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Part 21. Customer Account Services

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

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

21.7.2  Employment and Railroad Tax Returns (Cont. 2)

21.7.2.5 
Specific Claims and Other Issues

21.7.2.5.7 
Federal Labor Laws – Wage Payments Made by Federal Agencies

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

21.7.2.5.7.2.5  (11-04-2010)
Return Prepared Prior to Return Due Date (Wage Payments Made by Federal Agencies)

  1. In rare situations, a federal agency may submit a Form 941-X prior to the return due date for the tax period effected. If there are open filing requirements, it is possible the employer may report the additional wages and tax on their Form 941 and use line 9 to back out the employee share collected by the federal agency. Monitor the account until the tax return posts and take the following action:

    If And Then
    A tax return is filed by the employer There is an entry on line 9 corresponding to the federal agency wage determination Input TC 290 .00 and state "taxpayer reported as line item adjustment" in the Remarks section.
    A tax return is filed by the employer There is no entry on line 9 corresponding to the federal agency wage determination Adjust as in IRM 21.7.2.5.7.2.1.
    A return has not posted within 60 days of the return due date There is no indication of a return being filed; e.g., Unpostable, Reject, etc. Prepare a return as in IRM 21.7.2.5.7.2.3 but do not indicate "Final" . If there are credits on the module, enter CCC "X" .

21.7.2.5.7.2.6  (10-01-2011)
Missing or Incorrect Employer EIN (Wage Payments Made by Federal Agencies)

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

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

21.7.2.5.8  (05-06-2011)
Section 3402(d), Tax Relief in Employment Tax Cases (Forms 4668, 4669, and 4670)

  1. During the course of an examination, the IRS may determine an employer/employee relationship exists and propose the assessment of tax, penalties and interest. This assessment may include income tax which should have been withheld from amounts paid to employees.

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

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

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

      Note:

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

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

    1. An error is considered ascertained on the date taxpayer signs Form 2504. Therefore, the additional tax must be paid at the time the Form 2504 is signed in order for the assessment to be completely interest free.

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

  4. IRC 3402(d) provides relief from paying income tax proposed or assessed by Exam in these cases if the employee reported the income and paid the taxes due with their income tax return.

    Note:

    IRC 3402(d) abatement relief also applies to Exam assessments of backup withholding.

    Caution:

    Tax assessed under IRC Section 3509 is not subject to abatement. See. IRM 21.7.2.5.4 for more information on IRC Section 3509.

  5. To obtain relief under IRC 3402(d), taxpayers must:

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

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

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

      Exception:

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

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

    Note:

    Revenue Agents/Officers may process Forms 4670 and 4669 received before the examination is closed as per guidance in IRM 4.23.8.4.2, Procedures for Granting Relief Under IRC 3402(d) by Examiners.

21.7.2.5.8.1  (05-06-2011)
Processing Procedures for Forms 4669 and 4670

  1. Requests for relief under IRC 3402(d) provisions are not Exam criteria even though they involve tax accounts which were previously examined.

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

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

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

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

      Note:

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

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

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

    Exception:

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

    1. For each year involved, add the figures shown on line 5, "Amount of Payments (Including Commissions, Bonuses, Prizes, etc.) on Which Income Tax and Social Security Tax Were Not Withheld" , of the Form(s) 4669 submitted with Form 4670.

    2. Multiply the figure determined in step 1 above by 28% (.28).

    3. The amount of the tax adjustment to be made is limited to the lesser of the tax figure determined in step 2 above or the amount shown on line 17, "Maximum tax available for abatement under IRC 3402(d)" , of Form 4668.

      Caution:

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

  5. When the claim can be processed, adjust the module for the proper amount using either TC 291 or TC 299 (with IRN 003 or IRN 111) as follows:

    If And Then
    The employer signed the Form 2504 Interest is not restricted on the module Input TC 299 with an "interest from" date using the date the Form 2504 was signed.
    The employer signed the Form 2504 Interest is restricted on the module Interest must be manually computed and adjusted unless the assessment qualified as a completely interest free adjustment. Input TC 291 along with appropriate TC 34X amount. No underpayment interest is due on the amount being abated under IRC 3402(d) provisions. However, underpayment interest is due on any remaining amount of the assessment from the Form 2504 signature date to the date of full payment.

    Note:

    If the Form 2504 is unavailable, and there is a TC 308 on the module, it can be assumed the Form 2504 was signed and that the interest computation date used with the TC 308 is the correct date to be considered when following the procedures in the table above. If there is no TC 308, request the assessment document or contact the employer for a copy of the Form 2504. Fax copies are acceptable.

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

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

21.7.2.5.9  (10-01-2011)
IRC Section 127, Educational Exclusions

  1. Under IRC Section 127, an employer can exclude from gross income up to $5,250 per employee for educational assistance benefits. This benefit expired and was reinstated a number of times over the years until the Economic Growth and Tax Relief Reconciliation Act of 2001 permanently extended IRC 127.

