- 4.23.8 Determining Employment Tax Liability
- 188.8.131.52 Overview
- 184.108.40.206 Introduction
- 220.127.116.11 Interest-Free Adjustments - In General
- 18.104.22.168 IRC 3402(d) - Relief for Employer When Employees Have Paid Income Tax on Wages
- 22.214.171.124.1 IRC 3102(f)(3) - Relief for Employer When Employees Have Paid Additional Medicare Tax on Wages
- 126.96.36.199.2 Forms 4669/4670
- 188.8.131.52.3 Procedures for Relief Under IRC 3402(d) and/or IRC 3102(f)(3) in Examination
- 184.108.40.206 IRC Section 3509
- 220.127.116.11.1 Reduced Tax Rates Under IRC 3509
- 18.104.22.168.2 Application of IRC 3509
- 22.214.171.124.3 Employee's Liability Under IRC 3509
- 126.96.36.199 FICA Tax
- 188.8.131.52.1 Special Rules Relating to FICA, FUTA, and RRTA Taxes
- 184.108.40.206.2 Specific Instructions - FICA Overpayments in Examinations
- 220.127.116.11.3 Additional Medicare Tax Withholding Overpayments - Current Year
- 18.104.22.168.4 Additional Medicare Tax Withholding Overpayments Discovered in an Examination
- 22.214.171.124 Federal Unemployment Tax
- 126.96.36.199.1 FUTA State Credit Reduction
- 188.8.131.52.2 Allowing FUTA Credit in Cases Involving Insolvent Taxpayers
- 184.108.40.206.3 Special Rules Relating to FUTA and RUIA Taxes
- 220.127.116.11.4 FUTA Tax Overpayments
- 18.104.22.168.5 Federal Unemployment Tax Return Processing Procedures
- 22.214.171.124 Computing Income Tax Withholding
- 126.96.36.199.1 Income Tax Withholding Overpayments - Current Year
- 188.8.131.52.2 Income Tax Withholding Overpayments Discovered in an Examination
- 184.108.40.206 Period of Limitation on Credit or Refund
- 220.127.116.11 Delinquent Forms W2/W2c
- 18.104.22.168.1 Delinquent Forms W2/W2c Secured By Examiner Due to Examination Adjustments
- 22.214.171.124.2 Delinquent Forms W2/W2c Not Secured by Examiner
- 126.96.36.199.3 Special Procedures For Failure to File Form W2 Unagreed Case
- 188.8.131.52.4 Delinquent Forms 1099-MISC Secured by Examiner
- 184.108.40.206 Information Return Penalty Case File
- 220.127.116.11.1 Information Return Penalty Front Of Folder
- 18.104.22.168.2 Information Return Penalty Inside Of Folder
- 22.214.171.124 Withholding Tax on Certain Gambling Winnings
- 126.96.36.199 IRC 3406 Backup Withholding
- 188.8.131.52.1 Overview of Backup Withholding Notices
- 184.108.40.206.2 Procedures for Backup Withholding Examinations
- 220.127.116.11 Form 944 Examinations and Filing Requirements
- Exhibit 4.23.8-1 Code Provisions Restricting and Prohibiting Interest Employment Taxes
- Exhibit 4.23.8-2 Employment Tax Rate Chart under IRC 3509
Part 4. Examining Process
Chapter 23. Employment Tax
Section 8. Determining Employment Tax Liability
October 26, 2015
(1) This transmits a revision to IRM 4.23.8, Employment Tax, Determining Employment Tax Liability.
Updates are made to this section for editorial, procedural, and technical changes.
(1) Editorial and technical changes have been made throughout this section.
(2) IRM 18.104.22.168. Changed title to Interest Free Adjustments - In General. Deleted (4) information with regard to prior law (December 31, 2008) - all paragraphs renumbered. Provided cite to regulations.
(3) IRM 22.214.171.124 (10 and 11). Expanded on interest-free scenarios/explanations.
(4) IRM 126.96.36.199 (13 and 14). Expanded on employer requirements for adjustments and refund claims.
(5) IRM 188.8.131.52.1. Removed reference to procedure prior to January 1, 2009. Added that Failure to Deposit penalties may be applicable if the tax is not paid when agreement is secured.
(6) IRM 184.108.40.206. Increased supplemental withholding rate starting January 1, 2014, to 39.6%.
(7) IRM 220.127.116.11.3. Title change to Procedures for Relief Under IRC 3402(d) and/or IRC 3102(f)(3) in Examination to more accurately reflect the process.
(8) IRM 18.104.22.168. Deleted paragraph (2) as repetitive.
(9) IRM 22.214.171.124. Added additional information on employer liability for FICA taxes.
(10) IRM 126.96.36.199.1. Deleted Common Paymaster subsection, as that information is duplicated in IRM 188.8.131.52, Related Corporations Providing Concurrent Employment - Common Paymaster. Renumbered all following subsections.
(11) IRM 184.108.40.206.1. Revised mailing address info for TE/GE and FSLG. Corrected reference from IRM 4.90.12 for IRM 4.90.9. Inserted a Note for instructions on unknown SSNs for corrected W-2s. Added Note for unknown worker names for delinquent W-2 processing.
(12) IRM 220.127.116.11.1(2). Changed "Examiners will secure" to "Examiners will solicit," as there are procedures for the employer to submit Forms W-2 if not secured in the examination.
(13) IRM 18.104.22.168.2. Corrected reference from IRM 4.90.12 to IRM 4.90.9. Deleted sentence in (3) stating that the taxpayer could not appeal until the forms had been filed, as post-assessment appeal means that the taxpayer cannot appeal until the penalties are assessed.
(14) IRM 22.214.171.124. Statute date corrected to "02/EE/XX" .
(15) IRM 126.96.36.199. Updated and revised as part of the expansion of the topic.
(16) IRM 188.8.131.52.1. New section, Overview of Backup Withholding Notices, expanding on CP2100 Notice provisions and incorporating IGM SBSE-04-1014-0800.
(17) IRM 184.108.40.206.2. New section, Procedures for Backup Withholding Examinations. Formerly IRM 220.127.116.11.1. Rearranged and consolidated to provide examination procedures.
(18) IRM 18.104.22.168. Updated information to reflect appropriate controls for Form 944 examinations, and added a table on filing requirements and cache values.
(19) Exhibit 4.23.8-2. Revised to include 2014 and 2015 information. Information regarding older years deleted.
Barbara J. Fiebich
Director, Specialty Examination Policy
Small Business/ Self-Employed Division
IRM 4.23.8 discusses the factors to consider when determining an employment tax liability.
A determination of employment tax liabilities requires finding that there is an employer, an employee, and a payment of wages or compensation. Federal employment taxes consist of five separate employment taxes, items (a) through (e). This subsection will also discuss the income tax on self-employment income, item (f).
Federal Insurance Contributions Act (FICA): IRC 3101 through IRC 3128
Railroad Retirement Tax Act (RRTA): IRC 3201 through IRC 3233
Federal Unemployment Tax Act (FUTA): IRC 3301 through IRC 3311
Railroad Unemployment Repayment Tax (RURT): IRC 3321 and IRC 3322
Collection of Income Tax at Source on Wages (ITW): IRC 3401 through IRC 3406
Self-Employment Contributions Act (SECA): IRC 1401 through IRC 1403
The FICA, RRTA, RURT, FUTA, and income tax withholding are imposed by Chapters 21, 22, 23, and 24, respectively, of Subtitle C - "Employment Taxes." Not a true employment tax, SECA tax is imposed by Chapter 2 of Subtitle A - "Income Taxes" of the Code.
Subtitle C also includes Chapter 25 of the Code entitled "General Provisions Relating to Employment Taxes." This chapter includes ten additional code sections relating to miscellaneous employment tax provisions.
A worker’s status or classification (i.e., employee, independent contractor, or other non-employee) determines what taxes are paid and who is responsible for reporting and paying these taxes. Generally, if an employer-employee relationship exists, the employer is liable for FICA, FUTA, and ITW under IRC 3101, IRC 3102, IRC 3111, IRC 3301, IRC 3402, and IRC 3403, respectively. But there are special rules that may apply. For example, certain workers are subject to FICA taxes even though they are independent contractors under the common law test. These workers are commonly called "statutory employees" . See Exhibit 4.23.5–2, Employment Tax Treatment for Various Categories of Workers.
Controversies arising from a worker's classification may be prompted by the firm's concern for the potential increase in tax liability. Although there are relief provisions available under IRC 3102(f)(3), IRC 3402(d), IRC 3509, and IRC 6521, employers may not be aware of them and, with respect to IRC 3102(f)(3), IRC 3402(d) and IRC 6521, employers sometimes find it difficult to locate and get the cooperation of former employees in order to avail themselves of the relief.
If certain requirements are met, section 530 of the Revenue Act of 1978 provides relief to taxpayers for Federal employment tax purposes only. The effect of section 530 is to provide employers relief from Federal employment tax obligations imposed on the employer under FICA, FUTA, RRTA, and the withholding of income tax at source on wages (ITW). For more information, see IRM 22.214.171.124.3, Effect of Section 530 on Employees.
Section 530 does not change the status, liabilities, or rights of the worker whose status is at issue. Section 530 only terminates the employer liability for the related employment taxes. It does not convert individuals from the status of employee to the status of self-employed. As such, they may be employees for tax qualified benefit plan eligibility purposes. Where warranted, a referral to Employee Plans can be made on the electronic Specialist Referral System, at https://srs.web.irs.gov/. As an alternative, a Form 3449, Referral Report, may be completed and mailed to:
IRS - EP Classification
McCaslin Industrial Park
2 Cupania Circle
Monterey Park, CA 91755-7631
The question of whether a business is eligible for section 530 relief must be addressed before the development and consideration of any worker classification case. Section 530 applies to all subtitle C taxes and can apply to corporate officers as well as to statutory employees. The first step in any worker classification examination is to advise the taxpayer and any duly appointed representative of the provisions of section 530 by presenting them with the plain language summary, Publication 1976, Do You Qualify for Relief under Section 530? In addition, the examiner should be prepared to answer any questions on section 530 and to ensure that the taxpayer fully understands the relief provisions. See IRM 126.96.36.199, Section 530 of the Revenue Act of 1978. For information with regard to examination procedures and report writing when the taxpayer qualifies for section 530, see IRM 188.8.131.52.3.1, No-Change Reports for Section 530 Eligible Taxpayers.
IRC 3509 provides a "statutory offset mechanism that will apply in reclassification cases" and provides reduced tax rates in certain circumstances for determining an employer's liability for an employee's share of FICA tax and income tax withholding on wages paid to the employee. The employer is still liable for the full employer's share of FICA and FUTA taxes. The employee's liability for FICA tax under IRC 3101 is not affected by IRC 3509 and the employer is not entitled to recover from the employee any part of the employee tax assessed under this section. The relief provisions of IRC 3402(d), concerning income taxes paid by the recipient, and IRC 6521, containing the mitigation provisions with respect to employee FICA tax and self-employment tax, do not apply to the tax computed under IRC 3509. See IRM 184.108.40.206, IRC Section 3509.
Both the ITW and Additional Medicare Tax not withheld but paid by the employer after December 31 of the year in which the wages are paid cannot be taken as a credit for withheld income taxes or withheld Additional Medicare Tax on the employee's income tax return. The ITW not withheld but assessed against the employer is subject to the provisions of IRC 3402(d). The Additional Medicare Tax not withheld but assessed against the employer is subject to the provisions of IRC 3102(f)(3). These sections and regulations under these sections afford relief to the employer providing the employer can show that the employee filed a return, reported the wages, and paid the tax. Generally, Form 4669, Statement of Payments Received, and Form 4670, Request for Relief of Payment of Certain Withholding Taxes, are utilized for this purpose. See IRM 220.127.116.11.2.
The ITW not withheld from an employee's wages but paid by the employer on behalf of the employee before December 31 of the year in which the wages are paid constitutes gross income to the employee in the year paid and is wages subject to FICA, FUTA, and income tax withholding. If such taxes are not withheld, the wages need to be grossed up. See Rev. Proc. 81-48, 1981-2 C.B. 623.
IRC 6205(a) provides that an employer who makes, or has made, an under collection or underpayment of employment taxes (FICA, RRTA, or income tax withholding), may make interest-free payments of the tax due when certain conditions are met. This provision does not apply to FUTA or penalties.
