21.7.2  Employment and Railroad Tax Returns (Cont. 2)

21.7.2.4 
Employment Tax Returns Procedures

21.7.2.4.11 
Household Employment Taxes

21.7.2.4.11.3  (10-01-2014)
Household Employment Taxes and Section 3504 Agents

  1. An employer may appoint an agent under IRC Section 3504 to withhold, report and pay Federal employment taxes. To request approval to act as a Section 3504 agent for an employer, the agent files Form 2678, Employer/Payer Appointment of Agent, with the IRS.

    Note:

    Form 2678 processing information may be found in IRM 3.13.2.16, Form 2678, Employer/Payer Appointment of Agent.

  2. Specific rules apply when the employer is a Home Care Service Recipient (HCSR).

    • A Home Care Service Recipient (HCSR) is an individual who receives home care services while enrolled in a program administered by a Federal, state, or local government agency that provides funding for the home care services.

    • "Home care services" are personal and attendant care services rendered to the Home Care Service Recipient.

    • Generally, the Home Care Service Recipient (HCSR) is the employer if they have the right to direct and control the provision of services by the home care services provider. The provision of services to the HCSR also generally constitutes household employment.

    • The Home Care Service Recipient (HCSR) may designate, and the IRS may approve, a Section 3504 agent to act on behalf of the HCSR to withhold, report and pay the Federal employment taxes for the workers they hire to provide home care services. Agents may be also be authorized for purposes of Federal Unemployment Tax Act (FUTA) taxes if they are acting on behalf of an HCSR (only).

  3. There are two types of Section 3504 agents that act on behalf of Home Care Service Recipients (HCSRs):

    • Federal, state or local government agency operating in accordance with Rev. Proc. 2013-39. See IRM 21.7.2.4.11.3.1, State or Local Government Agency Acting as IRC 3504 Agent, for special procedures that apply to these agents and their subagents.

    • Any other non-governmental entity engaged by the Federal, state or local government agency to participate in various aspects of a home care services program. These entities may choose to act as the Section 3504 agent for the HCSRs in accordance with Rev. Proc. 2013-39 by filing a Form 2678 for each HCSR.

    Note:

    Both types of agents may elect to perform the employment tax obligations themselves or to further contract with a reporting agent or subagent.

21.7.2.4.11.3.1  (10-01-2014)
State or Local Government Agency Acting as IRC 3504 Agent for Home Care Service Recipients

  1. A state or local government agency may be approved to act as a Section 3504 agent on behalf of Home Care Service Recipients (HCSRs) who hire home care service providers.

  2. These entities may be identified by one or more of the following characteristics:

    • The presence of Employment Code "A" .

    • The literals "HHCSR" or "HCSR" in the name line of the entity.

    • Returns or correspondence referencing the terms "Household Employer Agency" , "Fiscal Agent" , or "Choreworker" .

  3. Rev. Proc. 2013-39, 2013-52 I.R.B. 830, provides guidance to state and local government health and welfare agencies acting on behalf of HCSRs. Rev. Proc. 2013-39 superseded Rev. Proc. 70-6 , Rev. Proc. 80-4 , and Notice 2003-70 .

  4. If the government agency operates according to Rev. Proc. 2013-39, then several special procedures apply:

    • Government agencies acting on behalf of HCSRs enrolled in a program they administer do not need to file a Form 2678, Employer/Payer Appointment of Agent, for each HCSR. For more information on Form 2678, see IRM 21.7.2.3.7, Section 3504 Agents, and IRM 3.13.2.16, Form 2678, Employer/Payer Appointment of Agent.

    • The government agency obtains a special EIN that is used for the sole purpose of acting as a Section 3504 agent for HCSRs. See Rev. Proc. 2013-39, section 10.03(3).

    • The government agency files aggregate Form 941 and Form 940 tax returns using the government agency’s special EIN to report all wages paid on behalf of HCSRs.

      Note:

      Section 3504 agents are required to attach an allocation schedule when filing aggregate employment tax returns. See IRM 21.7.2.4.4.3, Loose Schedule R (Form 941): Allocation Schedule for Aggregate Form 941 Filers, and IRM 21.7.3.4.6.1, Schedule R (Form 940): Allocation Schedule for Aggregate Form 940 Filers, for more information.

    • The government agency may remit all taxes related to HCSRs with a timely filed Form 941 or Form 940. Government agencies acting as Section 3504 agents for HCSRs are not required to make Federal Tax Deposits (FTDs) or follow the deposit schedules applicable to employers and other Section 3504 agents. If the government agency hires a reporting agent to perform employment tax obligations, the reporting agent may perform those obligations as if it were the government agency. However, if the government agency uses Form 2678 to appoint a Section 3504 Agent (called a "subagent" ) to perform the employment tax obligations of the HCSRs, the subagent must file returns using its own EIN and make deposits under normal deposit rules.

      Note:

      FTD penalties are systemically waived for accounts bearing Employment Code "A" . However, incorrect penalties may be charged on accounts which have not been correctly coded. See the table in IRM 21.7.2.4.11.2, Procedures for Household Employment Tax Inquiries, for instructions on addressing FTD penalties charged on accounts of state or local government agencies acting as Section 3504 agents for HCSRs.

21.7.2.5  (10-01-2011)
Specific Claims and Other Issues

  1. This section includes information and procedures for specific claims and other issues associated with employment taxes.

21.7.2.5.1  (10-01-2013)
Frivolous Employment Tax Claims

  1. Claims citing IRC 861 may be frivolous claims and must be sent to the Ogden Compliance Campus Frivolous Return Program as outlined in IRM 21.5.3.4.16.7, 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 payroll taxes ≡ ≡ ≡ ≡ ≡ for all open payroll tax quarters. Most of these returns have been prepared by hand.

    • The explanation generally states "see attached..." which is usually 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 941-X 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 taxpayer only cites "Administrative Error" and does not indicate further why they are reducing the tax ≡ ≡ ≡ ≡ ≡ .

  4. If doubt exists as to whether the claim is frivolous, do not send the claim to Ogden. Reject the claim back to the taxpayer 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 taxpayer for a complete explanation before adjusting the account.

21.7.2.5.2  (02-27-2013)
Employer’s Wages Erroneously Reported on Form 941, 943 or 944

  1. On occasion, individual taxpayers erroneously treat personal withdrawals as wages and pay FICA taxes on Form 941, Form 943, or Form 944. To correct such errors in reporting, taxpayers must file the appropriate Form 94XX.

  2. If a taxpayer files a Form 94XX on this basis, take the following actions:

    1. Review the Form 94XX to ensure all required items are complete.

    2. Input TC 291 with IRN's 004, 073 and 074 (as appropriate) for wages and 112 for tax to each period involved. Use the appropriate Hold Code. Attach a copy of the Form 94XX to each adjustment document.

    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 20.1.4.21.3, Amended or Supplemental Return (Tax Decrease or Non-Interest Free Tax Increase).

    4. If the taxpayer wishes the overpayment(s) on the employment tax return(s) to be applied to their individual Form 1040 account (for example, to pay a balance due), input credit transfers as appropriate. See IRM 21.5.8, Credit Transfers, for general guidance on credit transfers.

21.7.2.5.3  (10-10-2014)
Worker Classification Determinations

  1. A worker, whose firm reported earnings on a Form 1099-MISC, can request IRS to determine whether or not they are an employee. (The term "Firm" is used here 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. The form can also be filed by workers treated as employees if they want to determine their proper classification.

  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 address provided 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 8919, Uncollected Social Security and Medicare Tax on Wages, to report only the employee share of social security and Medicare tax and file Form 1040X attaching 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

    Note:

    Currently the use of Form 8919, Uncollected Social Security and Medicare Tax on Wages, requires the filing of a Form SS-8 except in limited cases indicated on the form.

    Worker does not need to file Form 1040X, but simply keeps a copy of the determination letter for their records.
    Worker is determined to be an employee Section 530 of the Revenue Act of 1978 applies to the firm 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, Workers Whose Employers Qualify 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. See the Note in (2) above. Form SS-8 will not be processed if the worker does not agree to disclose their name to the firm. In that situation, the worker must determine to the best of their knowledge whether they are an employee. A worker receiving a Form 1099-MISC would be assumed to not be an employee (unless the worker can convince the employer they are, in fact, an employee and have Form W-2 issued instead of Form 1099-MISC). A worker who does not agree to disclose their name to the firm should be advised as follows:

    If Then
    The worker believes they should be classified as an employee and determination has not been made The worker should 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 review the return to determine if the taxpayer is liable for self-employment tax.
    The worker believes they should be classified as self-employed The worker should:
    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.

    Note:

    Always encourage the workers to participate in the Form SS-8 process. Only inform the workers of the filing/reporting options in the table above if they refuse to participate. Inform them that 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.

  6. If the taxpayer has not yet filed a return for the tax period involved and the tax year is 2006 or prior, see archived files for this IRM for handling instructions.

  7. If the taxpayer has not yet filed a return for the tax period involved (2007 or subsequent), instruct them 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 they 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 by mailing it to the address provided in the “Where to File” section of the Instructions for Form SS-8. It is not to be filed with Form 1040.

