- 20.2.12.1 Employment Taxes Overview
- 20.2.12.2 Underpayment Adjustments
- 20.2.12.3 CAWR Assessments
- 20.2.12.4 Household Employment Taxes
- 20.2.12.5 Underpayments of FICA and RRTA Taxes
- 20.2.12.6 Corrections to Income Tax Withheld from Wages
- 20.2.12.7 Overpayments of FICA and RRTA Taxes
- 20.2.12.8 Foreign Subsidiaries of Domestic Corporations
- 20.2.12.9 Federal Unemployment Tax
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If more or less than the correct amount of tax is paid with respect to employment taxes imposed by the Code sections referenced below, proper adjustment of both the tax and the amount deducted is made without interest.
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IRC section 3101—FICA tax on employees
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IRC section 3111—FICA tax on employers
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IRC section 3201—RRTA tax on employees
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IRC section 3221—RRTA tax on employers
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IRC section 3402—Income tax collected at source.
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Generally, overpayments are adjusted without interest, under IRC section 6413(a) and underpayments are adjusted without interest, under IRC section 6205(a).
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In some circumstances, interest on an overpayment or underpayment of employment taxes will accrue:
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If a taxpayer does not qualify for an adjustment under IRC section 6413(a) and 6205;
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If a taxpayer qualifies for an adjustment but fails to timely pay the amount due. (IRC section 6205).
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An employer who makes or has made an undercollection or underpayment of FICA, RRTA, or income tax required to be withheld shall correct the error on a return currently in use for reporting the tax. (Reg. IRC section31.6205–1). The return on which the correction is shown must have the attached:
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a statement explaining the correction
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a statement designating the return period in which the error was ascertained
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the return period to which the error relates, and
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other information as prescribed in the regulations or instructions to the return.
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If the employer fails to indicate the tax period in which the error was made and it is not otherwise necessary to talk with the employer, it is assumed that the correction is not an "adjustment" and normal interest is assessed. Use TC 298/308 with an interest computation date of the due date of the return for the period in which the error was ascertained
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An error is ascertained when the employer has sufficient knowledge of the error to be able to correct it. Reg. 31.6205–1(a)(4).
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No underpayment shall be reported as an interest free adjustment after receipt of notice and demand based on assessment. The amount must then be paid with interest. Reg. 31.6025–1(a)(6).
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Combined Annual Wage Reporting (CAWR) proposed assessments may result in an interest free adjustment to Form 941 FICA tax.
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If the taxpayer agrees with the proposed increase (whether or not a Form 941c was filed), the adjustment is interest free if the discrepancy is FICA (Social Security). Use the due date of the current return as the interest start date, whether or not a full or partial payment has been made.
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If the taxpayer does not pay by the due date of the current return, interest accrues from the due date of the current return. When tax adjustments are made, adjustments to penalties and interest must be considered.
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For complete instructions on inputting CAWR assessments, see IRM 21.31, Reconciliation Balancing.
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The interest free provisions for adjustments on BMF employment taxes also cover errors discovered on IMF, Schedule H.
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Adjustments are interest free if reported by the due date of the return for the period in which the error was discovered.
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Exception:
If withheld income tax is involved, see section 19.6, below.
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If the employer has sufficient knowledge of the error in the period in which the error occurred and before the return is filed, it should be reported as an undercollection and paid with the return. This is not an adjustment.
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If the employer has sufficient knowledge of the error after the return is filed, an adjustment can be made in two ways:
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On the return for the period in which the employer has sufficient knowledge to correct the error. The return must be timely filed and the underpayment paid with the return.
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On a supplemental return for the period in which the error occurred. The return must be filed by the due date of the return for the period in which the employer had sufficient knowledge to correct the error.
Note:
If Payment accompanies the return, no interest is due. Reg. Sec. 31.6205–1(b)(2).
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If an adjustment is reported under either procedure,interest is due on any unpaid amount, from the due date of the return in which the employer had sufficient knowledge to correct error, until paid. Master File will assess the interest. Use the correct interest computation date with TC 298/308.
Note:
Interest on any penalties is due and will generate from the normal due date, extended return due date, or assessment date, whichever is applicable.
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If the adjusted or supplemental return is not filed by the due date of the return for the period in which the employer had sufficient knowledge to correct the error, interest is due on the underpayment from the due date of the return in which the error occurred.
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The correction of an error may be made under the above procedures during an audit of the return, provided the taxpayer corrects the error before notice and demand. Rev. RuI. 75–464, 1975–2 CB 474.
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Any correction on a return prepared under IRC section 6020(b) does not qualify for an interest free adjustment. Interest on this type of return is due from the original due date of the return.
Note:
Interest-free adjustments can apply to SFR modules if the Taxpayer signs an agreement or files a return.
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If no income tax or less than the correct amount of income tax is withheld and the error is ascertained before the return is filed for the period in which the wages were paid, the employer shall report the correct amount of tax required to be withheld on the return. THIS IS NOT AN ADJUSTMENT.