IRC 6413(a) provides that an employer who paid more than the correct amount of employment taxes (FICA, RRTA, or income tax withholding) may make interest-free adjustments of the amount overpaid when certain conditions are met. This provision does not apply to FUTA.
IRC 6402 permits the Service, within the applicable period of limitations, to credit or refund any overpayments. However, regulations under IRC 6402 permit the Service, within the applicable period of limitations, to credit or refund overpayments of Additional Medicare Tax only to the extent such overpayments were not deducted and withheld by the employer. Similarly, IRC 6414 permits the Service, within the applicable period of limitations, to refund an overpayment of income tax withholding to the extent such overpayment was not deducted and withheld by the employer.
Effective for errors ascertained on or after January 1, 2009, regulations with respect to employment tax adjustments and employment tax refund claims modified the process for making interest-free adjustments for both underpayments and overpayments of FICA, RRTA, and ITW under IRC 6205(a) and IRC 6413(a), respectively. Treas. Reg. 31.6205-1. These regulations also modified the process for filing claims for refund of overpayments of employment taxes under IRC 6402 and IRC 6414.
The regulations were issued in connection with the IRS's development of new "X" forms designed for reporting adjustments of employment taxes on regularly filed employment tax returns. The "X" forms are used to report adjustments to employment taxes and to claim refunds of overpaid employment taxes. The "X" forms correspond and relate line-by-line to the employment tax return they are correcting. The "X" forms affect taxpayers that file:
Form 941, Employer's QUARTERLY Federal Tax Return,
Form 943, Employer's Annual Tax Return for Agricultural Employees,
Form 944, Employer's ANNUAL Federal Tax Return,
Form 945, Annual Return of Withheld Federal Income Tax, and
Form CT-1, Employer's Annual Railroad Retirement Tax Return.
The regulations under IRC 6205 provide that if a return is filed and less than the correct amount of employee or employer portions of FICA or RRTA tax is reported and the employer discovers such error after filing the return, the employer will adjust the resulting underpayment of tax by reporting the additional amount due on an "adjusted return" for the return period in which the error was ascertained. The "X" form is an adjusted return. An error is ascertained when the employer has sufficient knowledge of the error to be able to correct it.
An adjusted return (e.g., Form 941-X) correcting an underpayment must be filed by the due date of the return for the return period in which the error is ascertained and the amount of the underpayment must be paid by the time the adjusted return is filed, or interest will begin to accrue from that date. For underpayments of Additional Medicare Tax and ITW where the incorrect amount was withheld, the regulations under IRC 6205 provide that an adjustment may be made only for errors ascertained during the calendar year in which the wages were paid unless IRC 3509 applies or the adjustment is being made in the context of an examination.
Interest-free adjustments may not be made if:
The amounts under-reported relate to an issue that was raised in a prior period examination,
The taxpayer knowingly under-reports employment tax liability,
The taxpayer receives notice and demand for payment after assessment and prior to filing the adjusted return,
The taxpayer receives Notice of Determination of Worker Classification prior to filing the adjusted return (see Treas. Reg. 31.6205-1(a)(2) and (a)(6)), or
The adjusted return is not timely filed; i.e., by the due date of the return for the return period in which the error was ascertained.
The regulations permit an interest-free adjustment to be made in situations where a return was not filed because:
The employer failed to treat any individuals as employees, or
The wrong return was filed (e.g., employer was required to file Form CT-1 reporting RRTA tax, but erroneously filed Form 941 reporting FICA instead).
The employer will make the interest-free adjustment by filing an original return and an attached adjusted return reporting the correct amount of tax, in accordance with the instructions for the adjusted return.
For Form 945, interest-free adjustments procedures may only apply if a return has been previously filed and an error is subsequently discovered. Interest-free does not apply to non-filed Forms 945. In a Form 945 scenario, IRC 6205 treatment would only apply if a Form 945 had been filed and an error subsequently discovered.
An employer making an interest-free adjustment of an underpayment must pay the amount of the underpayment by the time it files the adjusted return, e.g., Form 941-X. Such timely payment will satisfy the employer’s deposit obligations with respect to the adjustment. Conversely, if the amount of the adjustment is not paid by the time the adjusted return is filed, a penalty under IRC 6656 for failure to deposit may apply because the deposit obligation for such taxes is not deemed to be satisfied and the employer may not have otherwise satisfied the deposit obligations. Interest will also begin to accrue from the time the adjusted return is filed.
The regulations under IRC 6413 provide that interest-free adjustments to overpayments may be made at any time after the error is ascertained within the applicable period of limitations for credit or refund. An error is ascertained when the employer has sufficient information to be able to correct it.
An employer is required to repay or reimburse the employee in the amount of the over-collection prior to filing the adjusted return. For adjustments of FICA tax overcollected in prior years, the employer must also secure the employee’s written statement confirming that the employee has not made any previous claims (or the claims were rejected) and will not make any future claims for refund or credit of the amount of the overcollected FICA tax. The employer is required to certify on its adjusted return that it has repaid or reimbursed the employee in the amount of the overcollection. For adjustments of FICA tax overcollected in prior years, the employer must also certify that it has secured the required written statement from the employee. However, these requirements do not apply to the extent that the taxes were not withheld from the employee. If, after having made reasonable efforts, the employer cannot locate the employee or, for prior year FICA tax, the employee will not furnish the required written statement, the employer may make an adjustment of the overpaid employer share of FICA tax. Generally, interest-free adjustments to Additional Medicare Tax and income tax withholding may be made only for overpayment errors discovered and repaid during the calendar year in which the wages were paid.
The regulations under IRC 6402 and IRC 6414 provide that an employer may file a claim for refund at any time after the error is ascertained within the applicable period of limitations. Per the regulations under IRC 6402, refunds of Additional Medicare Tax shall be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld by the employer. Similarly, per IRC 6414, refunds of ITW will be made to the employer only to the extent that the amount of such overpayment was not deducted and withheld by the employer. As part of the claim for refund process, the employer must repay or reimburse the employee in the amount of the over-collection or secure the employee’s consent to the filing of the claim for refund. The employer must certify that it has repaid or reimbursed its employee or has secured the employee’s consent. For refund claims for FICA tax overcollected in prior years, the employer must also certify that it has obtained the employee’s written statement confirming that the employee has not made any previous claims (or the claims were rejected) and will not make any future claims for refund or credit of the amount of the overcollection. However, these requirements do not apply to the extent that the taxes were not withheld from the employee. If, after having made reasonable efforts, the employer cannot locate the employee, or the employee will not provide consent, or the employee will not provide the required written statement, the employer may claim a refund of the overpaid employer share of FICA tax
An error is ascertained when the employer has sufficient knowledge of the error to be able to correct it. Such knowledge may be obtained in the course of an examination. In an agreed case, this is when the employer signs one of the Form 2504 series agreements. For an unagreed case, it could be at the conclusion of an Appeals conference or when the taxpayer declines to exercise its right to go to Appeals. For periods beginning on or after January 1, 2009, 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, constitute adjusted returns. See Rev. Rul. 2009-39, 2009-52, I.R.B 951. This also includes Form 2504-AD, Offer of Agreement to Assessment and Collection of Additional Tax and Offer of Acceptance of Overassessment (Excise or Employment Tax), and Form 2504-S, Agreement to Assessment and Collection of Additional Tax and Acceptance of Overassessment (including section 530 statement).
If one of the exceptions listed in IRM 18.104.22.168(8) is not applicable, the signing of one of the Forms 2504 at the close of an examination or Appeals conference (and prior to the issuance of a notice and demand for payment) fulfills the requirements for correcting a return for purposes of the interest-free adjustment provisions of IRC 6205 and the regulations. For errors discovered on or after January 1, 2009, full payment of the tax must be made at the time of signing the agreement in order to receive complete interest-free treatment and avoid failure to deposit (FTD) penalties. If the tax adjustment is not paid when the agreement is signed, interest and penalties accrue. It is important that the examiner clearly explain the various penalty and interest-free rules when soliciting an agreement in an agreed case or closing an unagreed case. The interpretation of this paragraph is illustrated by the following examples:
Example 1: An employer files and pays the tax for a timely filed employment tax return that is incorrect. During an audit, an error in the FICA tax liability is discovered by the examiner and an adjustment is proposed to the employer on September 15th. The employer signs Form 2504 and pays the additional tax on November 10th. As the amount was paid at the time the agreement was secured, the taxpayer is entitled to an interest-free adjustment.
Example 2: Same situation as Example 1 above, except that the taxpayer signs the agreement on November 10th but does not pay the tax at that time. The interest computation date entered on line 11 of Form 5344 or Form 5599 is November 10th, and interest begins to accrue starting November 11th.
Under the regulations, an adjusted return must be filed to get an interest-free adjustment. If the taxpayer elects to pay the full adjustment amount (taxes and penalties) at any time prior to the closing of the examination but does not agree by signing Form 2504, the case will be processed as an unagreed case without an interest-free adjustment. If, after the case is closed unagreed, the taxpayer signs Form 2504 or files Form 941-X prior to the due date of the return for the period in which the payment was made, the taxpayer will be entitled to an interest-free adjustment.
An interest-free adjustment cannot be made:
After receipt of a statement of notice and demand for payment based on an assessment, or
After receipt of a Notice of Determination of Worker Classification.
In all employment tax cases which involve a restriction on the payment of interest, Form 3198, Special Handling Notice for Examination Case Processing, or Form 3198-A, TE/GE Special Handling Notice, must be attached to the outside of the case file to notify the Support and Processing function not to assess interest. Note the type of tax, the tax periods, and the section of the Code or Regulations which authorizes the restriction of interest. Check the appropriate block on Form 3198 or Form 3198-A and enter the interest computation date, i.e., the date the Form 2504 or Form 2504-WC was signed. Also, enter this date in Item 11 of Form 5344 or Form 5599 for TE/GE. Enter transaction code "308" in Item 12 of Form 5344 or Form 5599 to identify the tax as interest-free. There are no interest-free adjustments for underpaid FUTA taxes. The Code provisions restricting and prohibiting assessment or payment of interest are listed in Exhibit 4.23.8-1. Additional instructions on the preparation of Form 5344 for employment tax closures are provided in IRM 22.214.171.124.2, Form 5344/Form 5599 - Additional Entries for Completion of Employment Tax Closures, and in IRM 4.4.12, AIMS/Processing Handbook - Examined Closings, Surveyed Claims, and Partial Assessments.
If the taxpayer agrees with the examination findings for the years under examination and the current year returns reflect similar errors as adjusted in the examination, advise the taxpayer they must correct the errors using Forms 941-X (or other corresponding "X" form), for all quarters to be adjusted before the end of the current filing period to receive an interest-free adjustment for any underpayments.
If the case is unagreed and a Notice and Demand for payment is issued, interest generally begins to accrue starting on the due date of the return. See IRC 6601.
When income tax withholding is involved and IRC 3509 is not applicable, the withholding is either computed under ordinary income tax withholding requirements or using the supplemental withholding rate in Treas. Reg. 31.3402(g)-1.
Payment Date Supplemental Tax Rate 1/1/02 to 5/27/03 27% 5/28/03 to 12/31/15 25%
For supplemental wage payments in excess of $1,000,000, income tax will be withheld at the maximum rate in effect for the given year. For the years 2005 through 2013 that rate is 35%. Starting January 1, 2014, the rate is increased to 39.6%. Withholding is made at the highest rate without regard to the employee’s Form W-4. In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control. See Treas. Reg. 31.3402(g)-1.
Employers' requests under IRC 3402(d) for relief from the payment of income tax withholding are generally handled at a Campus; "relief from payment" meaning that the employer has not paid the tax yet. A Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, will not be solicited. Form 4670 is used to request relief from the employee income tax withholding obligation with the Form 4669 attachments.
FICA and FUTA taxes are not abatable under IRC 3402(d). In addition, penalties or interest adjustments are not abated by these procedures. A Partial Assessment process is used to ensure the correct assessments are made. See IRM 126.96.36.199.3, Procedures for Granting Relief Under IRC 3402(d) and/or IRC 3102(f)(3) by Examiners, below.
IRC 3402(d) is not available for employers who deducted and withheld income taxes but failed to report the withheld income taxes to the Service.