  8. If an inquiry is received during current year and the taxpayer wants a determination prior to the end of the year, inform the taxpayer that a determination cannot be made until a payer document (i.e. Form 1099-MISC) is received by the taxpayer.

21.7.2.5.4  (10-01-2014)
IRC Section 3509

  1. In certain circumstances, IRC 3509 provides for reduced employer liability for employment taxes when a worker is reclassified from being treated as an independent contractor to being treated as an employee. If IRC 3509 tax rates apply, the amount of employment taxes owed by the employer will depend on whether information returns (e.g. Form 1099–MISC) were filed as required for treatment of the individuals as independent contractors. The employer pays their share of FICA tax and either 20% or 40% of the employee's share (including Additional Medicare Tax to the extent wages and tips paid to an employee exceed $200,000 for a calendar year beginning after December 31, 2012). The employer also pays income tax withholding figured at either 1.5% or 3% of the wages.

  2. IRC 3509 assessments are often made by the Service and can be identified by the use of IRN 079. However, the employer may self-assess under IRC 3509 provisions if they determine the worker was misclassified and all requirements are satisfied. See Pub 4341, Information Guide for Employers Filing Form 941 or Form 944, Frequently Asked Questions about the Reclassification of Workers as Employees.

  3. The following procedures address employer self-assessments of employment taxes for misclassified employees where IRC 3509 special tax rates apply.

    Note:

    The following paragraphs reference the line numbers for Form 941 and Form 941-X. If the employer is filing another adjusted employment tax return, use the applicable line and column numbers.

  4. For misclassified workers discovered on or after January 1, 2009, employers must file Form 941-X (or other applicable "X" form) for each tax period involved to report employment taxes owed under the special IRC 3509 tax rates. The Form 941-X must be prepared as follows:

    1. The wage amounts must be entered in column 1 on lines 14, 15, 16, and 17.

    2. Zeroes should be entered in column 2 of lines 14, 15, 16, and 17.

    3. Columns 3 and 4 must be completed as per the Part 3 instructions.

    Note:

    See archived IRM 21.7.2 if information is needed on IRC 3509 handling prior to January 1, 2009.

  5. If an original tax return was not filed for each tax period involved, the employer must also file the delinquent tax return(s) as follows:

    1. An original tax return must be prepared for each tax period with "Misclassified Employees" written in dark, bold letters across the top margin of page 1.

    2. A zero must be entered on line 10 ("Total taxes after adjustments" ).

    3. Part 5 ("Sign here" ) must be completed.

    4. The completed Form 941-X (or other applicable "X" form) must be attached to the original return being filed.

    Note:

    These filing instructions are an exception to normal filing and processing. Submission Processing has instructions to forward Forms 941-X filed under these special procedures to Accounts Management for adjustment action and will code the original return to freeze any credit on the tax module. See IRM 3.11.13.10.3, Non-Taxable Returns With No Line Entries.

  6. Adjust the tax account per the Form 941-X (or other applicable "X" form) as follows:

    1. Input an increase to IRN 004 to match the figure in column 3 of line 15.

    2. Input an increase to IRN 073 to match the figure in column 3 of line 16.

    3. Input an increase to IRN 074 to match the figure in column 3 of line 17 (valid for Forms 941/943/944 for tax periods beginning after December 31, 2012).

    4. Input an increase to IRN 104 to match the figure in column 4 of line 14.

    5. Input an increase to IRN 105 for the combined figures found in column 4 for lines 15, 16 and 17 (and any amount reported for AdMT).

      Note:

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

    6. Input an increase to IRN 113 for the combined IRN 104 and IRN 105 figures as determined above.

    7. Input a TC 290 or TC 298 increase as per IRM 21.7.2.4.6.2, Interest-Free Adjustments (Employment Tax Returns), procedures to match the IRN 113 figure as determined above.

  7. Adjust the FTD penalty when using either a TC 290 (see IRM 20.1.4.21.3, Amended or Supplemental (Tax Decrease or Non-Interest-Free Tax Increase)) or a TC 298 (see IRM 20.1.4.21.5, Adjusted Returns (Forms 941-X, 943-X, 944-X, and CT-1X)).

    Note:

    See IRM 20.1.4.21.5.1, Amended ROFTL (Forms 941-X, 943-X, 944-X, 945-X, and CT-1X), when using a TC 298 or TC 290 and an amended ROFTL was provided with the adjusted return.

  8. If payment for the additional tax reported on the Form 941-X is not reflected on the tax period being adjusted, research the taxpayer's account for the missing credit and, if located, transfer the payment as appropriate.

    Note:

    Employers who discover they have misclassified employees but who do not qualify for the special IRC 3509 tax rates are also required to file Form 941-X (or other applicable "X" form) to report the employment taxes owed and may qualify for interest-free tax adjustments. In cases where the employer did not file an original return for the tax period involved, the employer is instructed to file an original tax return with "Misclassified Employees" written across the top margin of page 1 in dark, bold letters and to attach a completed Form 941-X (or other applicable "X" form). Accounts Management may receive documents filed under those procedures for misclassified employees. Normal tax rates and adjustment procedures are to be applied when the special IRC 3509 rates do not apply.

21.7.2.5.5  (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 21.7.2.6.5.8.

21.7.2.5.6  (10-01-2015)
Form SS-16, Certificate of Election of Coverage Under the Federal Insurance Contributions Act (FICA)

  1. A religious order whose members are required to take a vow of poverty (or any autonomous subdivision of such an order) may elect to have FICA extended to services performed by its members in the exercise of duties required by such order. They are excluded from "employment" for FICA purposes, except when an election of coverage is in effect. See IRC 3121(b)(8)(A) and § 31.3121(b)(8)-1; IRC 3121(r) and § 31.3121(r)-1.

  2. A religious order making an election of coverage must file Form SS-16, Certificate of Election of Coverage Under the Federal Insurance Contributions Act. See IRM 3.13.12.15, Form SS-16, for additional information.

  3. On Form SS-16, the religious order must designate one of the following dates as the effective date for the election:

    • The first day of the calendar quarter in which the Form SS-16 was filed, or

    • The first day of the calendar quarter immediately after the calendar quarter in which Form SS-16 is filed, or

    • The first day of any one of the 20 quarters before the quarter in which the Form SS-16 was filed.

  4. The following table illustrates the last day the Form SS-16 can be filed to elect retroactive coverage for 20 quarters:

    If the religious order wants coverage retroactive to: Then Form SS-16 is due:
    January 1, 2010 (1st quarter 2010) March 31, 2015
    April 1, 2010 (2nd quarter 2010) June 30, 2015
    July 1, 2010 (3rd quarter 2010) September 30, 2015
    October 1, 2010 (4th quarter 2010) December 31, 2015
    January 1, 2011 (1st quarter 2011) March 31, 2016
    April 1, 2011 (2nd quarter 2011) June 30, 2016
    July 1, 2011 (3rd quarter 2011) September 30, 2016
    October 1, 2011 (4th quarter 2011) December 31, 2016
    If Then
    Form SS-16 is made effective the first day of the calendar quarter in which the SS-16 is filed The return is due the normal due date for Form 941 for the current quarter.
    Form SS-16 is made effective the first day of the calendar quarter immediately after the calendar quarter in which the SS-16 is filed The return is due the normal due date for Form 941.
  5. Under IRC 3121(r), the due date of the returns for all retroactive quarters is determined by the date the Form SS-16 is "filed " . The due date for filing the returns and paying the tax, for calendar quarters prior to the quarter in which the SS-16 is filed, is the last day of the calendar month following the calendar quarter in which the Form SS-16 is filed.

    If the Form SS-16 is filed any day during the Then all the returns for the retroactive quarters must be filed and tax paid by
    1st quarter 2015 April 30, 2015
    2nd quarter 2015 July 31, 2015
    3rd quarter 2015 October 31, 2015
    4th quarter 2015 January 31, 2016
    1st quarter 2016 April 30, 2016
    2nd quarter 2016 July 31, 2016
    3rd quarter 2016 October 31, 2016
    4th quarter 2016 January 31, 2017

    Note:

    Generally, the received date is the date Form SS-16 is "filed" for purposes of determining when returns are due. If the religious order or subdivision selects an effective date that is the first day of the 20th calendar quarter preceding the quarter in which Form SS-16 is postmarked, but the Form SS-16 is received in a later quarter, the IRS will use the postmark date to determine the date filed to ensure the intended 20th quarter can be included.

  6. A religious order will not be subject to a failure to pay penalty or interest, if it files the returns for the retroactive quarters and pays the total tax liability by the due date. IRC 3121(r) provides that the period of limitations for assessment for retroactive quarters will not expire before the expiration of 3 years from such due date.

  7. A religious order must report its tax liability for each quarter it is electing coverage. The form that must be filed for each of the retroactive quarters depends on whether an original Form 941, Employer's QUARTERLY Federal Tax Return, was filed for the specific retroactive period. Refer to table below:

    If Then
    Form 941 was never filed for one or more quarters for which the election is effective The religious order must file Forms 941 for those retroactive quarters.
    Original Forms 941 were filed for any of the retroactive quarters for which the election is effective The religious order must file Form 941-X, Employer's QUARTERLY Federal Tax Return or Claim for Refund, for those retroactive quarters.