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If the underwithholding is discovered after the return has been filed, an adjustment can be made in two ways:
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on a return for any period in a calendar year in which the wages were paid, or
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on a supplemental return for the return period in which the wages were paid.
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The reporting constitutes an adjustment only if the return or supplemental return on which the underpayment is reported is filed on or before the last day on which the return is required to be filed for the period in which the error was ascertained.
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If the employer reports an underpayment of income tax withheld by the due date of the return for the quarter in which an error is determined, and all required tax is timely paid for the quarter in which the adjustment is taken, NO INTEREST is due on the underpayment.
Note:
Income tax withheld cannot be corrected for prior year returns.
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If the underpayment is reported timely, but the amount of tax due on the return for the quarter in which the underpayment is ascertained is not timely paid, INTEREST accrues from the due date of the return for the period in which the underpayment is ascertained.
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If an underpayment of income tax withholding is not reported as an adjustment within the time prescribed, the underpayment must be reported on the employer's next return in the calendar year in which the wages were paid or reported immediately on a supplemental return for the quarter in which the wages were originally paid. INTEREST is due on such underpayment.
Note:
Where INTEREST is due on an underpayment of withheld income tax, such interest will accrue from the due date of the return for the quarter in which the wages were originally paid.
Example:
The taxpayer submitted a Form 941C reporting increases of both FICA and Withholding taxes. He indicated that the errors were "determined" during the 1st Quarter of 1997. His Form 941C was received April 21, 1997 and his 2nd Quarter 1997 tax account shows the payment of the tax was also received on April 21, 1997. Since the additional tax was reported and paid by the 1st Quarter due date of April 30, 1997, the entire additional tax is assessed with a TC 298 and 04301997 (MMDDYYYY) in the date field. NO INTEREST IS ASSESSED.
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If an employer overwithholds income tax from an employee's wages and pays the tax to IRS, the employer may repay or reimburse the employee for the overcollection in any subsequent quarter during the same calendar year.
If Then Repaid The employer must obtain and keep, as part of his records, a receipt from the employee. Not repaid The employer can reimburse the employee by applying the overcollection against subsequent tax required to be withheld from wages paid during the same calendar year in which the over collection occurred. -
If the employer repays or reimburses the employee for the overcollection, the employer may adjust, withoutinterest, the overcollection on a return for any quarter in the calendar year in which the employer repays or reimburses the employee. Interest may be allowable where the return otherwise shows an overpayment.
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Note:
Adjustment of income tax withheld is applicable only if the adjustment is made before the end of the calendar year in which the wages were paid.
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A refund or credit for an overpayment of income tax made after the close of the calendar year is allowable only if the overpayment of tax was not deducted from the employee's wages. Interest accrues on refunds or credit of withheld tax not deducted from employees wages.
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If interest is not allowed, input a TC 770 with a zero amount.
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Procedures for claims for refund or credit of overcollected employee tax are found in Customer Service IRM 21.7, BMF Adjustments Procedures.
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If the overcollection is discovered after the return is filed, the employer (after repaying or reimbursing the employee) may claim a credit for both the employer and the employee's share of the FICA tax by entering it as an adjustment on a return for a quarter ending on or before the last day of the return period following the quarter in which the error was ascertained and before the expiration of the period of limitations. This adjustment is made without interest.
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If the employer elects to file a claim for refund instead of adjusting the tax on a subsequent return, credit interest is allowed from the due date of the return or date paid, whichever is later to the refund schedule date.
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If a nonresident alien receives a refund of erroneously withheld Social Security taxes (e.g. students arriving on F, J or M visas who may be exempt from paying Social Security taxes), see IRM 3.15.128. IRS is required to withhold taxes at the source at the applicable treaty rate from any interest allowed to a non-resident alien before the refund is issued. This means that the net interest is refunded.
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Domestic corporations, that employ U.S. citizens in their foreign subsidiaries, may enter into agreements under IRC section 3121 whereby Federal Old Age and Survivors Insurance is extended to those citizens. Under these agreements the corporations pay the amounts equivalent to FICA taxes imposed by IRC section 3101 and 3111. Whether the amount is overpaid or underpaid, adjustments are without interest.
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Special Rule for Overpayment Not "Adjusted" —A domestic corporation may file a claim for refund of any overpayment made under an agreement under IRC section 3121. The law provides a special two-year limit from the date of the overpayment for claiming such a refund. The claim must be plainly marked "Claim under IRC 3121" . Adjustment documents for such overpayment will bear the same notation.
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IRC section 3302(a) provides for the allowance of credit against the tax imposed by IRC section 3301 of the amount of contributions paid by the employer into a state unemployment fund in any taxable year. An additional credit is also allowable under IRC section 3302(b).
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Credits allowable under IRC section 3302, to the extent not previously allowed, are considered an overpayment.
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No interest is allowed or paid on such overpayment.
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When the taxpayer reduces his/her tax as a result of an increase in state credits, input TC 770 with a zero amount.