The actual amount of tax credit available for abatement is included on line 12 of Form 4668, Employment Tax Examination Changes Report. See IRM 188.8.131.52.3, Examination Report Forms for IRC 3402(d) and IRC 3102(f)(3) Abatements.
If an employer deducts less than the correct amount of Additional Medicare Tax, it is nevertheless liable for the correct amount of tax that it was required to withhold, unless and until the employee pays the tax. Under IRC 3102(f)(3), if an employee subsequently pays the tax that the employer failed to deduct, the tax will not be collected from the employer.
Employers' requests under IRC 3102(f)(3) for relief from the payment of Additional Medicare Tax withholding are generally handled at a Campus; "relief from payment" meaning that the employer has not paid the tax yet. A Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, will not be solicited. An employer is not relieved of its liability for payment of any Additional Medicare Tax required to be withheld unless it can show that the tax has been paid by the employee. Form 4670 is used to request relief from the employee Additional Medicare Tax withholding obligation with the Form 4669 attachments. These are the same forms used for requesting federal income tax withholding relief.
Penalties or interest adjustments are not abated by these procedures. A partial assessment process is used to ensure the correct assessments are made. See IRM 184.108.40.206.3, Procedures for Granting Relief Under IRC 3402(d) and/or IRC 3102(f)(3) by Examiners, below.
The actual amount of tax credit available for abatement is included on Form 4668, Employment Tax Examination Changes Report.
Form 4669, Statement of Payments Received, is used by the taxpayer to secure statements from payees that the income tax and/or Additional Medicare Tax on the payments in question has been satisfied. Form 4670, Request for Relief of Payment of Certain Withholding Taxes, is used to summarize and transmit the Forms 4669 to the Campus.
In examinations where the taxpayer has not paid the tax and will request an abatement after completion of the examination, (see IRM 220.127.116.11 above) an extra copy of Form 4668, Employment Tax Examination Changes Report, or Form 4668-B, Report of Examination of Withheld Federal Income Tax for Withholding Reported on Forms 1099 and W-2G, should be provided to the taxpayer. Instruct the taxpayer to mail the copy of the report form along with Forms 4669/4670 to the appropriate Campus. It is not necessary to submit an "X" form, e.g. Form 941-X or Form 945-X, (however, the taxpayer may find use of the form helpful for calculation).
If the taxpayer haspaid the additional employment tax examination assessment after the examination and later wants a refund (for instance, additional payees have been contacted and new Forms 4669 have been secured), the claim would be filed using the appropriate "X" form (e.g., Form 941-X or Form 945-X,) with the attached examination report copy of Forms 4668/4668-B.
Examiners are authorized to accept and consider any original Forms 4669 submitted to the examiner before the examination is closed. A separate form must be obtained by the taxpayer from each payee for each year. These forms must be completed correctly by the payee and are attached to the Form 4670 prepared by the taxpayer. These completed forms must have every appropriate line item completed by the payee and accompanied by Form 4670 prepared by the payor. If any information is omitted, Form 4669 must be returned to the business owner for correction. The Form 4669 must be signed by the payee under penalties of perjury.
The original signed Form 4669 is considered "prima facie" evidence of filing the return and the payment of tax. Any form may be rejected by the examiner on the basis of incomplete or inaccurate information on the face of the document. Any questionable Form 4669 (e.g., possible unreported income, false information, forged signatures) should be referred to Planning and Special Programs (PSP) for appropriate follow-up action.
In addition to the questionable Forms 4669 submitted for immediate review, any Form 4669 may subsequently be reviewed by Campus after completion of the examination to determine if the income was properly reported by the payee. Where a payee is found either to have not filed income tax returns or not included the income in question, appropriate action will be considered. Payees found to have perjured themselves by providing false information, or Form 4669 found to have forged signatures of the payee, may also be referred to the appropriate function for enforcement action.
The examiner should provide the taxpayer with Forms 4669 and a Form 4670 when the issue is identified in the examination and inform the taxpayer as early as possible in the examination to begin soliciting these forms from the payees. The examiner should allow a reasonable amount of time for the forms to be returned. Subsequent submissions of Form 4669 by the taxpayer after the case is closed from the group will be processed under existing guidelines by the Campus. See IRM 18.104.22.168.2.
The amount of each payee's abatement will be the lesser of:
The amount shown on the Form 4669 by the payee as included on the income tax return, or
The amount paid to the payee by the taxpayer.
At the close of the examination, the examiner should advise the taxpayer that although the income tax withholding and/or Additional Medicare Tax may be abated under IRC 3402(d) and IRC 3102(f)(3), the taxpayer remains liable for any penalties or interest attributable to the original assessment.
If penalties are assessed, or interest-free provisions are not granted, the Modified Partial Assessment (Two-Step) report-writing procedures at IRM 22.214.171.124.2, Examination Procedures for IRC 3402(d) and IRC 3102(f)(3) Relief, must be followed.
If the examination does not propose penalties and the interest-free provisions of IRC 6205 are to be allowed, the Two-Step process is not to be used. The examiner will compute the tax due on Form 4668 or Form 4668-B based on the net payment adjustment using the accepted amounts from the secured Forms 4669.
In order to avoid duplicate processing of Forms 4669, clearly indicate on each form in bold print "DO NOT PROCESS — ADJUSTMENT CONSIDERED BY EXAMINER ON________(mm/dd/yy)" .
Prepare a list of all payees and amounts where adjustment may be applicable and prominently identify those payees where adjustment was granted. This action precludes duplicate abatements if additional Forms 4669 are submitted to Appeals or to the Campus at a later date. This spreadsheet should identify the payee, the amount paid to each payee, the amount of payment eligible for IRC 3402(d) and IRC 3102(f)(3) consideration, and the Forms 4669 accepted in the examination. In addition, if computed using a quarterly report, the IRC 3402(d) and IRC 3102(f)(3) credits allowed should be identified by quarter on the spreadsheet, and the total should match the IRC 3402(d) and IRC 3102(f)(3) credit amount listed on the Form 2504/Form 2504-S. The list should remain with the case file as a summary sheet of the attached Forms 4669. Attach Form 3198, Special Handling Notice, (Form 3198-A for TEGE) to the front of the case file, and mark in bold print "FORM 4669 – ADJUSTMENTS ALLOWED BY EXAMINATION."
All completed original Forms 4669, Statement of Payments Received, secured by SB/SE Employment Tax Examiners will be sent to the Employment Tax – Workload Selection and Delivery (ET WSD) for compliance review. Copies of the originals should be kept with the case file. To complete the review of Forms 4669, send the forms to:
Internal Revenue Service
Employment Tax Classification/PSP
201 W. River Center Blvd.
Covington, KY 41011
For instructions on report writing, processing, and Form 5344 completion for IRC 3402(d) examination abatements, see:
IRM 126.96.36.199.2, Examination Procedures for IRC 3402(d) and IRC 3102(f)(3) Relief, and
IRM 188.8.131.52.3, Examination Report Forms for IRC 3402(d) and IRC 3102(f)(3) Abatements.
When an employer erroneously treats an employee as a non-employee and does not withhold federal employment taxes, the employer is liable under IRC 3102 and IRC 3403 for the employee's share of social security and Medicare tax and the employee's income tax withholding.
IRC 3509 provides reduced rates for income tax withholding and the employee's share of social security and Medicare where an employer failed to withhold employment taxes by reason of treating such employee(s) as a non-employee(s). A "non-employee" includes, but is not limited to, an independent contractor. The provision does not relieve the employer of any portion of the employer's share of social security and Medicare and FUTA taxes.
If IRC 3509 applies, the offset provisions of IRC 3402(d) and IRC 6521 do not apply. Application of IRC 3509 is mandatory if the criteria are satisfied. The examiner and the taxpayer do not have a choice regarding its application. See IRC 3509(c) and (d) for exclusion criteria.
If Forms 1099-MISC were timely filed with respect to workers reclassified as employees, IRC 3509(a) applies:
Income tax withholding is computed at the rate of 1.5% with no abatement available under IRC 3402(d).
The employer's liability for social security and Medicare is computed at the rate of 20% of the employee's share, plus the entire employer's share. Relief under IRC 6521 does not apply.
IRC 3509(a) Example: Percentage ER share of social security and Medicare 7.65% 20% of EE's share of social security and Medicare (.20 * 7.65%) 1.53% Total social security and Medicare 9.18% ITW = 1.50% of wages 1.50% Total IRC 3509(a) Percentage 10.68%
For tax years starting in 2013, an employer is responsible for withholding 0.9% Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. There is no employer share of Additional Medicare Tax. Under IRC 3509(a), 20% of the Additional Medicare Tax rate of 0.9% equals 0.18% of wages subject to Additional Medicare Tax (that is, wages that exceed $200,000).
Example using lower Employee social security and Medicare rates for 2011 or 2012 tax year:
IRC 3509(a) Example for 2011 or 2012 Tax Year: Percentage ER share of social security and Medicare 7.65% 20% of EE's share of social security and Medicare (.20 * 4.2% plus .20 * 1.45%) 1.13% Total social security and Medicare 8.78% ITW = 1.50% of wages 1.50% Total IRC 3509(a) Percentage 10.28%
If required Forms 1099-MISC were not filed – IRC 3509(b) applies:
The income tax withholding rate becomes 3% with no abatement available under IRC 3402(d).
The social security and Medicare tax liability is the employer's share plus 40% of the employee's share. Relief under IRC 6521 does not apply.
If the employer’s failure to file Form 1099-MISC was due to reasonable cause and not willful neglect, the higher rates of IRC 3509(b) do not apply and the lower rates of 3509(a) are applied. See IRC 3509(b)(1). This application may include the failure to file Forms 1099-MISC for a corporate officer or in the case of employees being treated as partners.
IRC 3509(b) Example: Percentage ER share of social security and Medicare 7.65% 40% of EE's share of social security and Medicare (.40 * 7.65%) 3.06% Total social security and Medicare 10.71% ITW = 3.0% of wages 3.00% Total IRC 3509(b) Percentage 13.71%
For tax years starting in 2013, an employer is responsible for withholding 0.9% Additional Medicare Tax from wages or compensation it pays to an employee in excess of $200,000 in a calendar year. There is no employer share of Additional Medicare Tax. Under IRC 3509(b), 40% of the Additional Medicare Tax rate of 0.9% equals 0.36% of wages subject to Additional Medicare Tax (that is, wages that exceed $200,000).
Example using lower Employee social security and Medicare rates for 2011 or 2012 tax year:
IRC 3509(b) Example for 2011 or 2012 Tax Year: Percentage ER share of social security and Medicare 7.65% 40% of EE's share of social security and Medicare (.40 * 4.2% plus .40 * 1.45%) 2.26% Total social security and Medicare 9.91% ITW = 3.0% of wages 3.00% Total IRC 3509(b) Percentage 12.91%
For substitute for return (SFR) cases, the failure to file penalty (FTF) under IRC 6651(a)(1) and the failure to pay penalty (FTP) under IRC 6651(a)(2) are applicable if there is no reasonable cause for the employer’s failure to treat the workers as employees and to file any employment tax returns. See IRM 20.1.2, Failure to File/Failure to Pay Penalties, of the Penalty Handbook for further instructions. See also IRM 184.108.40.206.3.2, Amount of Underpayment and Penalties for Reclassified Workers - Table 2.
The failure to deposit (FTD) penalty (IRC 6656) will apply to delinquent employment taxes unless there is reasonable cause. See IRM 20.1.4, Failure to Deposit Penalty, for further instructions. However, the deposit penalty does not apply to FICA and income taxes which should have been, but were not, withheld from compensation paid to employees.
Treas. Reg. 31.6302(c)–1 states the taxes required to be deposited are those which were withheld, together with any employer tax imposed by FICA. Typically in a reclassification situation, no taxes were actually withheld from the workers, so the deposit penalty is computed only on the employer's share of FICA. See Rev. Rul. 75–191,1975–1 C.B. 376.
If a taxpayer has not filed a return, the accuracy-related penalty does not apply as a substitute for return is not considered a return for this purpose.