21.7.2.5.7  (04-25-2012)
Federal Labor Laws — Wage Payments Made by Federal Agencies

  1. Certain government agencies are empowered to collect wages from employers that were erroneously not paid to current or former employees. These federal agencies disburse the wage amounts to the employees concerned. Agencies allowed to take this action and some of the provisions which allow such action are:

    • Department of Labor (DOL) – Fair Labor Standards Act

    • Government Accountability Office (GAO) – Davis-Bacon Act

    • Housing and Urban Development (HUD) – Davis-Bacon Act

    • National Labor Relations Board (NLRB) – Labor Management Relations Act

    Note:

    Extensive investigations are performed by the federal agencies to determine if claims for back wages or unfair labor practices are 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.

21.7.2.5.7.1  (01-09-2012)
Processing of Tax Returns Filed by Federal Agencies to Report Withheld Income Taxes and Employee Share of FICA Taxes (Wage Payments Made by Federal Agencies)

  1. Federal agencies making wage determinations withhold income taxes and the employee's share of FICA taxes from payments made to employees. The federal agency then reports and pays the withheld income taxes and the employee share of FICA with an employment tax return filed with the IRS under a separate EIN assigned to the federal agency.

  2. Employment tax returns filed by the federal agencies are processed at the campus of receipt.

  3. In addition to federal income tax withheld, the federal agency will report wages on the appropriate lines of Form 941 and compute the full amount of FICA taxes. The employer share of FICA is then deducted on one of the adjustment lines of Form 941 as a negative adjustment.

    Note:

    Wages may also be reported on Form 943 or Form 944.

  4. An aggregate Form 941-X will generally be attached to the federal agency's Form 941.

    1. The aggregate Form 941-X will reflect the total wages and tax withheld for all employees for which wage determinations were made by the federal agency for that tax period.

    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. The Form 941-X is stamped "Do Not Transmit to SSA" .

    Note:

    The federal agency also prepares two copies of Form 941-X for each employer showing the wage determinations for their employees and the FICA taxes owed by the employer. The federal agency sends one copy to the employer to inform them of their tax liability. The federal agency files the other copy with the IRS for assessment of the employer's share of FICA on the employer's EIN. See IRM 21.7.2.5.7.2, Processing of Forms 941-X Filed by Federal Agencies to Report Employer Share of FICA Taxes (Wage Payments Made by Federal Agencies), for instructions on processing those Forms 941-X.

21.7.2.5.7.2  (02-27-2013)
Processing of Forms 941-X Filed by Federal Agencies to Report Employer Share of FICA Taxes (Wage Payments Made by Federal Agencies)

  1. Federal agencies collecting wages from employers on behalf of employees withhold income taxes and the employee's share of FICA taxes from the payments made to the employees. However, the employer remains liable for the employer's share of FICA taxes.

  2. The federal agency prepares two copies of Form 941-X for the employer showing the wage determinations for their employees and the FICA taxes owed by the employer. One copy is sent to the employer to inform them of their tax liability. The other copy is filed by the federal agency with the IRS for assessment of the employer's share of FICA on the employer's EIN.

    Reminder:

    Additional Medicare Tax (AdMT) is only imposed on the employee (for tax periods beginning after December 31, 2012). There is no employer share of AdMT. Therefore, no AdMT should be assessed in the course of handling cases per the procedures found in the following subsections.

  3. The Form 941-X used by federal agencies for this purpose is generally not filed on the official Form 941-X version and does not include line numbers. However, it will be accepted so long as all information needed to compute the employer's share of the FICA tax liability and to process the adjustment is provided.

21.7.2.5.7.2.1  (05-07-2015)
Return Posted (TC 150), Account Not in TDA (Taxpayer Delinquent Account) Status (Wage Payments Made by Federal Agencies)

  1. If a return for the employer is posted:

    1. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

      Caution:

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

      Example:

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

    2. Use IRN 004 to show the amount of taxable social security wages.

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

    4. Input IRN 112 for the total FICA tax adjustment (employee and employer shares).

    5. Input IRN 110 and IRN 113 to reduce tax for the employee share of FICA tax already collected from the employee's wages by the federal agency.

    6. Initiate Letter 134C to the employer (use the address currently showing on ENMOD/BMFOLE) advising a bill for employer’s portion of FICA will be issued in the near future and include a copy of Form 941-X from the government agency.

    Caution:

    Do not include FITW (Federal Income Tax Withheld) (IRN 003/111) in the adjustment.

    Note:

    If the TC 150 on the module was a dummy return prepared per procedures later in this IRM section and there is a credit balance on the module which exceeds the amount of the assessment reflected on the Form 941-X filed by the federal agency, then use Hold Code 1 with the adjustment to hold the credit and allow the notice of adjustment to be issued. Also, in this particular situation, inform the employer in the Letter 134C being issued that they must file the appropriate original employment tax return to report any other taxes due and/or to claim a refund for any overpaid taxes.

21.7.2.5.7.2.2  (11-04-2010)
Return Posted, Account in TDA Status (Wage Payments Made by Federal Agencies)

  1. If a return for the employer has posted, but the account is in TDA Status, see IRM 21.3.3.4.9.2.1, Amended Returns/Claims - Compliance Criteria, for additional guidance. State the nature and facts of the case if routing per that guidance.

21.7.2.5.7.2.3  (10-01-2014)
No Return Posted, No Filing Requirements (Wage Payments Made by Federal Agencies)

  1. If no return for the employer has posted and there are no filing requirements for the current quarter, take the following actions:

    1. Initiate Letter 134C to the employer (use the address currently showing on ENMOD/BMFOLE).
      • Include a copy of the Form 941-X received from the federal agency.
      • Advise the taxpayer that we will be processing the Form 941-X and will issue a bill once that action is complete.
      • Advise the taxpayer of the amount of tax that will be assessed.
      • Advise the taxpayer that they should go ahead and make payment for the amount of tax to be assessed in order to limit any interest charges that may be due.

    2. Prepare a dummy return on the applicable employment tax return (usually Form 941) showing zero tax for the tax period for which the Form 941-X was filed.
      • Enter "Dummy Return Prepared by IRS — Do Not Correspond for Signature" on the signature line.
      • Mark the block for "Final" return.
      • Enter Computer Condition Codes (CCC) "F" and "X" on the face of the dummy return. DO NOT enter any other Computer Condition Codes such as "M" , "D" , "J" , or "R" to restrict penalties or interest.
      • Route the completed dummy return to Submission Processing.

    3. Monitor the account until the dummy return posts to the module.

    4. Follow the procedures in IRM 21.7.2.5.7.2.1 to adjust the account per the Form 941-X.

      Note:

      Do not issue a second Letter 134C to the employer when the assessment is made under these procedures.

21.7.2.5.7.2.4  (11-04-2010)
No Return Posted, Delinquency Notice Issued (Wage Payments Made by Federal Agencies)

  1. If no return for the employer 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 941-X to the memo.

21.7.2.5.7.2.5  (10-01-2012)
No Return Posted, Open Filing Requirements, No Delinquency Notice Issued (Wage Payments Made by Federal Agencies)

  1. A federal agency may submit a Form 941-X before the employer's tax return is processed and posted to their tax account. This includes some rare situations where the federal agency submits the Form 941-X prior to the return due date for the tax period effected.

  2. In these situations, it will be necessary to monitor the employer tax account for posting of their tax return prior to taking action on the Form 941-X. Once posted, the employer's tax return data must also be reviewed to determine whether they have reported the additional wages and tax on their Form 941 and used one of the adjustment lines to back out the employee share collected by the federal agency.

  3. Monitor the account until the tax return posts and take the following action:

    If And Then
    A tax return is filed by the employer There is an entry on one of the adjustment lines corresponding to the federal agency wage determination Input TC 290 .00 and state "taxpayer reported as line item adjustment" in the Remarks section.
    A tax return is filed by the employer There is no entry on one of the adjustment lines corresponding to the federal agency wage determination Follow the procedures in IRM 21.7.2.5.7.2.1, Return Posted (TC 150), Account Not in TDA (Taxpayer Delinquent Account) Status (Wage Payments Made by Federal Agencies) or IRM 21.7.2.5.7.2.2, Return Posted, Account in TDA Status (Wage Payments Made by Federal Agencies), as appropriate.
    A return has not posted within 60 days of the return due date A delinquency notice has been issued Follow the procedures in IRM 21.7.2.5.7.2.4, No Return Posted, Delinquency Notice Issued (Wage Payments Made by Federal Agencies).
    A return has not posted within 60 days of the return due date No delinquency notice has been issued and there is no indication of a return being filed; e.g., Unpostable, Reject, open controls, etc. Follow the procedures in IRM 21.7.2.5.7.2.3except:
    • Do not indicate "Final" and do not CCC"F" .
    • If there are credits on the module, be certain to enter CCC "X" on the dummy return and use Hold Code 1 when adjusting the account to hold any excess credits.

    Reminder:

    All open controls and assignments must be considered and contacts made as appropriate prior to taking action on a tax account per these procedures.

