their MF accounts.

21.7.2.4.20.1.1  (01-01-2005)
Adjustment Procedures (Wage Payments Made by Federal Agencies)

  1. When a copy of the continuation page(s) and a return and/or transcript is received, compute the employer’s share of the FICA tax liability.

21.7.2.4.20.1.1.1  (04-28-2008)
Return Posted (TC 150), Account Not in TDA Status

  1. If a return is posted:

    1. Input an adjustment using IRN 004 to show the amount of taxable social security wages.

    2. Input IRN 073 to show the amount of taxable Medicare wages.

    3. Input IRN 112 for the total FICA tax adjustment.

    4. Initiate Letter 134C to the employer advising a bill for employer’s portion of FICA will be issued in the near future and include a copy of Form 941c from the government agency and a copy of the applicable employment tax return.

    Note:

    Do not include FITW (IRN 003/111) in the adjustment.

21.7.2.4.20.1.1.2  (04-28-2008)
Return Posted, Account in TDA Status

  1. If a return has posted, but the account is in TDA Status, work accordingly. See IRM 21.3.3.4.10.2.1, Amended Returns/Claims - Compliance Criteria, for additional information. If routing the case, state the facts.

21.7.2.4.20.1.1.3  (04-28-2008)
No Return Posted, No Filing Requirements

  1. If no return has posted and there are no filing requirements for the current quarter, prepare the applicable employment tax return, usually Form 941, for the amount of the assessment and input as a "Final" return.

  2. Enter one-half of the tax as a plus adjustment on the following lines:

    • Prior quarters' social security and Medicare taxes

    • Total Adjustments

    • Total taxes after adjustments

    • Balance due

  3. Indicate along the bottom portion of the return the governing agency in which the return was prepared. See IRM 21.7.2.4.20 for a listing of the applicable agencies.

  4. Initiate Letter 134C to the employer advising a bill for the employer’s portion of FICA will be issued in the near future and include a copy of the Form 941c from the government agency and a copy of the applicable employment tax return.

21.7.2.4.20.1.1.4  (01-01-2005)
No Return Posted, Delinquency Notice Issued

  1. If no return has posted and a delinquency notice has been issued:

    1. Route to your Campus Collection Function.

    2. State facts in case and amount due.

    3. Attach continuation page(s) of Form 941c to the memo.

21.7.2.4.20.1.1.5  (04-28-2008)
Return Prepared Prior to Return Due Date

  1. If return was prepared by the federal agency prior to the actual return due date for the period effected (and taxpayer has filing requirements), monitor the account until the return posts. Taxpayer should report this as an adjustment on line 7e:

    If And Then
    Reported on line 7e   Input TC 290 .00 and state "taxpayer reported as line item adjustment" in the Remarks section.
    Not reported on line 7e   Adjust as in IRM 21.7.2.4.20.1.1.1.
    A return has not posted after 60 days from the return due date There is no indication of a return being filed; e.g., Unpostable, Reject, etc. Prepare a return as in IRM 21.7.2.4.20.1.1.3 but do not indicate "Final" . If there are credits on the module, enter CCC "X" .

21.7.2.4.20.1.1.6  (04-28-2008)
Missing EIN (Wage Payments Made by Federal Agencies)

  1. If Form 941c (or Schedule A) is missing only an EIN and one cannot be located from research, forward the case to Entity Control (5 day turnaround) for research/assignment of an EIN.

  2. If Form 941c (or Schedule A) is missing data (address, money amount, etc.) necessary to process the case in addition to a missing EIN, return Form 941c to the agency initiating the case and request the missing data. If agency returns Form 941c stating taxpayer does not have an EIN, forward the case to Entity Control as in (1) above.

21.7.2.4.21  (01-01-2005)
Employment Tax Adjustment Program (ETAP)

  1. ETAP was discontinued in October 1998. Do not forward ETAP issues to DCC (Detroit Computing Center). ETAP assessments can be identified by BS 93 in the DLN for 1998 and prior.