If reasonable cause relief is available, a determination as to whether or not reasonable cause exists must be based on a careful consideration of the facts and circumstances of each case prior to the assertion of a penalty. Employment tax examiners should consider any reason a taxpayer provides in conjunction with the guidelines, principles, and evaluating factors. See IRM 220.127.116.11, Criteria for Relief From Penalties, as well as the applicable IRC section and Treasury Regulations relating to the specific penalty.
Consideration of the provisions of IRC 3509 is mandatory for all determinations involving worker reclassification assessments. This includes cases involving the reclassification of corporate officers.
A taxpayer cannot waive IRC 3509 when its conditions are met. However, the lower rates of IRC 3509(a) and IRC 3509(b) do not apply:
In cases of the employer's intentional disregard of the requirement to deduct and withhold employment taxes (IRC 3509(c)),
In cases where the employer deducts income tax from the wages of an employee but does not deduct FICA tax (IRC 3509(d)(2)), or
In cases of certain statutory employees for FICA tax purposes (IRC 3509(d)(3)).
In agreed and unagreed cases, the provisions of IRC 3509 will be applied to all quarterly returns required to be filed for any completed calendar year under examination. If different rates under IRC section 3509 are applied to the same employer, the case file/workpapers should be documented to explain the reasoning for using the different rates. If the employer's failure to file Form 1099-MISC was due to reasonable cause and not willful neglect, apply the rates of IRC 3509(a) rather than the higher rates of 3509(b).
If all assessments in an examination are made using IRC 3509 rates, in addition to the required entries for Item 15 of Form 5344, Examination Closing Record, (or Form 5599, TE/GE Examination Closing Record), also enter reference code 079 with an adjustment amount of "0" . Inputting reference code 079 with an amount of zero causes the literal "3509" to print on the transcript account. This notifies Collection that the Trust Fund Recovery Penalty is not applicable, as the assessment was made using IRC 3509 rates and there are no employee withholding taxes subject to penalty. See IRM 4.4.12, AIMS/Processing Handbook - Examined Closings, Surveyed Claims, and Partial Assessments, and various updated job aids for instructions on the completion of Form 5344, Examination Closing Record.
The employee's liability for FICA tax under IRC 3101 is not affected by IRC 3509. The employer is not entitled to recover from the employee any part of the tax assessed under this section. Treas. Reg. 31.3102–1(d) provides that an employee is responsible for the employee's share of FICA until it is collected from him or her by the employer. Since IRC 3509 bars the employer from collecting the tax from the employee, the employee remains liable for the FICA tax on their individual Form 1040 return. See Rev. Rul. 86-111, 1986-2 C.B. 176.
The employee may file a claim for refund of any self-employment tax which is attributable to the reclassification. Notice 989, Commonly Asked Questions When IRS Determines Your Work Status is "Employee" , provides instructions to the reclassified worker on how to file a claim for refund.
The amount of SECA tax refund is offset by the amount of the employee's share of the tax imposed on the employee under IRC 3101 as a result of the application of Treas. Reg.31.3102–1(d). The reclassified worker can use Form 8919, Uncollected Social Security and Medicare Tax on Wages, to compute the amount of FICA taxes due. It should be used as an attachment to Form 1040 or 1040X. Ultimate liability is on the employee until collected from either the employee or the employer. See Rev. Rul. 86–111. For example, if a worker paid self-employment tax on a net profit of $35,100 ($45,000 less $9,900 related business expenses) and during a subsequent examination of the payor, the IRS reclassified those earnings from self-employment income to gross wages of $45,000, the worker would be entitled to a SECA tax refund calculated as follows for the year 2014:
$35,100 × 92.35% (Net earnings from SE) $ 32,415.00 $32,415 × 15.3% (SECA tax) $ 4,959.50 $45,000 × 7.65% (Employee FICA tax) $ 3,442.50 Allowable SECA tax refund $ 1,517.00
Expenses that the reclassified worker claimed on Schedule C, Profit or Loss From Business (Sole Proprietorship), would be eliminated but may be deductible, if applicable, on Form 2106, Employee Business Expenses, and/or Schedule A, Itemized Deductions, subject to the 2% adjusted gross income limit. The adjustments on Page 1 of the Form 1040 for one-half of the self-employment tax (line 27) and self-employed health insurance (line 29) would be eliminated.
Since the related business expenses are subject to the 2% adjusted gross income limit, this change will increase the taxable income and possibly the federal income tax. Also certain expenditures, such as medical insurance or a Keogh-type retirement plan, cannot be claimed as miscellaneous deductions on Schedule A.
Any additional federal income tax will offset the SECA tax refund.
If the period of limitations for the SECA tax or FICA tax is expired, IRC 6521 mitigates this by allowing the refund/payment.
For purposes of FICA, all wages (cash or non-cash) derived from employment, unless specifically excluded by statute, are subject to tax. It is immaterial what the wages are called as long as the payment is for services performed. FICA tax includes both social security and Medicare tax. Wages subject to social security taxes do not include amounts paid to an employee that are in excess of the taxable wage base. As of 1994, there is a wage base for the social security portion but not for the Medicare portion. See Exhibit 4.23.8-2, Employment Tax Rate Chart under IRC 3509.
In addition to withholding Medicare tax at 1.45%, an employer must withhold a 0.9% Additional Medicare Tax from wages it pays to an employee in excess of $200,000 in a calendar year. The employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. Additional Medicare Tax is only imposed on the employee. There is no employer share of Additional Medicare Tax. All wages that are subject to Medicare tax are subject to Additional Medicare Tax withholding if paid in excess of the $200,000 withholding threshold.
Wages are considered to be paid when they are made available to the employee; that is, when they are actually or constructively received by the employee. Wages are constructively received when credited to the account of the employee or when set apart to permit the employee at his or her discretion to draw upon the account or take possession of the amount without substantial limitations or restrictions.
An employer may not, in determining the social security and Additional Medicare Tax wage limits, take into consideration wages paid to an employee by another employer (except a predecessor employer) in a calendar year. Rev. Rul. 55-584,1955-2 C.B. 394, and Rev. Rul. 57-32, 1957-1 CB 301. The employee can recover any excess employee social security tax withheld and/or and Additional Medicare Tax on their individual income tax return. See IRM 18.104.22.168, Related Corporations Providing Concurrent Employment—Common Paymaster, and IRM 22.214.171.124.1, Wages Paid by Predecessor Attributed to Successor, for additional information.
The IRS is responsible for enforcement of the filing of tax returns as well as collection of taxes under the Railroad Retirement Tax Act (RRTA). See Chapter 22 of the IRC for these provisions.
Instead of paying social security and Medicare taxes, railroad employers and employees pay RRTA taxes. These taxes are collected and deposited throughout the year but are not reported quarterly on Form 941 - they are reported annually on Form CT-1, Employer's Annual Railroad Retirement Tax Return. Railroad employee representatives file Form CT-2, Employee Representative's Quarterly Railroad Tax Return, on compensation received for services performed as an employee representative. Federal income tax withholding (ITW) is not reported on the Form CT-1 or Form CT-2. Railroads are required to report ITW on the quarterly Form 941.
The IRS is responsible for assessing and collecting FICA, FUTA, and RRTA taxes, however, it is not responsible for Railroad Unemployment Insurance Act (RUIA) taxes. A railroad employer is subject only to RUIA and not FUTA for railroad employees. If an employer audit results in a conversion from FICA tax to RRTA tax and FUTA tax returns have been filed up to that point, the examiner may only correct the FUTA liabilities. It is the railroad employer's responsibility to reconcile both unemployment accounts and correct the RUIA.
There are times when the employer status as a railroad may be unclear. The employer, employees, or others may ask either the Railroad Retirement Board (RRB) or the IRS to determine its status as a railroad. The RRB issues a Board Coverage Determination (BCD) to outline this opinion. The IRS may also render an opinion on the status of an employer as a railroad. The Office of Chief Counsel may rule on the employer status as a railroad in a Private Letter Ruling (PLR). In addition, the Office of Chief Counsel (TEGE) had previously issued informal opinions to the appropriate campus function indicating if it concurred with RRB BCD opinions, so that the appropriate filing requirements could be entered. However, beginning in 2009, this task was transferred to the Campus function to make the independent determination regarding the taxpayer's filing requirements based on the information provided by the RRB. In most cases, the Office of Associate Chief Counsel had concurred with RRB's determination regarding railroad status based on the information provided. The Campus function will consult with the Office of Associate Chief Counsel (TEGE) in any unclear cases.
IRC 6103(l)(1)(C) of the Internal Revenue Code authorizes disclosure of returns and return information concerning RRTA to the RRB for administering the RRA. If the adjustment is for RRTA, Campus Compliance Services, Centralized Case Processing (CCP), will forward copies of all RRTA tax audit results, assessments, or abatements to the RRB CFO. Only RRTA information is permitted to be disclosed to the RRB. Contact your local IRS disclosure office if you need to disclose additional information.
If a taxpayer erroneously pays RRTA tax when it should have paid FICA tax, or vice versa, the erroneous payment of the one tax is credited against the other. See IRC 3503, Erroneous Payments.
Treas. Reg. 31.3503-1 and the regulations under IRC 6205, IRC 6402, and IRC 6413 provide the proper procedures for correcting the errors. Note that Treas. Reg. 31.3503-1 has not been updated to refer to Form 941-X instead of Form 843. See Treas. Reg. 31.3503-1.
If an employer erroneously paid FICA taxes with respect to the remuneration of employees for services which are held to be covered under the Railroad Retirement Tax Act, RRTA returns must be filed for each return period involved. The taxable compensation paid to all employees involved and the employer tax and employee tax applicable must be reported on such returns. The correct original Form CT-1 and/or Form CT-2, adjusted Form CT-1X, amended Form CT-2, or an employment tax RAR must be prepared. In addition, credit must be claimed for the amount of FICA tax (both the employer and the employee portions) erroneously paid for corresponding return periods, and all of the wages erroneously reported for the employees on FICA returns must be corrected on an accompanying Form 941-X for each period. See Treas. Reg. 31.6205-1(b)(2)(ii) and the Instructions for Form 941-X. In addition, the employer will be required to file Form W–2c, Corrected Wage and Tax Statement, in order for the Social Security Administration to correct the employee's earnings record.
Treas. Reg. 31.3503–1 requires the employer to file a claim for the FICA tax in accordance with Treas. Reg. 31.6402(a)-2. Though the regulation states the claim should be filed on Form 843, Form 941-X should be used instead. If the employer fails to file a claim or files a protective claim for FICA tax, then the examiner should recommend the assessment of the full amount of RRTA tax to avoid statute problems.
Only the net RRTA tax liability will be assessed after the credit for FICA tax has been applied. The delinquency penalty provisions do not apply as long as the taxpayer mistakenly and in good faith paid FICA taxes on the remuneration involved. For the same reason, and in order to avoid double taxation, it has been the practice of the Service to grant relief in such cases by permitting the crediting of one tax against another when the period of limitations on refunds or credits has expired with respect to any erroneously or mistakenly paid taxes. The rates under RRTA are higher than under FICA; therefore, no net refund is generally involved in this transaction.
If Form 940 returns have been filed for years that are the subject of conversion from FICA tax to RRTA tax, see IRM 126.96.36.199.3 below.
If an employer erroneously paid RRTA taxes with respect to the compensation of employees for services which are held to be covered under the FICA, FICA tax returns must be filed for each return period involved. The wages paid to all the employees involved and the applicable tax must be reported on the appropriate return, either an original Form 941 and/or Form 941-X. In addition, credit must be claimed for RRTA employer and employee taxes erroneously paid for the corresponding return periods using Form CT-1X. See Treas. Reg. 31.6205-1(b)(2)(iii) and the instructions for Form CT-1X. To the extent the credit for RRTA tax exceeds the liability for FICA tax, the excess will be refunded to the extent that refund is not barred by the statutory period of limitations on refunding of tax. See IRC 3503 and Treas. Reg. 31.3503-1 and 31.6402(a)-2. To the extent the underpayment of FICA tax exceeds the credit for RRTA tax, the net FICA tax will be assessed.
Where an employer is determined to be a railroad but has erroneously paid FICA tax on Form 941, all forms are forwarded to IRS as a package with the following explanations:
RRB has determined that Employer is a railroad - effective date: "____________."
Employer previously filed Form 941 reporting all wages under the FICA system.
Employer requests to file Form CT-1 to comply with the RRB's decision.