21.7.2.5.7.2.6  (10-01-2014)
Missing or Incorrect Employer EIN (Wage Payments Made by Federal Agencies)

  1. If the Form 941-X is otherwise processable and is missing only a correct EIN for the employer (or an SSN was provided in either SSN or EIN format), research for the correct EIN. If the correct EIN is not found, forward the case to Entity Control (5 day turnaround) and request that they determine the correct EIN or assign an EIN to the business.

  2. If the Form 941-X is missing data (address, money amount, etc.) necessary to process the case in addition to a missing or incorrect EIN, return the Form 941-X to the agency initiating the case and request the missing data. If the agency returns the Form 941-X with the missing information but states the employer does not have an EIN, forward the case to Entity Control as in (1) above.

    Note:

    Use Letter 134C or other appropriate "C" letter when rejecting documents back to the initiating federal agency. Agency addresses may be found in the text of Letter 134C.

21.7.2.5.8  (01-14-2015)
Section 3402(d) and Section 3102(f)(3), Tax Relief in Employment Tax Cases (Forms 4668, 4669, and 4670)

  1. During the course of an examination, the IRS may determine an employer/employee relationship exists and propose the assessment of tax, penalties and interest. This assessment may include income tax and/or Additional Medicare Tax (AdMT) that should have been withheld from amounts paid to employees.

  2. Form 4668, Employment Tax Examination Changes Report, is the basic report used for all employment tax return examinations.

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

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

      Note:

      TC 971 AC 057 is sometimes used by Exam to designate a cross-reference account where relevant documentation is located.

    Note:

    Form 4668-B, Report of Examination of Withheld Federal Income Tax, is generally used for backup withholding issues.

  3. 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 Cases, are used to obtain a taxpayer’s agreement to the proposed assessment or over-assessment of employment tax.

    • An error is considered ascertained on the date the signed Form 2504 is received by the IRS. Therefore, the additional tax must be paid at the time the signed Form 2504 is received for the assessment to be completely interest-free.

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

  4. When specific conditions are met, the Internal Revenue Code (IRC) provides relief from paying certain employment taxes proposed or assessed by Exam:

    • IRC 3402(d) provides relief from paying income tax proposed or assessed by Exam if the employee reported the income and paid the taxes due with the employee's income tax return. IRC 3402(d) relief also applies to Exam assessments of backup withholding.

    • IRC 3102(f)(3) provides relief from paying Additional Medicare Tax (AdMT) proposed or assessed by Exam (for tax periods beginning after December 31, 2012) if the employee reported the income and paid AdMT due with the employee's income tax return.

    Caution:

    Income tax withholding assessed under IRC 3509 is not subject to abatement. See IRM 21.7.2.5.4 for more information on IRC 3509.

  5. To obtain relief under IRC 3402(d) and/or IRC 3102(f)(3), employers must:

    1. Secure a signed Form 4669, Statement of Payments Received, from the employee(s) covered by the examination.

    2. Prepare and sign a Form 4670, Request for Relief from Payment of Income Tax Withholding, indicating the tax year and number of statements (Form 4669) secured.

    3. Submit the signed Form 4670 with the signed Form(s) 4669 attached.

      Exception:

      If the tax due was paid prior to the filing of the Forms 4670 and 4669, then the Forms 4670 and 4669 must be attached to a properly completed claim form (Form 94XX) since that situation constitutes a claim for refund rather than a request for relief from payment as provided for under IRC 3402(d) or IRC 3102(f)(3).

  6. The Revenue Agent/Officer conducting the examination provides the employer with an extra copy of Form 4668 along with blank Forms 4669 and 4670. The employer is instructed to file the copy of the Form 4668, a Form 4670, and Form(s) 4669 with the appropriate campus.

    Note:

    Revenue Agents/Officers may process Forms 4670 and 4669 received before the examination is closed as per guidance in IRM 4.23.8.4.3, Procedures for Granting Relief Under IRC 3402(d) and/or IRC 3102(f)(3) by Examiners.

21.7.2.5.8.1  (10-01-2015)
Processing Procedures for Forms 4669 and 4670

  1. Requests for relief under IRC 3402(d) and/or IRC 3102(f)(3) are not Exam criteria even though they involve tax accounts that were previously examined.

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

  3. The Form 4668 for the case must be secured to determine the amount of tax for which relief can be granted under IRC 3402(d) and IRC 3102(f)(3). Take the following actions if the employer submits Forms 4669 and 4670 without a copy of the Form 4668:

    1. Make two attempts to contact the employer (or an authorized representative) by phone to obtain a copy of the Form 4668.

    2. If unable to obtain the Form 4668 from the employer, request the TC 30X assessment document (or controlling DLN) on the last quarter of the calendar year shown on Form 4670.

      Note:

      If the TC 30X assessment document is charged out to Examination on an initial document request, suspend the case and request the document again after 30 days.

    3. If a copy of the Form 4668 cannot be obtained from the employer or from Files as per the above procedures, return the Forms 4669 and Form 4670 to the employer with instructions to resubmit the documents with a copy of the Form 4668.

  4. Use Forms 4668 and 4669 to determine the amount of tax to be adjusted as follows:

    Exception:

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

    • IRC 3402(d) relief requests:
      1) For the calendar year involved, add the figures shown on line 6a, "Payments subject to Income Tax Withholding" (line 6b, "Payments subject to Backup Withholding" , for backup withholding), of the Form(s) 4669 submitted with Form 4670.
      2) Multiply the figure determined in step 1 above by 28% (.28).
      3) The amount of the tax adjustment to be made is limited to the lesser of the tax figure determined in step 2 above or the amount shown on line 12, "Maximum tax available for abatement under IRC 3402(d)" , of Form 4668 (or line 20 of Form 4668-B).

      Caution:

      If line 12, Form 4668, is zero, blank or "none" , do not make any adjustment to income tax withheld (or backup withholding).

    • IRC 3102(f)(3) relief requests:
      1) For the calendar year involved, add the figures shown on line 6d, "Payments subject to Additional Medicare Tax Withholding" , of the Form(s) 4669 submitted with Form 4670.
      2) Multiply the figure determined in step 1 above by 0.9% (.009).
      3) The amount of the tax adjustment to be made is limited to the lesser of the tax figure determined in step 2 above or the amount shown on line 13, "Maximum tax available for abatement under IRC 3102(f)(3)" , of Form 4668.

      Caution:

      If line 13, Form 4668, is zero, blank or "none" , do not make any adjustment to AdMT.

      Note:

      The instructions above are based on current form versions. Relief requests filed on earlier versions of Form 4669 are to be processed whenever possible. See archived IRM versions if information relating to previous form versions is needed, including previous line numbers and line titles.

      Note:

      Revised Form 4669 includes line 6c, "Payments to Foreign Persons subject to Withholding Tax" , which can be used by taxpayers to request relief from payment of certain taxes proposed or assessed by Exam. Requests for relief of taxes related to payments which could be reported on line 6c of Form 4669 should not be received in Accounts Management. Contact the IRM author through the campus P & A Staff for guidance on resolving or rerouting the case if a Form 4669 is received in Accounts Management with a figure entered on line 6c of Form 4669.

  5. When the claim can be processed, adjust the module for the proper amount using either TC 291 or TC 299 (along with the appropriate IRNs) as follows:

    If And Then
    The employer signed the Form 2504 Interest is not restricted on the module Input TC 299 with an "interest from" date using the date the original signed Form 2504 was received by the IRS.
    The employer signed the Form 2504 Interest is restricted on the module Interest must be manually computed and adjusted unless the assessment qualified as a completely interest-free adjustment. Input TC 299 with an "interest from" date using the date the original signed Form 2504 was received by the IRS and the appropriate TC 34X amount. No underpayment interest is due on the amount being abated under IRC 3402(d) and/or IRC 3102(f)(3). However, underpayment interest is due on any remaining amount of the assessment from the date the original Form 2504 was received to the date of full payment.
    The employer did not sign the Form 2504 Interest is not restricted on the module See IRM 20.2.12.6.3 , Interest on Income Tax Withholding Assessment Abated under IRC 3402(d). Input TC 299 with an interest from date. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    The employer did not sign the Form 2504 Interest is restricted on the module See IRM 20.2.12.6.3 , Interest on Income Tax Withholding Assessment Abated under IRC 3402(d). Interest must be manually computed and adjusted. Input TC 299 with an interest from date and adjust interest with a TC 34x transaction as appropriate. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    Note:

    If the Form 2504 is unavailable, and there is a TC 308 on the module, use the date of the TC 308 for the interest computation date when following the procedures in the table above. If there is no TC 308, request the assessment document or contact the employer for a copy of the Form 2504. Fax copies are acceptable.

  6. Restrict any penalty assessments on the module if a tax decrease made under these procedures would cause penalties to recompute. The employer is liable for all penalties as a result of the examination. Penalties should not be decreased when tax is adjusted.

  7. Documentation for the adjustment must include the Forms 4669 and 4670 provided by the employer, copy of the Form 4668, and Form 2504 (if secured).

21.7.2.5.9  (10-01-2011)
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. This benefit expired and was reinstated a number of times over the years until the Economic Growth and Tax Relief Reconciliation Act of 2001 permanently extended IRC 127.

