State and local governments that have established Section 218 agreements with the Social Security Administration (SSA) can agree to modify these agreements to establish coverage for past years. These modifications can be effective retroactively, going back as much as five years. In most cases, this will require a government entity to make retroactive payments to the IRS for back employment taxes. In cases where the Section 218 modification agreement covers only years for which the statute of limitations on assessment remains open, a government entity should useForm 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund PDF, or Form 944-X, Adjusted Employer’s Annual Federal Tax Return or Claim for Refund PDF, to amend the employment tax returns and pay the back employment taxes. If the modification covers years where the IRS statute is barred or closed, the government entity will need to seek a closing agreement with IRS for those barred statute years. Under Section 218(c)(4) of the Social Security Act, an entity covered by a Section 218 Agreement and the Social Security Administration can agree to modify the Section 218 Agreement. Section 218(e) specifies that coverage may cover a retroactive period of not more than five calendar years. If this agreement is executed, the entity is expected to pay the additional Social Security and/or Medicare taxes associated with the retroactive coverage. IRS Statutes of Limitations Under Internal Revenue Code Sections 6501(a) and 6501(b)(2), the statute of limitations for assessment of Social Security and Medicare taxes is three years from the date the returns are deemed filed, or when they are actually filed, whichever is later. When returns are timely filed, the statute runs from April 15 of the year following the calendar year to which the employment tax returns relate. For example, in tax year 2014, a fourth quarter Form 941 return that’s timely filed by the due date of January 31, 2015, has a statute that runs until April 15, 2018. Likewise, a 2014 annual Form 944 return, timely filed by the due date of January 31, 2015, has a statute that runs until April 15, 2018. If a government entity pursues implementation of a retroactive modification to a Section 218 agreement covering a five-year period, the earliest two years will generally be barred from assessment. For payments on the full five-year retroactive period (including the barred statute years), the government entity will seek to enter into a closing agreement with IRS under which it waives the statute of limitations for assessment and agrees to pay the full amount of tax due. The government entity may contact Federal, State and Local/Employment Tax (FSL/ET) regarding the closing agreement process for these types of payments, by fax at 855-243-4014. More information about Section 218 Agreements may be found in IRS Publication 963, Federal-State Reference Guide PDF.