Employer requests that the amounts of FICA previously paid be CREDITED against the RRTA due.
Employer attaches the following forms pursuant to this request:
Corrected Forms W-2 for each year for each employee showing zero FICA wages and taxes. Employer requests that these be forwarded to the SSA so each employee's record can be corrected.
Corrections to Form 941 prepared on Forms 941-X for each quarter showing the elimination of FICA wages.
Form 941-X for each quarter showing total amount of FICA overpayment. Employer requests that these FICA amounts erroneously paid NOT BE REFUNDED, but be credited on Form CT-1.
Form CT-1 for each year showing total RRTA tax amounts on Line 11, "Total Tax Based on Compensation," offset by total FICA already paid on Line 12, "Adjustments." (Line references are to the 2008 Form CT-1).
If applicable, a statement such as: "Employer requests that late filing and late payment penalties be waived as, prior to the RRB decision dated "______________," employer did not realize it was subject to RRTA taxes."
The above package of forms should be aggregated together by year. A cover sheet summarizing each year's results should be attached to each year's package of returns.
The entire package including all years should be submitted under a cover letter briefly explaining the above to the IRS Cincinnati Campus in Covington, Kentucky:
Internal Revenue Service
Attn. Railroad Processing
P.O. Box 12267
Covington, KY 41012
If the examination of multiple periods results in an over-assessment for any period, the examiner will follow these procedures:
Verify that the error causing the over-assessment was not corrected in a subsequent period.
If the error was properly corrected by the employer in another quarter, verify this fact and make comments in the workpapers or the examination report.
If the error was not corrected, inform the taxpayer of the option to make an adjustment or file a claim for refund using Form 941-X.
If the employer elects to file a claim, secure the claim and determine the amount allowable. The secured claim may be on Form 941-X or may be an informal claim. Procedures for the examination of claims should be followed in these cases. See IRM 4.23.13, Employment Tax Refund or Abatement Claims. The amount of claim allowable will be reflected on Form 4668. An explanation of adjustment will be prepared to inform the employer of the amount of his claim allowed. The explanation may be in the other information of Form 4666 or prepared on Form 886–A.
If the employer does not agree with the over-assessment, prepare the report to show that the taxpayer does not wish the adjustment to be made.
If, during any return period, an employer collects from an employee more than the correct amount of Additional Medicare Tax withholding (IRC 3102) and repays the amount of the over-collection to the employee and obtains a written receipt showing the date and the amount of the repayment before the return for such period is filed with the Service and before the end of the calendar year in which the over collection was made, the employer shall not report on any return or pay to the Service the amount of the over-collection.
If, in any return period in a calendar year, an employer collects from any employee more than the correct amount of Additional Medicare Tax withholding tax under IRC 3102 and the employer pays the over-collection to the Service, and if the employer discovers the error within the calendar year in which the wages were paid, the employer may correct the error. The employer must repay or reimburse its employees in the amount of the over-collection prior to the end of the calendar year in which the wages were paid. See Treas. Reg. 31.6413(a)-1(a)(2). The employer may correct the overpayment through an interest-free adjustment by filing an adjusted return (e.g., Form 941-X). See Treas. Reg. 31.6413(a)-2(b )(2). Form W–2 or Form W-2c shall be prepared so as to adequately reflect the adjustments.
Any overpayment of Additional Medicare Tax withholding paid to the United States Treasury during the return periods of one calendar year is not adjustable if the error is discovered in a subsequent year, or if the employer does not repay or reimburse its employees in the amount of the over-collection before the end of the calendar year in which the wages were paid, unless it is attributable to an administrative error. An administrative error is any error that does not change the amount of Additional Medicare Tax that was actually withheld (e.g., a transposition error). In addition, the employer may not claim a refund or credit of the overpayment on a Form 941-X unless the amount of such overpayment was not withheld from an employee's wages.
If an examiner discovers an overpayment in a prior calendar year and no adjustment was made and no claim filed, the examiner will allow the overpayment for refund only to the extent the overpayment was an administrative error and not deducted or withheld from an employee's wages.
If an adjustment was made on a return for a period in one calendar year to correct an overpayment on a return for a period in another calendar year, where the overpayment was not actually withheld the examiner will:
Adjust the return on which the adjustment was made by increasing the Additional Medicare Tax withholding reported by the amount of the adjustment, and
Include the overpayment on the examiner's report for the period in which the overpayment was made.
When there is additional liability for FUTA tax for a calendar year, secure the taxpayer's agreement on the appropriate Form 2504. See IRM 188.8.131.52.10, Form 2504, Form 2504-S, and Form 2504–WC. FUTA, FICA, and ITW taxes may be included on the same Form 2504 agreement, but a separate line should be used for each type of tax. FUTA tax due for one calendar year may not be adjusted in a return filed for another calendar year.
When making any worker classification adjustment, the de minimus exception standards of IRM 184.108.40.206.1do not apply. The reclassification of an independent contractor to an employee would be considered to be a special situation where the assessment would be made regardless of the amount.
The credit under IRC 3302(a) for contributions paid to a state unemployment fund will be allowed if the contributions are timely. If contributions are not timely, only 90% of the credit that would otherwise be allowable for timely contributions is available to the taxpayer. See IRC 3302(a)(3). Therefore, if there are additional FUTA wages and the taxpayer pays the additional tax due to the state on these wages, the taxpayer may receive only 90% of the credit that would have been allowed if the taxes had been paid timely.
The additional credit under IRC 3302(b) is allowable only for the wages for which contributions are required to be paid to the state by the taxpayer, whether or not the taxpayer pays such required contributions. If the examiner discovers additional FUTA wages which are not required to be reported to the state, no additional credit under IRC 3302(b) is available to the taxpayer with respect to such wages. In this instance, assess the full FUTA rate on the additional wages.
If the taxpayer paid state contributions in excess of the maximum credit allowable against the previously reported FUTA wages, i.e. in excess of 5.4%, there may be additional state contributions to credit against the FUTA tax on the additional wages. See the worksheet in the Form 940 Instructions.
When additional FUTA wages are discovered during an examination, the taxpayer should report the additional wages to the state if they are subject to state contributions. Before allowing any credit for additional contributions paid or additional credit under IRC 3302(b), secure from the taxpayer a certification by the state of the amount of additional state wages reported and the amount of tax paid on the additional wages. The taxpayer should be given 30 days to secure the certification from the state.
In some cases, a 30-day period is granted for the purpose of submitting evidence of payment to a state fund, yet the taxpayer may disagree with the finding that a delinquent tax liability exists or with the correctness of the amount of such liability. Issuance of a preliminary letter affording the taxpayer an opportunity to request an Appeals conference should be delayed until the expiration of the 30-day period mentioned or receipt of the evidence of payment into the state fund, whichever is earlier.
Title XII of the Social Security Act provides for advances to states which are in need of supplementary funds for the payment of unemployment compensation benefits. If the advances are not repaid in full within the specified period, employers in affected states will have their credit against the FUTA tax reduced as provided by IRC 3302(c)(2). The amount collected because of the reduced credit is applied against the outstanding balances of the respective state(s).
The Internal Revenue Service certifies actual collection data to the Financial Management Service (FMS) and the Department of Labor (DOL). The FUTA state credit reduction amount is derived from information on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return.
After the close of each taxable year, the IRS receives certifications made by the Secretary of Labor to the Secretary of the Treasury relating to the approval of state unemployment compensation laws and with respect to additional credit allowance, in accordance with IRC 3303(b)(1) and IRC 3304(c). Announcement of such certifications is published annually in the Internal Revenue Bulletin.
For the purpose of the additional credit allowance and in accordance with Treas. Reg. 31.3302(b)–2, the IRS receives, at the close of each taxable year, a letter of certification from each state disclosing the highest rate of contributions applied under the state law in the calendar year. Unless the IRS advises to the contrary, area offices will assume that the highest rate of contributions applied in a calendar year under the law of any state was not lower than 5.4 percent. If, in the case of any state, notification is received that the highest rate applied under the state law was lower than 5.4 percent, the amount of the additional credit computed with respect to such state will be reduced accordingly.
In the case of an insolvent taxpayer or where the estate of any deceased debtor, in the hands of executors or administrators, is insufficient to pay all the debts due from the deceased, the taxpayer's right to pay the state and take credit against the federal tax has been discontinued. Accordingly, once priority attaches under 31 U.S.C. section 3713, payments of the assets in the custody of the fiduciary into a state unemployment fund cannot serve to reduce FUTA tax liability.
If doubt exists in any case regarding the allowance of credit under the FUTA credit provisions, the advice of the TEGE Division Counsel (DC) area counsel attorneys should be requested.
Railroads are not covered under the Federal Unemployment Tax Act (FUTA). Instead they have their own unemployment compensation system referred to as the Railroad Unemployment Insurance Act (RUIA). Although IRS is responsible for FUTA, FICA and RRTA, it is not responsible for RUIA. RUIA filings, taxes, collections, and benefits are controlled solely by the U.S. Railroad Retirement Board (RRB). A railroad employer is always subject to RUIA and never to FUTA for railroad employees.
If an employer erroneously paid FUTA tax with respect to the remuneration of employees for services which are covered under the RUIA, the examiner will notify the employer that they are entitled to a refund of FUTA and recommend the over-assessment of the FUTA tax. As the IRS does not have jurisdiction over RUIA taxes, we cannot transfer FUTA payments to RUIA. The employer needs to work with RRB to pay RUIA separately.
If during an examination it is determined an overpayment of FUTA tax was reported, prepare an examination report showing the over-assessment.
If a refund of FUTA tax is based on credit allowable for contributions paid under the unemployment compensation laws of a state, no interest is allowable on the refund. In those cases, indicate on Form 3198, Special Handling Notice of Examination Case Processing, or Form 9231, Collection – Employment Tax Examination Handling/Routing Instructions, that restricted interest procedures are applicable. (See IRC 6413(d)).
In order to correctly process cases with an adjusted Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, examiners must provide the appropriate Case Processing Support unit with the following information:
Total tax adjustment and the state code being adjusted,
Wage adjustment and the state code being adjusted,
Total corrected Form 940 wages, and
Credit reduction wages, credit reduction amount and the state code(s) for the state(s) subject to credit reduction (if applicable).
When a FUTA examination results in a change of wages (increase or decrease), report the change in Item 15 of Form 5344 (or Form 5599 for TE/GE) by inserting a three character reference code and the rounded dollar amount of the change in wages. (This will equal Line 2 of Form 4667, Examination Changes – Federal Unemployment Tax Examination Closing Record). The reference code will be a "W" followed by the state abbreviation sanctioned by the United States Postal Service, (e.g., "WCA" for California or "WIN" for Indiana). If adjustments are made to more than one state, the wage adjustment amount(s) attributed to each state will be entered.
When a FUTA examination results in a change in tax (increase or decrease), report in Item 15 of Form 5344 (or Form 5599 for TE/GE) by inserting a three character reference code and the rounded dollar amount of the tax change. (This will equal Line 8 of Form 4667). The reference code will be a "T" followed by the state abbreviation as described in (2) above, e.g., "TUT" for Utah. If adjustments are made to more than one state, the tax adjustment amount(s) attributed to each state will be entered.
Use the top two lines for wage and tax increases. Enter the code on the left and the dollar amounts on the right of Item 15. Enter decreases on the bottom two lines in the same manner.
IRC 3402 requires employers to deduct and withhold income tax from payments of wages. When income tax withholding is involved and IRC 3509 is not applicable, use the supplemental wage withholding rates. See IRM 220.127.116.11, IRC 3402(d) - Relief for Employer When Employees Have Paid Income Tax on Wages.
Where the employer can establish the employee's allowable number of exemptions from the Form W–4, Employee’s Withholding Allowance Certificate, on file for the employees during the audit years, the computation can be made based on the laws and regulations in existence during those years.
Treas. Reg. 31.3403-1 states that every employer required to deduct and withhold the tax under IRC 3402 from the wages of an employee is liable for the payment of such tax, whether or not it is collected from the employee by the employer.
Under IRC 3402(d), the employer may request relief from payment of income tax withholding. Form 4669 and Form 4670 are used for this purpose. See IRM 18.104.22.168.3, Procedures for Granting Relief Under IRC 3402(d) and/or IRC 3102(f)(3) by Examiners.