  2. Employers should account for IRC Section 127 exclusions as they pay wages and report employment taxes during the year. However, employers may file claims on Forms 94XX if necessary when errors in reporting have occurred. Follow the procedures for the appropriate Form 94XX adjusted employment tax return when working these claims or adjustment requests.

  3. Employees unable to obtain refunds from their employer may 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, they must provide this information to the best of their ability. (Contact the taxpayer if neither an employer or employee statement has been provided with the claim. Fax copies are acceptable.) When the required documentation is secured, follow procedures in IRM 21.7.2.4.6.4.2, Excess Social Security and Medicare Tax Withheld — Employee Claims for Refund, under "Claim is correctly filed with employer's statement attached" , in the "If/Then" table.

  4. See archived IRM 21.7.2 if information is needed with regards to the handling of claims for tax years ending December 31, 2001 or earlier.

21.7.2.5.10  (11-10-2011)
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. On March 2, 2010, the Internal Revenue Service made an administrative determination to accept the position that medical residents are excepted from FICA taxes based on the student exception for tax periods ending before April 1, 2005 when new IRS regulations went into effect. The IRS has contacted hospitals and universities as well as medical residents who filed FICA (social security and Medicare tax) refund claims for these tax periods for the purpose of perfecting the claims. Additional information may be found on the IRS website at: IRS to Honor Medical Resident FICA Refund Claims.

  3. Final regulations under IRC 3121(b)(10) (the "student exception" ) clarified who can be considered a student for purposes of the student exception. The final regulations provide that an employee whose normal work schedule is 40 hours or more per week is considered a full-time employee and is not eligible for the student FICA exception (the "full-time employee" rule). This prevents medical residents from being considered students and therefore wages earned by medical residents are considered wages subject to FICA taxes. The final regulations are applicable with respect to services performed on or after April 1, 2005.

  4. In Mayo Foundation for Medical Education and Research et al v. United States, 131 S. Ct. 701 (2011), the Supreme Court held that the full-time employee rule was valid. This resolved the FICA tax treatment of wages paid to medical residents for tax periods beginning April 1, 2005.

  5. 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."

  6. For medical/dental resident claims filed by employers, including those citing the Mayo Foundation decision and/or citing Section 218 agreements, follow handling procedures in IRM 21.7.2.5.10.1, Employer Claims (Medical/Dental Residents).

  7. For medical/dental resident claims filed by employees, including those citing the Mayo Foundation decision and/or citing Section 218 agreements, follow handling procedures in IRM 21.7.2.5.10.2, Employee Claims (Medical/Dental Residents).

21.7.2.5.10.1  (11-10-2011)
Employer Claims (Medical/Dental Residents)

  1. Follow the instructions in the table below for Medical/Dental Resident claims filed by employers, including those citing the Mayo Foundation decision and/or citing Section 218 agreements.

    If And Then
    A claim (Form 941-X) is filed for any tax period. There is no evidence of timely filing Disallow the claim on the basis of the expired refund statute expiration date (RSED) and send Letter 105C as per instructions in IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures, and IRM 25.6.1.10.2.5.3 , Notification to Taxpayer Upon Disallowance of a Claim.
    A claim (Form 941-X) is filed for a tax period before April 1, 2005. There is evidence of timely filing. Forward as CATA and notate case as 'CATAMEDDEN'.

    Exception:

    Do not send CAT-A until the claim is complete for processing, including all required certifications. Take the following actions on incomplete claims:
    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 the taxpayer (employer), return the claim using Letter 916C. Inform the taxpayer (employer) of the information needed and instruct them to resubmit the claim when the necessary information is obtained. If the claim is received within 180 days of RSED, follow procedures in IRM 21.5.3.4.3, Tax Decrease and Statute Consideration.

    A claim (Form 941-X) is filed for a tax period after March 31, 2005 The claim is timely filed Disallow the claim and send Letter 105C as per instructions in IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures. The following language should be used in the disallowance letter open paragraph: "Your claim(s) is being denied because of the Supreme Court decision in Mayo Foundation for Medical Education and Research v. United States, 131 S. Ct. 704 (2011). In that case, the Court held that medical residents do not qualify for exemption from FICA taxes as “students” under Internal Revenue Code Section 3121(b)(10) for tax periods ending after March 31, 2005."

    Note:

    For tax period 200812 and earlier, employers could correct errors and make claims (including Medical/Dental claims) for prior tax periods as line adjustments on a current employment tax return. For Medical/Dental Resident claims taken as line adjustments on returns filed for tax periods ending December 31, 2008 and earlier, follow the table above. For Medical/Dental Resident claims taken as line adjustments on returns filed for tax periods ending after December 31, 2008, follow the appropriate section of IRM 21.7.2.4.6.7, Exception Processing — Incorrect Filing, Including Forms Routed to AM from SP.

21.7.2.5.10.2  (11-10-2011)
Employee Claims (Medical/Dental Residents)

  1. Follow the instructions in the table below for Medical/Dental Resident claims filed by employees, including those citing the Mayo Foundation decision and/or citing Section 218 agreements.

    If And Then
    A claim is filed for any tax period There is no evidence of timely filing Disallow the claim on the basis of the expired refund statute expiration date (RSED) and send Letter 105C as per instructions in IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures, IRM 25.6.1.10.2.5.3 , Notification to Taxpayer Upon Disallowance of a Claim, and the last two rows of the If/Then Table in (3) of IRM 21.7.2.4.6.4.2, Excess Social Security and Medicare Tax Withheld — Employee Claims for Refund.
    A claim is filed for a tax period before January 1, 2006. There is evidence of timely filing. Forward as CATA and notate case as 'CATAMEDDEN'.

    Exception:

    Do not send CAT-A until the claim is complete for processing, including the employer statement (or equivalent employee statement) discussed in IRM 21.7.2.4.6.4.2, Excess Social Security and Medicare Tax Withheld — Employee Claims for Refund. Take the following actions on incomplete claims:
    1. Attempt to contact the taxpayer (employee) 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 the taxpayer (employee), return the claim using Letter 916C. Inform the taxpayer (employee) of the information needed and instruct them to resubmit the claim when the necessary information is obtained. If the 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 filed for a tax period after December 31, 2005. The claim is timely filed Disallow the claim and send Letter 105C as per instructions in IRM 21.5.3.4.6.1, Disallowance and Partial Disallowance Procedures. The following language should be used in the disallowance letter open paragraph: "Your claim(s) is being denied because of the Supreme Court decision in Mayo Foundation for Medical Education and Research v. United States, 131 S. Ct. 704 (2011). In that case, the Court held that medical residents do not qualify for exemption from FICA taxes as “students” under Internal Revenue Code Section 3121(b)(10) for tax periods ending after March 31, 2005."

    Note:

    Although Form 1040X is not the proper form to file for refund or credit of these excess FICA claims, we will accept it for processing purposes if it contains the necessary information. However, 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.

21.7.2.5.11  (10-01-2013)
Foreign Students — FICA Tax Erroneously Withheld

  1. Per IRC 3121(b)(19), certain foreign students and other non-resident aliens 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.

  2. It is generally the employer's responsibility to determine the tax status of foreign students and other non-resident employees for employment tax purposes. However, employers sometimes erroneously treat an exempt employee's wages as taxable for FICA. In that situation, claims for refund or credit may be filed by either the employer or the employee:

    • See IRM 21.7.2.5.11.1, Procedures for Inquiries Received From Foreign Students, for handling guidance on inquiries and claims filed by employees for this issue.

    • See IRM 21.7.2.5.11.2, Employer Claims Involving Foreign Students, for handling guidance on inquiries and claims filed by employers for this issue.

21.7.2.5.11.1  (10-01-2015)
Procedures for Inquiries Received From Foreign Students

  1. Employers may in some instances erroneously withhold FICA taxes from exempt foreign students and other non-resident aliens holding F, J, M, or Q visas. Employees for whom FICA taxes are erroneously withheld should seek reimbursement from their employer. However, If the employee is unable to obtain repayment or reimbursement from their employer, they may file a claim for refund of the erroneously withheld FICA taxes.

    Caution:

    Any excess Additional Medicare Tax (AdMT) withheld by an employer and not repaid or reimbursed to the employee in the same calendar year must be claimed on an income tax return.

  2. In order to substantiate exemption from FICA taxes, 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, the claim may be processed.

    2. Form W-2 (If a Form W-2 is not provided, the FICA withholding amount can be verified using CC IRPTR, if available.) 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 (US Citizenship and Immigration Service) 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, 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 , 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.

  3. Foreign student claims filed by employees are processed at the Ogden campus as per procedures in IRM 21.8.2.7.3, Processing Employee Claims.

  4. Process foreign student claims received at any campus other than at Ogden as follows:

    If Then
    The employee's claim is complete for processing (verify items discussed in (2) above are attached). Route these claims to the following address and advise the taxpayer of the transfer via Letter 86C:
    Ogden Campus
    1973 N Rulon White Blvd
    Ogden, Utah 84404
    M/S 6552
    The employee's claim is not complete for processing (verify items discussed in (2) above are attached). Follow procedures in IRM 21.8.2.7.3(4) and advise the employee in the required Letter 513C to file a complete claim at the Ogden campus address as above if they are unable to obtain reimbursement from their employer.