21.7.2.4.22  (10-01-2007)
Attributed Tip Income Program (ATIP)

  1. Attributed Tip Income Program (ATIP) is a voluntary tip reporting program that promotes tip income reporting and reduces record keeping burden. This program is an expansion of the Service's Tip Rate Determination and Education Program (TRD/EP) and is administered through Rev. Proc. 2006-30.

  2. This reporting alternative for employers in the food and beverage industry is designed to promote tip income reporting and provide benefits to employers and employees similar to those offered under previous tip reporting agreements without requiring one-on-one meetings with IRS to determine tip rates or eligibility. Employers and employees do not have to sign any contracts or agreements - making this program attractive to small employers. Employers currently participating in existing TRD/EP programs may elect to switch to ATIP. See Publication 1461 for additional information.

21.7.2.4.23  (02-12-2008)
Employee – Employer Status Determinations

  1. A worker, whose firm failed to withhold taxes and reported earnings on a Form 1099-MISC, can request IRS to determine whether or not they are an employee. ("Firm " is used instead of "employer" since the issuer of the Form 1099-MISC has not been determined to be an employer at this stage.) A Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, must be filed by the worker or the firm in order for the IRS to make the determination.

  2. In order to file Form SS-8:

    • The worker must have filed a tax return(s) for the period(s) in question. (See (6) or (7) below, depending on tax year, for procedures when the taxpayer has not yet filed a return for the period(s) in question.)

    • The statute of limitations must be open for that period(s).

    • The worker must have no objection to disclosing their name to the firm.

    Note:

    If the taxpayer initially objects to disclosing their name to the firm, encourage them to do so. If Form SS-8 is not filed, the matter becomes an issue which the worker must resolve. Usually this involves contact with the firm. That process is time consuming and frustrating for both the worker and the firm. If worker still objects, see (5) below.

  3. If the worker meets the criteria in (2) above, follow the steps below.

    1. Send Form SS-8 to the worker.

    2. Instruct the worker to complete Form SS-8 and mail it to the appropriate address. (The appropriate address is based on the firm's legal residence, principal place of business, office, or agency and can be located in the "Where to File" section of the Instructions for Form SS-8.)

    3. Alert the taxpayer that the determination can take up to 180 days after the Form SS-8 is received.

      Note:

      If the statute of limitations for the period in question may expire before the determination is made, inform the worker that a letter will be sent when the Form SS-8 is received advising of procedures for filing a protective claim for that period.

  4. The SS-8 group contacts the firm and asks them to complete Form SS-8 from their perspective of the work relationship. The SS-8 group compares the two Forms SS-8. The SS-8 group makes a determination, and:

    If And Then
    Worker is determined to be an employee Worker originally filed Schedule SE and paid self-employment tax Worker should file Form 1040X and Form 4137 or Form 8919, depending on the tax year, to report only the employee share of social security and Medicare tax and file an amended Schedule SE to correct the self-employment tax previously reported.
    Worker is determined to be an employee Worker originally reported only the employee share of social security and Medicare tax Worker does not need to file Form 1040X, but simply keeps a copy of the determination letter for his/her records.
    Worker is determined to be an employee Firm is protected by one of the Safe Havens of Section 530 of the Revenue Act of 1978 The firm is not required to treat worker as an employee for employment tax purposes. The worker is liable for only the employee share of social security and Medicare taxes. IRM 21.6.4.4.15, Employees Filing Under the Revenue Act of 1978, Section 530, contains additional information.
    Worker is determined to be an independent contractor   The SS-8 group sends the worker a letter advising of the necessary actions including self-employment tax liability.

  5. If the worker objects to disclosing their name to the firm, the worker must determine to the best of their knowledge whether they are an employee. (See Note in (2) above.) Since the worker received a Form 1099-MISC (unless they can convince the employer they are, in fact, an employee and have Form W-2 issued instead of Form 1099-MISC), it would appear they are not an employee. However, the worker must decide how to report the income on Form 1040.