If, during any return period, an employer collects from an employee more than the correct amount of income tax withholding (IRC 3402) and repays the amount of the over-collection to the employee and obtains a written receipt showing the date and the amount of the repayment before the return for such period is filed with the Service and before the end of the calendar year in which the over collection was made, the employer will not report on any return or pay to the Service the amount of the over-collection.
If, in any return period in a calendar year, an employer collects from any employee more than the correct amount of withholding tax under IRC 3402 and the employer pays the over-collection to the Service, and if the employer discovers the error within the calendar year in which the wages were paid, the employer may correct the error. The employer must repay or reimburse its employees in the amount of the over-collection prior to the end of the calendar year in which the wages were paid. See Treas. Reg. 31.6413(a)-1(b)(2). The employer may correct the overpayment through an interest-free adjustment by filing an adjusted return (e.g., Form 941-X). See Treas. Reg. 31.6413(a)-2(c)(2). Form W–2 or Form W-2c will be prepared so as to adequately reflect the adjustments.
Any overpayment of income tax withholding paid to the United States Treasury during the return periods of one calendar year is not adjustable if the error is discovered in a subsequent year, or if the employer does not repay or reimburse its employees in the amount of the over-collection before the end of the calendar year in which the wages were paid, unless it is attributable to an administrative error. An administrative error is any error that does not change the amount of income tax that was actually withheld (e.g., a transposition error). In addition, the employer may not claim a refund or credit of the overpayment on a Form 941-X unless the amount of such overpayment was not withheld from an employee's wages.
If an examiner discovers an overpayment in a prior calendar year and no adjustment was made and no claim filed, the examiner will allow the overpayment for refund only to the extent the overpayment was an administrative error and not deducted or withheld from an employee's wages.
If an adjustment was made on a return for a period in one calendar year to correct an overpayment on a return for a period in another calendar year, where the overpayment was not actually withheld the examiner will:
Adjust the return on which the adjustment was made by increasing the income tax withholding reported by the amount of the adjustment, and
Include the overpayment on the examiner's report for the period in which the overpayment was made.
As with other claims for refund, under Sec. 6511(a), claims for credit or refund of any overpayment of FICA, ITW, FUTA, or RRTA taxes must be filed within three years from the date the return was filed or two years from the time the tax was paid, whichever is later. If no return was filed by the taxpayer, claim for credit or refund must be filed within two years from the time the tax was paid.
If the claim for refund is filed within the three-year period, the amount payable to the taxpayer is limited to the tax paid during the three years immediately preceding the filing of the claim (plus the period of any extension of time for filing the return). If the claim was not filed within the three-year period, the amount of the credit or refund will not exceed the portion of the tax paid during the two years immediately preceding the filing of the claim.
In computing the period of limitations, IRC 6513(c) provides that employment tax returns reporting FICA tax or ITW for any period ending with or within a calendar year filed before April 15th of the succeeding calendar year are deemed filed on April 15th of such succeeding calendar year. Likewise, IRC 6513(c) provides that FICA tax or ITW paid during any period ending with or within a calendar year before April 15th of the succeeding calendar year is deemed paid on April 15th of the succeeding calendar year.
The statutory period of limitations also applies to the allowance of credits taken on FICA and RRTA returns. Credit for overpayment of taxes claimed on a return are considered to be claimed on the date the return is filed with the Service. Under IRC 6513(c), FICA returns are deemed filed on April 15, but this does not apply to RRTA returns.
In certain circumstances, IRC 6521 can mitigate the effects of an expired period of limitations in the case of FICA and SECA taxes. IRC 6521 does not provide a mechanism to assess FICA or SECA taxes but instead provides limited mitigation of the expiration of the assessment statute of limitations for FICA or SECA taxes when a taxpayer's employment status has been corrected and either self-employment income is incorrectly treated as wages and FICA taxes are paid, or wages are incorrectly treated as self-employment income and SECA taxes are paid. IRC 6521 mitigates these types of errors by providing a reduction or offset of the amount erroneously paid by the amount actually due, or of the amount actually due by the amount erroneously paid, despite the expiration of the limitations period as to one of the taxes.
The above adjustments are generally accomplished at the Campus by a review of the Form 4669, Statement of Payments Received, on which the employee attests to the amount of self-employment tax paid. Refer to Rev. Rul. 78–127, 1978–1 C.B. 436, when dealing with mitigation issues under IRC 6251.
Examiners are advised to take a conservative approach and protect the FICA tax statute rather than rely on mitigation rules. (See IRM 22.214.171.124.10.1(4)).
Wage information is reported to the Social Security Administration (SSA) by means of a Form W–2, Wage and Tax Statement, or Form W–2c, Corrected Wage and Tax Statement, filed by the employer. Delinquent Form W–2 or Form W–2c discovered during an examination should be secured by the examiner.
The examiner will select the appropriate mailing address depending on the carrier chosen (U.S. Postal Service or a private delivery service such as FedEx or UPS). Paper forms should be sent to SSA's Wilkes-Barre Data Operations Center (WBDOC) at the addresses listed on Form W-3 or Form W-3c. These addresses should be used for both worker classification and non-classification cases. For submissions, please refer to the Social Security web site, Employer W-2 Filing Instructions & Information, at; http://www.ssa.gov/employer/.
SSA no longer accepts wage reports on magnetic tape, cartridges, or 3 1/2 inch diskettes. If the employer is expected to file 250 or more Forms W-2c's, Corrected Wage and Tax Statement, during a calendar year, they are now required to file them electronically. Go to the SSA website for the current versions of Specifications for Filing Forms W-2 Electronically (EFW2) and Specifications for Filing Forms W-2c Electronically (EFW2C). The SSA web site can be accessed at http://www.ssa.gov.
If the adjustment is for RRTA, Centralized Case Processing (CCP) will forward a copy of Form 4668 to the Railroad Retirement Board (RRB).
Employers will be advised to prepare Form W–2 or Form W–2c, whichever is applicable, to report the amount of wage adjustments for each individual who was affected by the employment tax examination. Since no taxes were actually withheld from the employee's wages as a result of the examination, no withheld taxes should be reported on delinquent Form W–2 or Form W-2c statements in Boxes 2, 4, or 6.
If the names of the workers are unknown, the examiner should not solicit Forms W–2 from the taxpayer. The examiner should advise the taxpayer that they may receive a notice from the SSA in the future due to the tax assessed not matching the Forms W-2 filed and they should respond with a copy of their audit report
Examiners will solicit Form W–2 or Form W-2c, and Form W–3 or Form W-3c, from the employer at the completion of an agreed employment tax examination. The employer should be given a reasonable time, i.e., 30 days, to prepare the wage statements. Penalties for Failure to File and Failure to Furnish must be considered even if the documents are secured. The case workpapers must be noted if reasonable cause exists. See IRM 126.96.36.199.2, Wage and Tax Statements, for penalty information. See (7) if employer is to submit the forms after the examination.
If there are no reasons for a waiver of the penalties, the penalties must be proposed and processed at the same time as the employment tax examination. See IRM 188.8.131.52 for instructions on preparing an Information Return Penalty Case File.
Enter on Form 4668, Employment Tax Examination Changes, the number of employees who should receive wage statements, the date to file and furnish the wage statements, and the address of where to send the wage statements.
Internal Revenue Service
Centralized Case Processing
Mail Stop 8412-G
201 W. Rivercenter Blvd.
Covington, KY 41011
For certain TE/GE functions:
Internal Revenue Service
300 East 8th Street
MS 4097 AUS
Austin, TX 78701
For EO, refer to IRM 184.108.40.206.1(8), EO Delinquent, Amended and Substitute for Return Procedures, Secured Forms W-2 - Employment Tax Examination
For FSLG, refer to IRM 220.127.116.11.3.2, Delinquent Forms W-2/W-2c Secured by Specialist During Examination.
When Forms W-2/W-2c are secured:
Reconcile the FICA wages on Form W–3/W–3c to the FICA wages on Form 4668.
Resolve any discrepancies with the employer.
Annotate, "Wage Statements Secured By Examiner" in the Form 4668 block regarding the filing of Forms W–2/W–2c and in the other instructions section of Form 3198, Form 3198-A, or Form 9231.
Annotate in red "Delinquent Wage Statement Secured by SB/SE (or TE/GE) — Penalty Considered" across the bottom of Form W–3/W-3c. This will alert the Social Security Administration that the area office has taken appropriate action concerning the assertion of penalties under IRC 6721 and IRC 6722.
Include copies of the forms in the workpapers section of the employment tax case file and the penalty case file, if applicable.
Send the original Forms W-2/W-3 and W-2c/W-3c to the Social Security Administration.
If the employer is expected to file 250 or more Forms W-2c's, Corrected Wage and Tax Statement, during a calendar year, they are now required to file them electronically. See IRM 18.104.22.168(2) for additional information.
Conversion of independent contractor to employee:
Annotate "Reclassification — self-employed/employee status" on Form 3198 or Form 3198-A and on top of Form 4668. This will assist Centralized Case Processing in identifying for Social Security Administration any Forms W–2 that are subsequently filed by the employer.
Advise the employer to take prompt action in notifying their employees so that the workers will have the opportunity to file a claim for refund if they did pay self-employment tax on the same wages.
Provide the employer with an example of a letter they would issue which explains to the workers why they are receiving the wage statement and Notice 989. See IRM 22.214.171.124.1, Non-CSP Procedures. See Exhibit 4.23.10-9, Filing Instructions for Reclassified Workers, for an example of a letter that the employer could issue to employees.
In some circumstances, the examiner may permit the employer to delay the submission of the forms. For example, where it is determined that reasonable cause exists, the examiner may allow the employer an extension of time to prepare the Form W–2's or Form W–2c's. However, the employer must file Form W–2c's by the last day of February following the calendar year in which the employer agrees to the employment tax assessment. For example, for an agreed examination completed in September 2013, the Form W–2c's are to be filed by the last day of February, 2014. The employer will be instructed to file Forms W-2 or Forms W-2c with CCP. The SB/SE examiner will include the mailing address above on Form 4668. The employer must furnish the forms to employees by the last day of January of the calendar year following the assessment. The Form 4668 contains language to be used. Other Business Operating Divisions (BODs) should consult their respective procedures.
When Form(s) W-2/W-2c are not obtained from the employer at the conclusion of an agreed case, the examiner will provide instructions to the taxpayer on where and when to send the completed Forms. The examiner will notate in the "Other Instructions" section of Form 3198 or Form 3198-A, "Maintain tickler file – Employer to forward Forms W-2 and /or W-2c to CCP" .
The examiner will prepare a separate folder, clearly labeled “tickler file,” in their closed case files. This folder will include:
Form 4668, with the appropriate mailing address entered at the bottom, for each year examined,
Employment Tax Examination Report (ETER) with a full explanation of the issues,
Copy of the Form 2504 agreement, and
List of employees whose wages are to be reported on the Forms W-2/W-2c.
This file will be maintained by Centralized Case Processing (CCP). If an employer fails to file Form W-2/W-2cs by February 28 of the subsequent year, CCP will send the tickler file flagged as a "Penalty Case Referral" to Employment Tax Centralized Workload Selection and Delivery for review and possible assignment to a field group.
Efforts will be made to secure the Forms W–2/W-2c and Form W-3/W-3c even if penalties are asserted. If the Failure to File Penalty and the Failure to Furnish Penalty have already been assessed and the taxpayer still refuses to file the forms, the Willful Failure to File Penalty under IRC 7203 should be considered. The taxpayer's appeal rights are post-assessment. The penalty referral case will be controlled by the group and must be returned to CCP upon completion.