    Note:

    Employer claims involving foreign students must be filed on the appropriate Form 94XX and are processed at the Cincinnati or Ogden Campuses. See IRM 21.7.2.5.11.2, Employer Claims Involving Foreign Students.

21.7.2.5.11.2  (10-01-2013)
Employer Claims Involving Foreign Students

  1. Employer claims must be filed on the appropriate Form 94XX and are processed at the Cincinnati or Ogden Campuses.

  2. There are no special procedures (see Exception in (3) below) for Forms 94XX filed by employers seeking refunds or credits of FICA taxes erroneously withheld from employees who are foreign students and other exempt non-resident aliens holding F, J, M, or Q visas or for the associated employer's share of FICA taxes.

  3. Forms 94XX filed by employers for this issue are to be processed as per the general Form 94XX processing instructions in IRM 21.7.2.4.6, Adjusted Employer's Federal Tax Return or Claim for Refund, and the procedures for the specific type of Form 94XX and filing situation (e.g., if the 941-X received is a tax decrease - claim for refund, follow IRM 21.7.2.4.7.6.2, Form 941-X Tax Decrease — Claim).

    Exception:

    If the employee has already filed a Form 843 claim and received a refund of erroneously withheld FICA taxes, then the employer may only obtain a refund or credit for the employer's share of associated FICA taxes. In that instance, the account will reflect a reduction in wages and a reduction in tax equal to the employee's share of FICA taxes. The Form 94XX filed by the employer may reflect an identical reduction in wages as was posted with the employee claim adjustment. If so, adjust IRN 112 (or IRN 007 as appropriate) but do not reduce wages a second time.

    Note:

    Employee claims involving foreign students are filed on Form 843 and are processed at the Ogden Campus. See IRM 21.7.2.5.11.1, Procedures for Inquiries Received From Foreign Students, for handling and routing information if an employee claim is received at a site other than Ogden.

21.7.2.5.12  (03-30-2011)
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, employers must pay the employer portion of FICA taxes on unreported tips shown on the Section 3121(q) Notice and Demand. See Letter 3263 and Letter 4520 for more information. They are instructed to include the taxes due on line 5e of their Form 941 for the quarter in which the Section 3121(q) Notice and Demand is made.

    Note:

    For tax periods in 2009 and 2010, taxpayers were instructed to report these taxes on line 7c of Form 941, notate "3121(q)" beside the line, and attach a copy of the Notice and Demand. For tax years 2005 through 2008, instructions were for these taxes to be reported on Line 7e of Form 941.

  3. Generally, 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. However, if the employer files Form 941 late and the filing date is after April 15 of the calendar year following the year the Section 3121(q) Notice and Demand is made, the Service must assess the employer FICA taxes within 3 years after the date the return was filed.

    Example:

    If the employer files Form 941 for the first quarter of 2015 on July 12, 2016, the assessment period ends on July 12, 2019.

    Note:

    If the employer files a false or fraudulent Form 941 for the quarter in which the liability is required to be reported or fails to file Form 941 for that quarter, the additional employer FICA taxes on the unreported tips can be assessed at any time.

21.7.2.5.12.1  (10-01-2012)
Procedures for Section 3121(q) Adjustments — Forms 941-X

  1. Even though employers are instructed to report a Section 3121(q) tip liability on their current period original Form 941, a Form 941-X may be received reporting a Section 3121(q) liability as an adjustment.

  2. If Form 941-X is received reporting a Section 3121(q) adjustment, verify all applicable sections are complete. See IRM 21.7.2.4.6, Adjusted Employer's Federal Tax Return or Claim for Refund, and IRM 21.7.2.4.7.6, Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund (including Form 941-X (PR)).

    Note:

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

    Example:

    Section 3121(q) Notice and Demand was dated March 30, 2014. If Form 941-X is filed, the adjustment must be input on the 201403 tax period.

  3. Section 3121(q) adjustments reported on Forms 941-X may qualify for interest-free treatment in limited situations. See IRM 21.7.2.5.12.2, Section 3121(q) and Interest-Free Adjustments, for information on when to use a TC 298 or TC 290 when making Section 3121(q) adjustments.

  4. IRN 114 is used to adjust the employer's share of social security and Medicare tax for Section 3121(q) liability on Form 941 for tax periods beginning on or after 01/01/2011. IRN 114 corresponds to Line 5f of Form 941 and Line 12 of Form 941-X.

    Note:

    IRN 112 was used for Section 3121(q) adjustments on MFT 01 for tax periods ending on or before 12/31/2010.

  5. Accept the employer's figure as reported unless a Section 3121(q) Notice of Demand is attached indicating the amount should be higher. In that case, adjust the account using the higher figure shown on the Section 3121(q) Notice of Demand and inform the employer using Letter 4384C.

    Exception:

    If an employer attaches a copy of a Section 3121(q) Notice and Demand to Form 941-X and it can be determined the employer reported both the employee and employer shares of the social security and Medicare tax adjustment, assess only the employer share of social security and Medicare taxes and inform the employer using Letter 4384C.

    Note:

    If an employer attaches a copy of a Section 3121(q) Notice and Demand to Form 941-X but does not report the tax on the Form 941-X and it was not reported with the original Form 941, assess the amount shown on the Section 3121(q) Notice and Demand and inform the employer using Letter 4384C.

  6. Do not adjust IRN 072 (Tips deemed to be wages) or IRN 073 (Medicare wages) when making Section 3121(q) adjustments for tax periods beginning on or after January 1, 2011 even if the employer provides wage information related to the adjustment on a Form 941-X or attaches the Section 3121(q) Notice and Demand. Wage data figures related to Section 3121(q) adjustments will not be recorded for tax periods beginning on or after January 1, 2011.

    Note:

    For tax periods ending December 31, 2010 and earlier, Section 3121(q) adjustment procedures included instructions to adjust IRN 072 and IRN 073 to record the wages on which the tax was reported.

  7. Ensure all applicable deposits have been applied to the account being adjusted.

  8. Adjust the FTD penalty when using either a TC 290 (see IRM 20.1.4.21.3, Amended or Supplemental (Tax Decrease or Non-Interest-Free Tax Increase)) or a TC 298 (see IRM 20.1.4.21.5, Adjusted Returns (Forms 941-X, 943-X, 944-X, and CT-1X)).

    Note:

    See IRM 20.1.4.21.5.1, Amended ROFTL (Forms 941-X, 943-X, 944-X, 945-X, and CT-1X), when using a TC 298 or TC 290 and an amended ROFTL was provided with the adjusted return.

    Caution:

    For tax decreases with an unreversed FTD penalty, see IRM 20.1.4.21.5, Adjusted Returns (Forms 941-X, 943-X, 944-X, and CT-1X).

21.7.2.5.12.2  (10-01-2012)
Section 3121(q) and Interest-Free Adjustments

  1. The date of the Section 3121(q) Notice and Demand is the ascertained date for the taxes due.

    • To qualify for interest-free treatment, a Form 941-X reporting additional tax must be filed by the due date for the tax period in which the liability for additional tax was ascertained. See IRM 21.7.2.4.6.2, Interest-Free Adjustments (Employment Tax Returns).

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

    • Therefore, a Form 941-X reporting taxes due for a Section 3121(q) adjustment has the same filing due date as the tax period being adjusted. If the Form 941-X is filed after the return due date for the tax period being adjusted, the adjustment does not qualify for interest-free treatment.

      Example:

      An employer receives a Section 3121(q) Notice and Demand dated June 22, 2015. The ascertained date for the taxes due is therefore June 22, 2015. Per the instructions provided to the employer, the taxes shown on the Section 3121(q) Notice and Demand should be reported on their Form 941 for the second quarter of 2015 which has a filing due date of July 31, 2015. Instead, the employer reports the correction on a Form 941-X. The ascertained date is still June 22, 2015 based on the Section 3121(q) Notice and Demand and the Form 941-X reporting the Section 3121(q) tax is due by July 31, 2015. The employer files the Form 941-X on July 27, 2015. Therefore the adjustment qualifies for interest-free treatment.

      Example:

      An employer receives a Section 3121(q) Notice and Demand dated September 21, 2015. The ascertained date for the taxes due is therefore September 21, 2015. Per the instructions provided to the employer, the taxes shown on the Section 3121(q) Notice and Demand should be reported on their Form 941 for the third quarter of 2015 which has a filing due date of October 31, 2015. Instead, the employer reports the correction on a Form 941-X. The ascertained date is still September 21, 2015 based on the Section 3121(q) Notice and Demand and the Form 941-X reporting the Section 3121(q) tax is due by October 31, 2015. The employer files the Form 941-X on November 15, 2015. The Form 941-X was filed late and therefore the adjustment does not qualify for interest-free treatment.

  2. Use the following table to determine whether to make the Section 3121(q) adjustment using a TC 290 or TC 298:

    If Then
    The Form 941-X is not filed by the due date of the tax period for which the Section 3121(q) adjustment is reported Input the adjustment using a TC 290.
    The Form 941-X is filed by the due date of the tax period for which the Section 3121(q) adjustment is reported Input the adjustment using a TC 298. Input the return due date of the tax period being adjusted as the interest computation date.