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

  3. Employees unable to obtain refunds from their employer may file Form 843 to obtain a refund. A statement from the employer must be attached listing any amount which has been reimbursed by employer. If employee is unable to obtain this statement, he/she must provide this information to the best of his/her ability. (Contact the taxpayer if neither an employer or employee statement has been provided with the claim. Fax copies are acceptable.) When the required documentation is secured, follow procedures in IRM 21.7.2.4.6.4.2 under "Claim is correctly filed with employer's statement attached" , in the "If/Then" table.

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

21.7.2.5.10  (10-01-2011)
Medical/Dental Residents Excess FICA Claims (United States vs. Mayo Foundation or Minnesota vs. Apfel)

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

  2. All of these claims are CAT-A, regardless of the amount. The claim does not have to specify Minnesota vs. Apfel . If claims reference medical or dental residents, "NRSA" Grant excludability under Section 117, or similar wording, forward as CAT-A. However, do not forward as CAT-A until the taxpayer supplies the necessary supporting statements. Close your IDRS control base before referring to Exam indicating 'CATAMEDDEN' as your action. Follow procedures in IRM 21.7.2.5.10.1 (employer claims) and IRM 21.7.2.5.10.2 (employee claims) below.

    Exception:

    Do not send excess FICA claims citing the Mayo Foundation decision CAT-A. See paragraph 4.

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

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

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

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

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

    2. If an individual files a claim for excess FICA and is NOT an employee or former employee of the Mayo Foundation, but is basing their claim on the Mayo Foundation decision, see IRM 21.7.2.5.10.2

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

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

    Note:

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

21.7.2.5.10.1  (04-15-2004)
Employer Claims (Medical/Dental Residents)

  1. Follow the instructions in the table below.

    If And Then
    A claim (Form 941-X) is received from an employer claiming a refund for both the employer and employee portions The claim contains the necessary certification Forward as CAT-A and notate case as 'CATAMEDDEN'.
    A claim is received from an employer claiming a refund of both the employer and employee portions The necessary information is NOT attached 1. Attempt to contact the taxpayer (employer) for the necessary information. (The information can be faxed as long as the original claim contains a signature.) Upon receipt, follow instructions above.
    2. If unable to contact taxpayer, return claim using Letter 916C. Inform taxpayer of information needed and to resubmit claim when the necessary information is obtained. If claim is received within 180 days of RSED, follow procedures in IRM 21.5.3.4.3, Tax Decrease and Statute Consideration.
    A claim is received from an employer requesting refund of the employer's portion only A statement is attached as described in IRM 21.7.2.4.6.4.1 (1) Forward as CAT-A and notate case as 'CATAMEDDEN'.
    A claim is received from an employer requesting refund of the employer's portion only A statement is NOT attached as described in IRM 21.7.2.4.6.4.1 (1) Follow procedures in the second "Then" box above.

  2. Line item adjustments identified in Code & Edit are also forwarded to Exam. The same procedures are followed as with IRC Section 3121(v) cases. See the table in IRM 21.7.2.5.13.1 (5).

21.7.2.5.10.2  (04-15-2004)
Employee Claims (Medical/Dental Residents)

  1. Follow instructions in the table below.

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

    Note:

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

    		A statement is attached as described in IRM 21.7.2.4.6.4.2 (2), Step 2, or the employee makes a statement to the best of their knowledge and belief (including a statement of the employees inability to obtain the statement from their employer) Forward as CAT-A and notate case 'CATAMEDDEN'.
    A claim is received from an employee Neither of the statements described in the "Then" box directly above, are attached Follow procedures in the second "Then" box in IRM 21.7.2.5.10.1 (1). See Note below.

    Note:

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

21.7.2.5.11  (05-06-2011)
Foreign Students – FICA Tax Erroneously Withheld

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

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

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

    3. A copy of the entry and current visa.

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

      Note:

      Overseas filers no longer have the Form I-94 since the USCIS (US Citizenship and Immigration Service) keeps this document when the student/visitor leaves the United States.

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

    6. Form 8316, Information Regarding Request for Refund of Social Security Tax Erroneously Withheld on Wages Received by a Nonresident Alien on an F, J, or M Type Visa , or signed claim/statement verifying that unsuccessful attempts have been made to obtain a refund from the employer. Statements in lieu of the Form 8316 must include all the information requested on the Form 8316.