When the examiner recommends assessment of penalties for failure to file and failure to furnish Form W–2 on an employment tax case involving reclassification of workers to employee status and the case is unagreed, the appropriate Information Return Penalty Package will be prepared. When neither Form 1099-MISC nor Form W–2 were filed, the following special procedures must be followed:
Prepare two forms Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, and two forms Form 3645, Computation of Penalty for Failure to File Information Returns or Furnish Statements. The first set of documents should reflect Form W–2 penalty assessments and the second should reflect Form 1099-MISC penalty assessments (a copy of Form 3645 should not be provided to the taxpayer),
Staple the first set (Form W–2 penalty) to the inside front cover and the second set (Form 1099-MISC penalty) to the inside back cover. On the first set, attach a slip of paper indicating "PRIMARY EXAMINER POSITION" ; on the second set, attach a slip of paper indicating "ALTERNATE EXAMINER POSITION" ;
On Form 4318–ET or penalty lead sheet, prepare two explanations; title the first explanation "PRIMARY EXAMINER POSITION" and the second "ALTERNATE EXAMINER POSITION" ,
Attach Form 3210, Document Transmittal, to the front of Form 4318–ET or the penalty lead sheet,
Enter in the Special Instructions section of Form 3198, Special Handling Notice, or in the "other" section of Form 3198-A, TE/GE Special Handling Notice, "Suspend assessment of information return penalties until the taxpayer's request for appeal period has expired." (If an Appeals conference is not requested, the civil penalty recommendation shown in the penalty package as the "PRIMARY EXAMINER POSITION" (attached to the inside front cover) will be processed and Form 3210 (enclosed in penalty file) returned to the examiner. If an Appeals Conference is requested, the civil penalty package with the examination case file will be closed to Appeals by Technical Services, where a final penalty determination will be made), and
Associate the penalty file with the examination case file.
The examiner should secure any delinquent Forms 1099-MISC that were required to be filed during the audit years.
Prepare Form 1096, Annual Summary and Transmittal of U.S. Information Returns, if it is not furnished with the Forms 1099-MISC. Write "Delinquent Returns - Secured by SB/SE (or LB&I or TE/GE) - Penalty Considered" in red ink in the space at the bottom of the Form 1096. Enter "E" (Examination) in the first box under "Official use only." This will alert the Campus that the area office has taken the appropriate action concerning assertion of penalties under IRC 6721 and IRC 6722.
If there is more than one type of information return, prepare a separate transmittal Form 1096 for each type of information return.
Send Form 1096 and Form 1099-MISC to the appropriate Campus, via Form 3210, and retain a copy in the penalty case file.
Attach copies of the forms, including transmittals, to the workpapers.
When a determination is made that penalties for failure to file and failure to furnish Form W–2, Form W–2c, or Form 1099-MISC apply to the examination, the examiner must prepare an Information Return Penalty case file. However, if an extension to file Form W–2c is granted by the examiner, the Form W–2c penalties do not become assessable under IRC 6721 and IRC 6722 until March 1st of the year following the examination. See IRM 126.96.36.199.2. Also see IRM 188.8.131.52, Penalties for Failure to File Certain Information Returns or Furnish Certain Statements, for additional information.
Use Form 5345-D to request controls of the penalty case file on ERCS. Fill in as normal with the following exceptions:
Form Type: Identify if the case is "Form 1099-MISC Penalty" or "Form W-2 Penalty"
MFT Code: For IMF, "P9/55" , for BMF "P9/13"
Activity Code: 506
Statute date: Unfiled information returns are "02/EE/XX"
The Information Return Penalty Package, located at the Employment Tax Operations Sharepoint site under "ET Web Documents/Writing Reports," is used to compute and assess on the Master File the penalties for failure to file correct information returns, IRC 6721, and failure to furnish correct payee statements, IRC 6722. See IRM 20.1.7, Information Return Penalties, for additional information.
The workbook automates the preparation of Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, the assessment document which is required for the completion of an Information Return Penalty case file. It also automates preparation of Form 3645, Computation of Penalty for Failure to File Information Returns or Furnish Statements, for each tax year. Refer to Exhibit 4.23.9–1, Instructions for Determining Civil Penalty Statute of Limitations, for instructions on determining the civil penalty statute of limitations.
Letter 5005, Information Return Penalty Notice (Form W-2), or Letter 5005-P, Information Return Penalty Notice (Form 1099), should be furnished to the taxpayer upon completion of the penalty calculations.
Record on Form 886-A all pertinent information including the issues, facts, law, taxpayer’s position, and conclusion. This will be attached to Form 3645 and becomes part of the Information Return Penalty Case File.
If the taxpayer agrees with the penalty, request payment. Prepare Form 3244-A, Payment Posting Voucher - Examination, to post payments received.
When asserting the penalty and the penalty relief provisions were considered, the following must be noted on Form 8278.
When penalty relief is denied:
- Assert the penalty,
- Note on Form 8278 that the relief provisions were considered, and
- Identify the relief requested using the penalty reason codes in Exhibit 20.1.1-3, Penalty Transaction Codes, of the Penalty Handbook (IRM 20.1.1).
When penalty relief is granted:
- The penalty should not be assessed, and
- A notation should be made on Form 8278 that the relief provision was granted.
After determining whether to grant or deny the relief provisions, identify the relief request using the penalty reason codes in Exhibit 20.1.1-3 of the Penalty Handbook (IRM 20.1.1). Compliance functions use penalty reference codes in the 600 series for assessing these penalties.
Consider the applicability of backup withholding under IRC 3406. See IRM 184.108.40.206.
The preparation of the penalty case file will follow the procedures outlined in IRM 20.1.7, Information Return Penalties.
If possible, close the penalty case concurrent with related employment or income tax case file.
Miscellaneous Penalty Time: The time spent reviewing books and records to determine if taxpayers are in compliance with various filing requirements should be charged to the key case. Once it is determined that miscellaneous penalties should be applied, the time spent from that time forward should be applied to the activity code for miscellaneous penalties.
Form 3198 and Form 3198-A: Check the "Other" block and add "Assess Civil Penalty as Indicated on Form 8278 & Form 3645." If Form 9231 is used in lieu of Form 3198, check the appropriate block.
Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, is for internal use only.
Form 3645, Computation of Penalty for Failure to File Information Returns or Furnish Statements.
Form 4318–ET or penalty lead sheet:
Document the actions completed.
Include an explanation of why the taxpayer did not file the forms in a timely manner. Any defense by the taxpayer should be in writing and signed under penalties of perjury.
Explain whether the failure was due to a reasonable cause.
Attach supporting workpapers to Form 4318–ET or penalty lead sheet.
For secured Forms 1096/1099-MISC's, W–3/W–2's or W-3c/W-2c's:
Attach copies of the forms including the transmittals to the workpapers. Send the original Form 1096 and Form 1099-MISC's to the appropriate campus (see Form 1096 instructions) and original Form W-3 and Form W-2's to the Social Security Administration via Form 3210.
Include transcripts or a copy of the tax return(s) under audit for the year(s) of the delinquent information returns. Generally, these will be Form 941.
Prepare Form 5346, Examination Information Report, for recipients of Form W-2/W-2c and/or Form 1099-MISC that appear to have high income tax potential for possible income tax under-reporting. Route the Form 5346 via Form 3210 to the area PSP Support staff.
Retain a copy of Form 5346 with the workpapers in the penalty case file.
Payors of certain types of gambling winnings must withhold income tax on proceeds that are over $5,000. IRC 3402(q) was amended to reduce the regular gambling withholding rates to equal the third lowest rate of tax applicable to single filers as defined in IRC 1(c).
Winnings from the following types of activities are subject to withholding:
State-conducted lotteries when the proceeds are over $5,000,
Sweepstakes, wagering pool, or lottery other than "a" above, when the proceeds are more than $5,000,
Poker tournament winnings of more than $5,000, beginning March 4, 2008. See Rev. Proc. 2007-57, and
Other wagering transactions, such as pari-mutuel pool for horse races, dog races, and jai alai when the proceeds exceed $5,000 and are at least 300 times the amount wagered.
The payor of gambling winnings from such activities must report winnings of $600 or more to the Service by filing Form W–2G, Certain Gambling Winnings. The payor of winnings from a bingo or slot machine win must report winnings of $1,200 or more. For keno, the reportable amount is $1,500 or more.
Back-up withholding is required if the winner of reportable amounts does not furnish a Taxpayer Identification Number (TIN) to the payor. This includes reportable amounts of winnings from bingo, keno, or slot machines.
When examining the income tax return of a taxpayer engaged in the business of gambling, the retained copies of the employment tax returns should be requested (including retained copies of Form W–2G) and inspected. Based on this inspection and all other available information, a decision must be made whether the employment tax returns (including the withholding on gambling winnings requirement) warrant an examination.
Where an employment tax examination is warranted, consideration should be given to using a computer assisted examination technique to screen the large volume of transactions for proper withholding and winner identification. The examiner should consider requesting the assistance of a Computer Audit Specialist.
All references to employment tax procedures for the withholding of income tax on wages will apply equally to the withholding of tax on certain gambling winnings.
The report writing instructions for examinations of income tax withholding for Form 945 are contained in IRM 4.23.10, Report Writing Guide for Employment Tax Examinations. Additional information can be found in the instructions for Form 1099-MISC, Form 1098, Form 5498, and Form W-2G.
IRC 3406 requires payors to withhold income tax on reportable payments of interest, dividends, and other payments under certain conditions. IRC 3406(a) also provides for backup withholding on certain reportable payments, if:
The payee fails to furnish a Taxpayer Identification Number (TIN) to the payor in the manner required,
The Secretary notifies the payor that the TIN furnished by the payee is incorrect,
There has been a notified payee under-reporting described in IRC 3406(c), or
There has been a payee certification failure described in IRC 3406(d).
Public Law 107-16 amended IRC 3406(a)(1) to reduce the backup withholding rates for amounts paid after August 6, 2001 to equal the fourth lowest rate of tax applicable to single filers as defined in IRC 1(c). The rate is 28% for all subject payments after December 31, 2002.
Backup withholding can apply to most kinds of payments that are reported on Form 1099-MISC. Reportable payment means any payment which is required to be shown on a return required under:
IRC 6042(a) (dividend payments),
IRC 6044 (patronage dividend, but only to the extent such payment is in money), and
IRC 6049(a) (interest payments).
In addition, it includes other payments required to be shown on a return required under:
IRC 6041 (relating to certain information at source payments),
IRC 6041A (payments for remuneration of services and direct sales),
IRC 6045 (returns of brokers),
IRC 6050A (payments to certain fishing boat operators),
IRC 6050N (royalty payments), and
IRC 6050W (relating to returns for payments made in settlement of payment card transactions).
Backup withholding is reported by the taxpayer on the annual Form 945, Annual Return of Withheld Federal Income Tax. The examiner will compute backup withholding tax on an annual basis whether the payments are sporadic over the year or by a single lump sum.
Payors will be held liable for the payment of any backup withholding required to be deducted and withheld under IRC 3406 per IRC 3403.
Backup withholding adjustments are subject to IRC 6672, Trust Fund Recovery Penalty.
Backup withholding is treated as withholding on wages per IRC 3406(h)(10).
When taxpayers file Forms 1099, the IRS reviews them for:
Obviously incorrect TINs
Mismatched names and TINs (Unassigned)
If there are errors, the IRS will notify the payor of these errors by sending notification CP2100. See Rev. Proc. 93-37. The CP2100 notifies a payor that they may be responsible for backup withholding, and is accompanied by a listing of missing, incorrect, and/or not currently issued payee TINs.
Small filer: Paper CP2100A Notice, less than 50 error documents
Mid-size filer: Paper CP2100 Notice, 50 to 249 error documents
Large filer: CD or DVD data file CP2100, over 250 error documents
The CP2100 includes instructions to the payor to provide a "B" Notice to each payee whose Name/TIN combination and account number in the payor’s records matches the combination that IRS identified as incorrect.
The "B" Notice informs the payee that the Name/TIN combination furnished to the payor does not match IRS or SSA records and describes the steps the payee must take to stop or prevent backup withholding. If this is the only notification of a Name/TIN mismatch received by the payor with respect to the account during the past three years, the "B" Notice, referred to as a "first B Notice" , instructs the payee to provide a signed Form W-9, Request for Taxpayer Identification Number and Certification, (or acceptable substitution) to the payor to stop or prevent backup withholding.
The payee should return the Form W-9 (or acceptable substitution) within 15 business days, or within 30 business days of the date of the CP2100 Notice. Once the Form W-9 (or acceptable substitution) is received, the payor should compare and update his records, if necessary, and backup withholding is not required.
If the payee does not provide the Form W-9 (or acceptable substitution) within 30 business days, the payor must begin backup withholding by the 30th business day after the date of the CP2100 Notice.