    Exception:

    If the Page 1 error discovery date, information in Part 4, or the date of the Section 3121(q) Notice and Demand (if attached) indicate the employer filed the Form 941-X for a tax period other than that required based on the ascertained date, input the adjustment as a TC 290 or TC 298 (if timely filed) on the tax period associated with the ascertained date and inform the employer using Letter 4384C.

    Note:

    For the Section 3121(q) adjustment to be completely interest-free, the tax must be paid by the return due date of the tax period for which the adjustment is reported. Otherwise, underpayment interest accrues from that date to the date of full payment.

21.7.2.5.12.3  (10-01-2012)
Taxpayer Reports Other Adjustments In Addition to Section 3121(q) Adjustments

  1. Even though employers are instructed to report a Section 3121(q) liability on their current period original Form 941, a Form 941-X may be received reporting a Section 3121(q) liability as an adjustment. And, if a taxpayer reports a Section 3121(q) adjustment on Form 941-X, it is possible they may also report other adjustments on the same Form 941-X.

  2. If a Section 3121(q) adjustment and other corrections are reported on the same Form 941-X, separate adjustment actions may be required as per the following table:

    If And Then
    The Form 941-X is filed by the due date of the tax period for which the Section 3121(q) adjustment is reported   Input one adjustment for the entire amount of the corrections reported using a TC 298. Input the return due date of the tax period being adjusted as the interest computation date.

    Reminder:

    Use IRN 114 for the Section 3121(q) portion of the tax adjustment.

    The Form 941-X is not filed by the due date of the tax period for which the Section 3121(q) adjustment is reported The employer provided an ascertained date for the other errors being corrected and the Form 941-X was timely filed by the associated due date Input the Section 3121(q) adjustment using a TC 290 and IRN 114. Input the adjustment for the other errors being corrected as a separate TC 298 adjustment using the Form 941-X received date as the interest computation date.
    The Form 941-X is not filed by the due date of the tax period for which the Section 3121(q) adjustment is reported The employer did not provide an ascertained date for the other errors being corrected Input one adjustment for the entire amount of the corrections reported using a TC 290.

    Reminder:

    Use IRN 114 for the Section 3121(q) portion of the tax adjustment.

    The Form 941-X is not filed by the due date of the tax period for which the Section 3121(q) adjustment is reported The employer provided an ascertained date for the other errors being corrected but the Form 941-X was not timely filed by the associated due date Input one adjustment for the entire amount of the corrections reported using a TC 290.

    Reminder:

    Use IRN 114 for the Section 3121(q) portion of the tax adjustment.

    Reminder:

    If the Page 1 error discovery date, information in Part 4, or the date of the Section 3121(q) Notice and Demand (if attached) indicate the employer filed the Form 941-X for a tax period other than for which the Section 3121(q) liability is required to be reported, input the adjustment for the Section 3121(q) liability as a TC 290 or TC 298 (if timely filed) on the correct tax period and inform the employer using Letter 4384C.

21.7.2.5.13  (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 (Section 31.3121(v)(2)-2) under IRC Section 3121(v).

21.7.2.5.13.1  (10-01-2014)
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 were previously reported as line 7e adjustments on Form 941 with the accompanying Form 941c. However, with the implementation of the new "X" returns, these adjustments will now be reported on the applicable adjusted employment tax return (Form 941-X or 944-X). Forms 943-X and CT-1X (volume should be extremely small) could also be filed.

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

    • 3121(v)

    • Regulations Section 31.3121(v)

    • Non-qualified deferred compensation (or NQDC)

    • Deferred compensation

    • Transitional rules

    • Treasury Decision 8814

    Exception:

    See IRM 21.7.2.5.13.2 for procedures relating to airline employee/retiree claims.

  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. Prior to the introduction of Forms 94XX, adjustment requests for this issue could be seen as line item adjustments on original employment tax returns with Form 941c or correspondence attached. See archived files for this IRM if information is needed on previous handling for that issue.

21.7.2.5.13.2  (03-03-2008)
IRC Section 3121(v) — FICA Claims from Airline Employees and Retirees

  1. Current or retired ≡ ≡ ≡ Airline and ≡ ≡ ≡ ≡ ≡ Airline employees whose nonqualified deferred pension benefit plans were terminated during the airlines' bankruptcy proceedings have filed claims for refund. Generally, these retirees' claims request a refund of the 1.45% Medicare tax and occasionally the 6.2% social security tax paid by the employer under IRC Section 3121(v)(2)(A). The refund claim amounts are based on FICA taxes paid on the net present value of the deferred benefit for that employee once the value became reasonably ascertainable and the FICA taxes that would have been assessed, if paid on the actual deferred pension benefit received by the retiree. The majority of the claims are related to Medicare tax.

  2. Claims have been filed on Form 843 and/or Form 1040X. These claims may be received at any campus.

  3. All these claims must be disallowed.

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

    2. Send Letter 105C and include the following paragraphs:

    "We have disallowed your claim for refund of FICA taxes. Section 3121(v)(2) of the Internal Revenue Code requires an employer withhold and pay FICA taxes on amounts deferred under nonqualified deferred compensation plans once the present value of the deferred benefit becomes reasonably ascertainable."

    "Unfortunately, an inherent feature of these plans is that benefits promised by the employer may never actually be distributed to the employees. Even though you may never receive the full value of the deferred benefits, these FICA taxes must be withheld and remitted by the employer. There are no provisions in law which allows the refund of FICA taxes if the plan is terminated."

    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.

  4. In addition to the above paragraph, if the taxpayer's claim was not timely filed, provide the following paragraph:

    "You filed your claim for refund more than 3 years after the date the tax return for withheld employee FICA taxes was to be filed. Withheld employee FICA taxes are deemed to be paid, and the tax returns with respect to such taxes are deemed to be filed on April 15 of the calendar year succeeding the calendar year in which your employer remitted these FICA taxes on your behalf."

    Note:

    The "not timely filed" paragraph is required in addition to the "substantive language" paragraph if the Form 843 and/or Form 1040X is filed more than 3 years following April 15 of the year following the year of retirement or any claim year.

21.7.2.5.14  (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. See IRM 21.7.2.5.14.2, Form 8274, Churches Making the Election for Exemption From FICA.

21.7.2.5.14.1  (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 both:

    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; and

    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.

21.7.2.5.14.2  (10-01-2012)
Form 8274, 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.

    • 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.

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

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

  2. 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

  3. The electing organization is required to withhold federal income tax on wages, tips, and other compensation. Forms W-2 and 941 (or 944) must be filed as appropriate. The IRS will permanently revoke the election if the organization does not file Form W-2 for two years or more and does not provide the information within 60 days after a written request by the IRS.

  4. By filing a Form 941 (or Form 944) and paying FICA taxes, the election can be permanently revoked.

21.7.2.5.14.3  (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.

21.7.2.5.15  (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 the employees are covered 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.

21.7.2.5.15.1  (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 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, 112, 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 is covered by a Section 218 agreement.

    1. See IRM 3.13.12.6.28.11, 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.

21.7.2.5.16  (10-02-2014)
Claims Related to CSX Corp. and/or Quality Stores, Inc. Litigation

  1. Claims are being filed for refunds or adjustments of FICA, RRTA (Railroad Retirement Tax Act), or FUTA taxes based on the following litigation:

    • The Court of Federal Claim's opinion in CSX Corp. v. United States, 518 F3d 1328 (Fed. Cir 2008), and/or,

    • The Sixth Circuit's opinion in United States v. Quality Stores, Inc.

  2. Most of these claims are being filed on Form 941-X, but they may also be seen on Forms 843, Forms 941 with the words "amended return" written in, as line adjustments on Form 941, or on stand alone Forms 941c. With respect to RRTA tax, the claims may be filed on Forms CT-1 X, amended Forms CT-1, or amended Forms CT-2. With respect to FUTA tax, the claims may be filed 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. Most claims received reference CSX Corp. v. United States. and/or United States v. Quality Stores, Inc. Each of these court cases 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. However, any claim referencing an item in the list below must also be handled in accordance with the procedures which follow.

    • "Involuntary Separation Plans"

    • "Involuntary Termination Benefits"

    • "SUCB" or "SUB-pay"

    • "Reduction in Force"

    • "Severance pay"

  4. In United States v. Quality Stores Inc., et al., 134 S. Ct. 1395 (March 25, 2014), the Supreme Court held that the severance payments in question were subject to FICA. All claims meeting the criteria discussed above are to be disallowed, including those with addresses of record in the Sixth Circuit (Kentucky, Michigan, Ohio, and Tennessee) and those with Form 8275, Disclosure Statement, attached.

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

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

      "Your claim is being denied because of the decision of the Supreme Court of the United States in United States v. Quality Stores, Inc., et al., 134 S. Ct. 1395 (March 25, 2014). In that case, the Supreme Court held that all of the payments were taxable wages for FICA tax purposes."

    Note:

    Claims citing Rev. Rul. 90-72 (with or without other citations) with IRS received dates prior to October 1, 2014 are to be formally disallowed as per the instructions provided above. For claims citing Rev. Rul. 90-72 received on or after October 1, 2014, see IRM 21.7.2.5.25, Claims Citing Rev. Rul. 90-72 (SUB-pay).