      Note:

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

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

    Philadelphia Campus
    AM / Clerical Team 442 / ADJ
    DP: 1-D08.113

21.7.2.5.11.1  (10-01-2009)
Procedures for Inquiries Received From Foreign Students

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

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

    • Copy of the appropriate visa

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

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

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

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

    2. File Form 941-X.

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

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

21.7.2.5.11.2  (01-13-2005)
Employer Claims Involving Foreign Students

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

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

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

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

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

21.7.2.5.12  (03-30-2011)
IRC Section 3121(q) Adjustments

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

  2. Following a tip examination, taxpayers must pay the employer portion of FICA taxes on unreported tips shown on the Section 3121(q) Notice and Demand. See Letter 3263 and Letter 4520 for more information. They are instructed to include the taxes due on line 5e of their Form 941 for the quarter in which the Section 3121(q) Notice and Demand is made.

    Note:

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

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

    Example:

    If the employer files Form 941 for the first quarter of 2010 on May 10, 2011, the assessment period ends on May 10, 2014.

    Note:

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

21.7.2.5.12.1  (03-30-2011)
Procedures for Section 3121(q) Adjustments — Forms 941-X

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

  2. If Form 941-X is received reporting a Section 3121(q) adjustment, verify all applicable sections are complete. See IRM 21.7.2.4.6, Adjusted Employer's Federal Tax Return or Claim for Refund, and IRM 21.7.2.4.7.8, Form 941-X, Adjusted Employer's QUARTERLY Federal Tax Return or Claim for Refund (including Form 941-X (PR)).

    Note:

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

    Example:

    Section 3121(q) Notice and Demand was dated January 20, 2010. If Form 941-X is filed, the adjustment must be input on the 201003 tax period.

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

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

    Note:

    IRN 112 was used for Section 3121(q) adjustments on Form 941 for tax periods ending on or before 12/31/2010.

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

    Exception:

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

    Note:

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

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

    Note:

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

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

21.7.2.5.12.2  (05-06-2011)
Section 3121(q) and Interest Free Adjustments

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

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

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

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

      Example:

      An employer receives a Section 3121(q) Notice and Demand letter dated April 21, 2011. The ascertained date for the taxes due is therefore April 21, 2011. Per the instructions provided to the employer, the taxes shown on the Notice and Demand should be reported on their Form 941 for the second quarter of 2011 which has a filing due date of July 31, 2011. Instead, the employer reports the correction on a Form 941-X. The ascertained date is still April 21, 2011 based on the Notice and Demand letter and the Form 941-X reporting the Section 3121(q) tax is due by July 31, 2011. The employer files the Form 941-X on July 27, 2011. Therefore the adjustment qualifies for interest free treatment.

      Example:

      An employer receives a Section 3121(q) Notice and Demand letter dated July 12, 2011. The ascertained date for the taxes due is therefore July 12, 2011. Per the instructions provided to the employer, the taxes shown on the Notice and Demand should be reported on their Form 941 for the third quarter of 2011 which has a filing due date of October 31, 2011. Instead, the employer reports the correction on a Form 941-X. The ascertained date is still July 12, 2011 based on the Notice and Demand letter and the Form 941-X reporting the Section 3121(q) tax is due by October 31, 2011. The employer files the Form 941-X on November 15, 2011. The Form 941-X was filed late and therefore the adjustment does not qualify for interest free treatment.

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

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

    Exception:

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

    Note:

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

21.7.2.5.12.3  (03-30-2011)
Taxpayer Reports Other Adjustments In Addition to Section 3121(q) Adjustments

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

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

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

    Reminder:

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

    Reminder:

    Use IRN 114 for the Section 3121(q) portion of the tax adjustment.
    The Form 941-X is not filed by the due date of the tax period for which the Section 3121(q) adjustment is reported The employer provided an ascertained date for the other errors being corrected but the Form 941-X was not timely filed by the associated due date Input one adjustment for the entire amount of the corrections reported using a TC 290.

    Reminder:

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

21.7.2.5.13  (01-01-2005)
IRC Section 3121(v)

  1. FICA tax is generally imposed at the time wages are actually or constructively paid. However, IRC Section 3121(v)(2)(A), contains a special timing rule. This special timing rule usually results in imposition of FICA tax before benefit payments under the plan begin. The rule provides that any amount deferred under a non-qualified deferred compensation (NQDC) plan must be taken into account as wages for FICA tax purposes the later of:

    • When the services are performed; or

    • When there is no substantial risk of forfeiture of the rights to such amount

  2. Section 31.3121(v)(2)-1, of the employment tax regulations provides guidance as to when amounts deferred under, or paid from, an NQDC plan are taken into account as wages for purposes of FICA tax. The regulations at this section are applicable January 1, 2000 and subsequent. They also contain transitional rules which provide relief for actions taken before the effective date of the regulations based on a reasonable good faith interpretation of the statute.