If the payor receives a second notice with respect to an account within three years from the date of the first CP2100 Notice with respect to that account, Treas. Reg. 31.3406(d)-5(g) requires the payor to send the payee another "B" Notice, referred to as a "second B Notice" . In response to a "second B Notice" , a copy of a social security card will serve as validation from the SSA of a name and SSN combination. Letter 147C, EIN Previously Assigned, issued by the IRS, serves as validation for a Business Master File (BMF) taxpayer as validation of the name and TIN. Under Treas. Reg. 31.3406(d)-5(g)(1)(i), a TIN certified on a Form W-9 is not sufficient to stop or prevent backup withholding for a second notice.
Payors may rely upon a social security card as being correct if:
The name and SSN combination appearing on the card differ from the name and SSN combination appearing on the "second B Notice" , or
The Social Security card is dated no earlier than six months prior to the date of the "second B Notice" .
If a payee does not have a Social Security card, a new or replacement card must be obtained from the SSA. See Rev. Proc. 2014-43.
For additional information on notice procedures, see:
Publication 1281, Backup Withholding on Missing and Incorrect Name/TINs (including Instructions for Reading Tape cartridges and CD/DVD Formats), and
Pub 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs (including instructions for reading CD/DVDs and Magnetic Media),
A backup withholding examination consists of the determination of a taxpayer’s compliance with the CP2100 process and an analysis of whether information returns were properly filed and completed. Although the failure to file Forms 1099 does not trigger backup withholding, a payor who did not file required Forms 1099 often did not secure the payees’ TINs. Failure to secure payees’ TINs subject the payor to backup withholding.
Backup withholding examinations require an in-depth review of a taxpayer's accounts payable and vendor master files to determine whether the payor solicited the payees TIN and, if so, the date(s) that the payor first solicited and received the payee's TIN. These dates determine the beginning date when backup withholding is required.
In addition to the analysis of accounts and disbursements to uncover substantial payments made to individuals and entities for which no Forms 1099-MISC were issued, additional potential issues exist where the TIN is either incorrect, (i.e., blank or less than nine digits) or the TIN does not match the name of the payee. This may be identified through the backup withholding notice process. See IRM 220.127.116.11.1.
The examiner should request a payer master file transcript (CC PMFOL) for a summary of the payor's information returns by year, type, and dollar amount. A PMFOLB shows the number of Forms 1099 filed with missing, unassigned, and mismatched TINs as well as the years that payor received a CP2100 Notice.
Before determining whether a payor is subject to backup withholding, examiners must first consider whether a potential worker classification issue exists with regard to the payees. If the payees are determined to be employees, backup withholding is not applicable even if the payor would have been subject to backup withholding based on failing to secure the payees’ TINs. Failure to consider the worker classification issue first may provide the payor with a prior audit safe haven under section 530 for subsequent year.
If any of the payees were incorrectly treated as independent contractors and the employer is not eligible for section 530 relief, the employment tax withholding and Form W–2 requirements apply and the backup withholding rules do not. However, if a worker is later determined to not be an employee (e.g., in an Appeals determination), backup withholding should be considered as an alternate position in a worker classification examination.
All references to employment tax procedures for the withholding of income tax on wages, except for special rules related to IRC 3509 rates or CSP, apply to backup withholding. Consequently, payors are liable for the payment of any backup withholding required to be deducted and withheld under IRC 3406.
The report writing instructions for examinations of backup withholding are contained in IRM 18.104.22.168.9.1, Form 4668-B and Exhibit 4.23.10-4, Form 4668-B, Report of Examination of Withheld Federal Income Tax:
Form 4668-B, Report of Examination of Withheld Federal Income Tax for Withholding Reported on Forms 1099 and W-2G, is used
The applicable tax rate is 28% in 2003 through 2015
If the examination involves other employment taxes in addition to backup withholding, a Form 4668, Employment Tax Examination Changes, will be prepared to reflect the other results of the examination
If notices or billings are generated from the campus regarding backup withholding compliance measures, campus' review of any records regarding these actions does not constitute the examination of any federal tax return.
The backup withholding assessment under IRC 3406 is subject to the abatement provisions of IRC 3402(d). Examiners are authorized to accept and consider any original Form 4669, Statement of Payments Received, submitted before the case is closed from the group. A separate form must be obtained from each payee for each year and is signed under the penalties of perjury. These completed forms must have every line item completed (Part 1 by the payor and Part 2 by the payee), and be accompanied by Form 4670, Request for Relief from Payment of Income Tax Withholding, prepared by the payor. If any information is omitted from a Form 4669, it must be returned to the payor for correction, as it is the responsibility of the payor to obtain properly completed forms from payees. Follow the IRM section, Procedures for Granting Relief Under IRC 3402(d) and/or IRC 3102(f)(3) by Examiners. See IRM 22.214.171.124.3.
If the examination is closed, but the tax has not been paid, advise the taxpayer to submit the completed Forms 4669 and Form 4670 to the campus where the Form 941 is filed, along with a copy of the Form 4668-B, Report of Examination of Withheld Federal Income Tax for Withholding Reported on Forms 1099 and W-2G from the examination, for consideration of the IRC 3402(d) abatement.
If the examination is closed and the tax paid, advise the taxpayer to submit a Form 945-X, Adjusted ANNUAL Return of Withheld Federal Income Tax or Claim for Refund, attaching the completed Forms 4669 and Form 4670, along with a copy of the Form 4668 from the examination, for consideration of the IRC 3402(d) abatement.
Additional information on backup withholding is found in:
Treas. Reg. 31.3406
Training Course 34103-002, Technical Basic Employment Tax Training
ELMS course 27553, SB/SE Employment Tax Backup Withholding Training
ELMS course 53472, SB-SP- ET Backup Withholding
Form 944, Employer's ANNUAL Federal Tax Return, is designed so the smallest employers (those whose annual liability for social security, Medicare, and withheld federal income taxes is $1,000 or less) will file and pay these taxes only once a year instead of every quarter.
For tax years 2006 through 2009, the IRS systemically identified and notified taxpayers who met Form 944 criteria of their new filing requirement change. This change is based upon an expected annual liability of $1,000 or less. Taxpayers were given an opportunity to "opt out" of the filing requirement change, but those that did not were automatically changed over. Taxpayers must file Form 944 only if they have been notified by the IRS of the filing requirement change. For the tax year 2010 and beyond, the Form 944 program was made voluntary. However, unless taxpayers pro-actively opt out or become ineligible (more than a $1,000 liability), they will remain in the program until notified by the Service of a new Form 941 filing requirement.
When an examiner receives a case into their inventory, they must verify the controls are on the appropriate module. In some situations, taxpayers who have not filed may have been assigned a Form 944 filing requirement because their liability, based on the non-filing, was less than the threshold. If the examination(s) is incorrectly opened on the Examination Returns Control System (ERCS) for Form 941 when the actual filing requirement is Form 944, or vice versa, controls must be reopened under the correct filing requirement for the specific tax period. The incorrect controls may be closed using the non-examined Disposal Code "36" , No Return Filed. During the examination process, additional tax may be determined which exceeds the threshold criteria for Form 944, however, the assessment must be made under the Form 944 tax period. A filing requirement can not be changed retroactively for a calendar year at any time..
When an examiner is requesting audit controls for prior and subsequent tax periods as part of expanding an audit, they MUST verify the filing requirement to ensure controls are requested on the appropriate module. These filing requirements are determined by year and can be different between years. To make the proper determination on the appropriate filing requirement, the examiner will review the cache information on page 2 of the BMFOLE. The filing requirement will be separately determined for each year under examination using the cache indicator.
Cache Indicator Filing Requirement Form MFT Blank 941 01 1 944 14 2 944 14
The "2" indicates that the filing requirement will change to a Form 941 for the following year.
A filing requirement cannot be changed retroactively. The examiner must establish controls using the information on the cache.
Examination assessments exceeding the threshold may not systemically change the taxpayer back to a Form 941 filer before the upcoming year. If it is expected the taxpayer’s liability will exceed the $1,000 threshold for the current or future periods, the examiner should change the filing requirements for future filings and notify the taxpayer. A filing requirement change may be made for the current year if done prior to April 1st. Changes after April 1 will apply to the following year and the taxpayer should be instructed to file a Form 944 for the current year.
To process the filing requirement change for the current year, follow these steps:
Form 2363, Master File Entity Change, should be completed (check item 016, "Change misc. codes" ). The appropriate filing requirement code from Document 6209 should be annotated under the correct tax return number, i.e., 944: MFT 14. In SB/SE, Form 2363 should be faxed to the Centralized Case Processing at the number provided: http://mysbse.web.irs.gov/AboutSBSE/aboutccs/ccsprog/casepro/cp/pro/21596.aspx.
Once the filing requirement change has posted, identify tax deposits/credits already posted on the current tax module should be transferred to the correct period(s). Form 3870 should be prepared and sent to CCP. (EO is to follow local procedures for processing Form 3870.)
Hand-deliver or mail (certified) notification of filing requirement change, to be received by the taxpayer and/or POA prior to April 1st of the current year. Letter 3007, Employment Return Filing Requirements/Instructions Form 941, is used for this purpose.
Document the case file with all actions taken.
|Interest Restricted on|
|§3402||Income Tax Collected @ Source||§6205(a)||§6413(a)|
|§3121(I)||Foreign Subs Domestic Corp.||----||§3121(I)(5)|
|§3302(a), §3302(b)||FUTA Tax Credit||---||§6413(d)|
|Calendar Year||Fica Wage Limit||3509(a) FICA rate||3509(a) Withholding Rate||3509(b) FICA Rate||3509(b) Withholding Rate|
|2000 - Social Security||$76,200||7.44%||1.50%||8.68%||3.00%|
|2000 - Medicare||No Limit||1.74%||2.03%|
|2001 - Social Security||$80,400||7.44%||1.50%||8.68%||3.00%|
|2001 - Medicare||No Limit||1.74%||2.03%|
|2002 - Social Security||$84,900||7.44%||1.50%||8.68%||3.00%|
|2002 - Medicare||No Limit||1.74%||2.03%|
|2003 - Social Security||$87,000||7.44%||1.50%||8.68%||3.00%|
|2003 - Medicare||No Limit||1.74%||2.03%|
|2004 - Social Security||$87,900||7.44%||1.50%||8.68%||3.00%|
|2004 - Medicare||No Limit||1.74%||2.03%|
|2005 - Social Security||$90,000||7.44%||1.50%||8.68%||3.00%|
|2005 - Medicare||No Limit||1.74%||2.03%|
|2006 - Social Security||$94,200||7.44%||1.50%||8.68%||3.00%|
|2006 - Medicare||No Limit||1.74%||2.03%|
|2007 - Social Security||$97,500||7.44%||1.50%||8.68%||3.00%|
|2007 - Medicare||No Limit||1.74%||2.03%|
|2008 - Social Security||$102,000||7.44%||1.50%||8.68%||3.00%|
|2008 - Medicare||No Limit||1.74%||2.03%|
|2009 - Social Security||$106,800||7.44%||1.50%||8.68%||3.00%|
|2009 - Medicare||No Limit||1.74%||2.03%|
|2010 - Social Security||106,800||7.44%||1.50%||8.68%||3.00%|
|2010 -Medicare||No Limit||1.74%||2.03%|
|2011 - Social Security||106,800||7.04%||1.50%||7.88%||3.00%|
|2011 - Medicare||No Limit||1.74%||2.03%|
|2012 - Social Security||110,100||7.04%||1.50%||7.88%||3.00%|
|2012 - Medicare||No Limit||1.74%||2.03%|
|2013 - Social Security||113,700||7.44%||1.50%||8.68%||3.00%|
|2013 - Medicare||No Limit||1.74%||2.03%|
|2013 - Additional Medicare Tax||Wages that exceed $200,00 withholding threshold||.18%||.36%|
|2014 - Social Security||117.000||7.44%||1.50%||8.68%||3.00%|
|2014 - Medicare||No Limit||1.74%||2.03%|
|2014 - Additional Medicare Tax||Wages that exceed $200,00 withholding threshold||.18%||.36%|
|2015 - Social Security||118,500||7.44%||1.50%||8.68%||3.00%|
|2015 - Medicare||No Limit||1.74%||2.03%|
|2015 - Additional Medicare Tax||Wages that exceed $200,00 withholding threshold||.18%||.36%|