    Note:

    Always encourage the worker to participate in the Form SS-8 process. Only inform the worker of the options below if they refuse to participate. Inform them if they do report the income as if they were an employee, it is possible they could be classified as self-employed at a later date and owe additional taxes.

    If Then
    The worker believes he should be classified as an employee and determination has not been made Report the income on the "wages" line on Form 1040 and attach Form 1099-MISC. (The taxpayer will not be assessed self-employment tax on original processing. However, Examination may look at the return to determine if the taxpayer is liable for self-employment tax.)
    The worker believes he should be classified as self-employed 1. Report income on Schedule C.
    2. Compute self-employment tax on Schedule SE.
    3. Attach Forms 1099-MISC, Schedule C, and Schedule SE to Form 1040.

  6. If the taxpayer has not yet filed a return for the tax period involved (2006 or prior), instruct him/her to:

    1. File Form 1040.

    2. Report the amount on Form 1099-MISC on the "wages" line. (The taxpayer may also want to indicate "Form SS-8 filed" on the dotted line to the left of the "wages" if he/she has filed, or will file, Form SS-8.)

    3. Complete Form 4137 and attach it to Form 1040.

    4. Cross out the word "TIP(S)" and insert the word "WAGE(S)" on Form 4137.

    5. Follow the instructions on Form 4137 for computing the social security and Medicare tax, and enter the amount on Form 1040, page 2 as instructed on Form 4137.

    6. File Form SS-8. Do not include it with Form 1040. Mail it based on the "firm's" address as provided on the Form SS-8 instructions.

  7. If the taxpayer has not yet filed a return for the tax period involved (2007 or subsequent), instruct him/her to:

    1. File Form 1040.

    2. Report the amount on Form 1099-MISC on the "wages" line. (The taxpayer may also want to indicate "Form SS-8 filed" on the dotted line to the left of the "wages" if he/she has filed, or will file, Form SS-8.)

    3. Complete Form 8919 and attach it to Form 1040.

    4. Follow the instructions on Form 8919 for computing the social security and Medicare tax, and enter the amount on Form 1040, page 2 as instructed on Form 8919.

    5. File Form SS-8. Do not include it with Form 1040. Mail it based on the "firm's " address as provided on the Form SS-8 Instructions.

  8. If taxpayer inquiry is received during current year (2009) and wants a determination prior to the end of the year, instruct TP to complete the SS-8 and mail accordingly. The TP does not have to wait until the year is over before asking for a determination.

21.7.2.4.24  (01-01-2005)
CT-1, CT-2 Railroad Tax Returns

  1. This section contains information on:

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

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

    • Unexplained adjustments to Form CT-1 ( CP 177)

    • Railroad Retirement Board (RRB) Employer Status Determinations

21.7.2.4.24.1  (01-01-2005)
What are Forms CT-1 and CT-2?

  1. Form CT-1 is filed to report and pay taxes collected from employers and employees for the purpose of providing retirement benefits for railroad employees. It is a calendar year return due by the last day of February of the following year. Forms CT-1 were processed at Kansas City Submission Processing Campus (KCSPC) up until 01/01/2003. Processing was moved 01/01/2003 to the Cincinnati Submission Processing Campus (CSPC).

    • The MFT is 09

    • Tax Class 7

    • Document Code 11

  2. Form CT-2 is used to report railroad retirement taxes imposed on compensation received by employee representatives and has been processed at the CSPC since 07/01/2002. It is a quarterly return filed in the employee representative's SSN (Social Security Number). Return is due the last day of the second month following the end of the quarter. Claims or other correspondence received at other campuses must be routed or coordinated as detailed in IRM 21.7.2.4.24.4.1, below.

    1. Forms CT-2 are processed NMF, MFT 72, Tax Class 6 and Document Code 2

    2. The duplicate copy is removed during processing and routed to RRB.


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