    Caution:

    Ensure all applicable years are addressed in the disallowance process.

    Reminder:

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

  5. Responses to 105c letters issued per the instructions in (4) are to be handled as per instructions in IRM 21.5.3.4.6.2, Appeals and Responses to Letter 105C and 106C.

    Exception:

    Responses to 105C letters stating the supplemental unemployment plan satisfies all the requirements of Rev. Rul 90-72 require development by Exam prior to acceptance in Appeals. See (2) in IRM 21.7.2.5.25 for handling instructions.

21.7.2.5.17  (10-01-2015)
FICA Claims from Automotive Industry Employees

  1. Former and/or current employees of ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ who were offered buyouts have filed claims for refund. These buyouts were correctly treated as wages and subject to FICA Withholding. Under Rev. Rul. 2004-110, IRB 2004-5, the employee receives the payment as consideration for cancelling the remaining period of their employment contract and relinquishing their contract rights. As such, the payment is part of the compensation the employer pays as reimbursement for employment. The payment provided by the employer to the employee is wages for purposes of FICA, FUTA, and federal income tax withholding. This conclusion applies regardless of the name by which the reimbursement is designated or whether the employment relationship still exists at the time the payment is made.

  2. Claims have been filed on Form 843 and/or Form 1040X by employees of ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . These claims may be received at any campus.

  3. All 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. See Rev. Rul. 2004-110 which states that an amount paid to an employee as considerations for cancellation of an employment contract and relinquishment of contract rights is ordinary income and wages for purposes of FICA, FUTA, and federal income tax withholding."

      Note:

      See IRM 21.5.3.4.6, No Consideration and Disallowance of Claims and Amended Returns, for more information.

21.7.2.5.18  (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 of this IRM through proper channels.

21.7.2.5.19  (10-01-2014)
Premium Assistance for COBRA Benefits

  1. COBRA (Consolidated Omnibus Budget Reconciliation Act) gives employees who lose coverage under the employer's group health plan due to a "qualifying event" , one of which is a termination of employment, the right to elect to continue that coverage for a period of time by paying premiums to the employer to continue such coverage. COBRA (under the Code, ERISA, or the Public Health Service Act) generally covers multi-employer health plans and health plans maintained by private-sector or state or local government employers with 20 or more employees. It generally does not apply to churches and certain religious organizations.

  2. The American Recovery and Reinvestment Act of 2009 (as modified by subsequent legislation) provides premium assistance for COBRA continuation coverage for certain individuals and their families (referred to as assistance eligible individuals) who lose health plan coverage due to an involuntary termination of employment during the period beginning September 1, 2008 and ending May 31, 2010 and who are eligible for COBRA continuation coverage during this period. Workers who were involuntarily terminated between September 1, 2008 and February 17, 2009 (date of enactment), but failed to initially elect COBRA or initially elected COBRA coverage and dropped it before February 17, 2009, were required to be given an additional period to elect COBRA and receive the subsidy. The premium assistance also applies to temporary continuation coverage elected under the Federal Employees Health Benefits Program and to continuation coverage under State programs that provide for coverage comparable to COBRA continuation coverage.

  3. A federal subsidy of 65% of the COBRA premium is available to assistance eligible individuals for up to 15 months.

    • Assistance eligible individuals who elect COBRA continuation coverage are treated as having paid the required COBRA continuation coverage premium if the individual elects COBRA and pays 35% of the premium.

    • The 65% of the premium not paid by the assistance eligible individual is reimbursed to the employer maintaining the group health plan through a credit against payroll taxes.

    • Individuals whose modified adjusted gross income exceeds $125,000 ($250,000 for those filing joint returns) are subject to a phase-out of the subsidy and must recapture the full amount of the subsidy if their modified adjusted gross income exceeds $145,000 ($290,000 for those filing joint returns). The employer/COBRA provider is not responsible for enforcing this limit. Instead, an individual who receives the subsidy and is subject to the phase-out must increase their tax liability by the amount of the subsidy to be recaptured.

    Note:

    The 15-month COBRA premium assistance subsidy eligibility period does not begin until employer provided coverage ends. For example, the 15-month eligibility period for an assistance eligible individual who was terminated on April 30, 2010 and received continued employer provided coverage under a 2-year severance package would begin May 1, 2012 (the day after employer provided coverage ended) and would continue through July 31, 2013. See Q-14 of Notice 2009-27 for more information.

  4. The employer reports the 65% premium assistance provided to assistance eligible individuals on their employment tax return after they have received the 35% premium payment from the individual.

    • The first quarter of 2009 was the first tax period employer's could claim the COBRA premium assistance credit.

    • For tax periods 200903 through 201312, employers could claim the COBRA premium assistance credit on their original employment tax return or on a corresponding Form 94XX adjusted return or claim. The amount claimed should be 65% of the total COBRA premiums for assistance eligible individuals and should not include any amounts paid to the employer/COBRA provider by the COBRA assistance eligible individuals.

    • Employment tax returns for tax periods 200903 through 201312 also included lines to report the total number of individuals provided COBRA premium assistance payments. Each assistance eligible individual who paid a reduced COBRA premium in the quarter should be counted as one individual, whether or not the reduced premium was for insurance that covered more than one assistance eligible individual. Each individual is reported only once per quarter.

    • For tax periods after 201312, lines for claiming the COBRA premium assistance credit were removed from original employment tax forms. Those few employers who are still eligible to claim the COBRA premium assistance must do so on the appropriate Form 94XX adjusted return or claim.

    • The credit is posted to Masterfile with a TC 766, CRN 299 and is treated as a deposit made on the first day of the return period (year or quarter) which reduces the employer's employment tax liabilities. Employers can apply the credit to offset their federal tax deposits, to generate a refund, or both.

  5. In most cases, the employer maintaining the group health plan is the party eligible to claim the credit for the subsidy provided to the assistance eligible individual. However, in some cases, a person other than the employer is the proper party to receive the credit. For example, if the COBRA coverage is provided by a multi-employer plan, the plan will provide 65% federal subsidy for the COBRA premium to the assistance eligible individuals who have paid their 35% premium, and then report the subsidy on its Form 941. Similarly, if the premium assistance is provided with respect to continuation coverage required under state law, the insurer is generally the proper party to receive the credit on its Form 941.

  6. Employers/COBRA providers must maintain supporting documentation for the credit claimed. This includes, but is not limited to:

    • Information on the receipt, including dates and amounts, of the assistance eligible individuals' 35% share of the premium.

    • In the case of an insured plan, copy of invoice or other supporting statement from the insurance carrier and proof of timely payment of the full premium to the insurance carrier required under COBRA.

    • In the case of a self-insured plan, proof of the premium amount and proof of the coverage provided to the assistance eligible individuals.

    • Attestation of involuntary termination, including the date of the involuntary termination (which must be during the period from September 1, 2008, to May 31, 2010), for each covered employee whose involuntary termination is the basis for eligibility for the subsidy.

    • Proof of each assistance eligible individual's eligibility for COBRA coverage at any time during the period from September 1, 2008, to May 31, 2010, and election of COBRA coverage.

    • A record of the SSN's of all covered employees, the amount of the subsidy reimbursed with respect to each covered employee, and whether the subsidy was for one individual or two or more individuals.

    • Proof of delayed eligibility for COBRA (i.e., length of severance period prior to start of COBRA coverage), if applicable.

    • Other documents necessary to verify the correct amount of reimbursement.

    Note:

    This documentation must be maintained, but will not be required to be submitted to the IRS with an original employment tax return or Form 94XX adjusted return or claim.

  7. The Internal Revenue Service issued News Release IR-2009-15 to help employers/COBRA providers claim COBRA premium assistance credit on their employment tax returns. This news release also provided employers/COBRA providers with informative FAQ's. The news release, FAQs, and other information are available on www.irs.gov.

21.7.2.5.19.1  (10-01-2014)
Submission Processing (SP) Procedures — COBRA

  1. This information applies to COBRA premium assistance payments claimed on original employment tax returns filed for tax periods 200903 through 201312. Credit for COBRA premium assistance payments for tax periods after 201312 must be claimed on the appropriate Form 94XX adjusted return or claim.

  2. For credits previously claimed on original employment tax returns, both the COBRA premium assistance amount and the number of COBRA recipients was transcribed and posted to MF. Credit for the COBRA premium assistance payments posts as a TC 766 with CRN 299 and the number of COBRA recipients will be displayed separately.

    Note:

    The COBRA TC 766 (CRN 299) credit is applied to Master File using the first day of the tax period as the credit effective date.

  3. During original processing, SP would correspond for missing information related to COBRA premium assistance. If an employer/COBRA provider claimed the credit on an original employment tax return, then an entry for the number of COBRA recipients was required and vice versa.

  4. If credit for COBRA premium assistance payments claimed on an original employment tax return (tax periods 200903 through 201312) was determined to be questionable during initial processing, any credit on the tax module was held pending a review to verify the allowable amount. Taxpayers were informed of the review via issuance of a CP 269C. This notice also advised the taxpayer that the Service could ask them to provide information substantiating the premium assistance payments reported.


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