  3. Treasury Decision 8814 provided final regulations under IRC Section 3121(v).

21.7.2.5.13.1  (10-01-2009)
IRC Section 3121(v) Claims and Requests for Adjustments

  1. Claims and requests for adjustments may be received for current years as well as prior years. Treasury Decision 8814 contained a provision where affected taxpayers could make adjustments for tax years 1994 and 1995 as long as they were made by March 31, 2000. (Form 941 filers should have reported these on their first quarter 2000 return.) Since that period has already passed, these adjustments can no longer be made. Therefore, normal statute implications now apply.

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

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

    • 3121(v)

    • Regulations Section 31.3121(v)

    • Non-qualified deferred compensation (or NQDC)

    • Deferred compensation

    • Transitional rules

    • Treasury Decision 8814

    Exception:

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

  4. These cases must be recontrolled to Exam. If Exam returns the case, instructions are included.

    Note:

    If a claim is received on Form 843 and Exam provides instructions to disallow the claim, follow normal claim disallowance procedures.

  5. Line item adjustments previously identified in Code & Edit were also forwarded to Exam. The adjustment was allowed on initial processing and the return was NOT "C" coded. Code & Edit photocopied the Form 941 (or other return), Form 941c, and any correspondence and routed to Exam with the notation "3121(v) — Detached in Code & Edit" .

    If Then
    Exam determines the adjustment is allowable Nothing is forwarded to Accounts Management.
    Exam determines the adjustment is not allowable 1. Exam routes the photocopies to Accounts Management with instructions for disposition.
    2. Accounts Management inputs the adjustment on the period indicated on Form 941 (or other form). For example, if the Form 941 was filed for period ending March 31, 2008 and the line item adjustment attempted to correct period ending June 30, 2007, input the adjustment on period ending March 31, 2008. (That is the period on which the adjustment was allowed on initial processing.)

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

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

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

  3. All of these claims must be disallowed.

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

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

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

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

    Note:

    Ensure all applicable years are addressed in the disallowance process.

    Note:

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

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

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

    Note:

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

21.7.2.5.14  (01-01-2005)
FICA Adjustments on Exempt Organizations Pursuant to IRC Section 501(c)(3)

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

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

21.7.2.5.14.1  (01-01-2005)
IRC Section 501(c) Definitions

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

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

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

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

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

21.7.2.5.14.2  (01-01-2005)
Churches Making the Election for Exemption From FICA

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

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

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

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

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

    • Service as minister of a church

    • Members of a religious order

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

21.7.2.5.14.3  (10-01-2011)
Filing Form 941 (or Form 944) – Churches Which Are Exempt From FICA

  1. The electing organization is required to withhold federal income tax on wages, tips, and other compensation. Forms W-2 and 941 (or 944) must be filed as appropriate.

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

21.7.2.5.14.4  (01-01-2005)
Claims (IRC Section 501(c))

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

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

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

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

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

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

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

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

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

21.7.2.5.15  (01-01-2005)
State and Local Government FICA Under Section 218

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

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

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

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

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

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

21.7.2.5.15.1  (01-01-2005)
Internally Generated Transcripts (IRC Section 218 Coverage)

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

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

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

    2. After input of the EC, or if EC "T" has already posted, input TC 29X (see IRM 21.5.2.4.17, Posting Delay Codes (PDC)) with IRN's 004, 112, and 073 to assess FICA taxes based on the wages shown on the return.

    3. Advise taxpayer of action taken.

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

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

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

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

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

21.7.2.5.16  (10-14-2010)
CSX Claims

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

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

  3. Most claims received reference CSX Corp. v. United States. However, treat any claim referencing an item in the list below as a CSX claim.

    • "Involuntary Separation Plans"

    • "Involuntary Termination Benefits"

    • "SUCB" or "SUB-pay"

    • "Reduction in Force"

    • "Severance pay"

    • "Quality Stores Inc. v. United States"

  4. All CSX claims (including those in the list above) are to be disallowed unless one of the following situations applies:

    ≡ ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "

    Caution:

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

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

    Exception:

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

    ≡ ≡ ≡

  5. CSX claim disallowance procedures:

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

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

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

      "The recent decision of a U.S. district court in Quality Stores, Inc. v. United States, 424 B.R. 237 (W.D. Mich. 2010), does not change our position regarding your claim. This decision is on appeal in the United States Court of Appeals for the Sixth Circuit."

    Note:

    Ensure all applicable years are addressed in the disallowance process.

    Note:

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

21.7.2.5.16.1  (05-24-2010)
CSX Claims - Exam Disallowance Review

  1. Examination would like to review specific CSX claims which have been disallowed. If the claim is for ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ and does not meet the exception in IRM 21.7.2.5.16 (4), disallow the claim and forward the claim to Exam.

    Note:

    Do not input a TC 971 AC 013 when forwarding this copy to Examination.

  2. If working a paper CSX claim:

    • Complete all necessary case actions to disallow the claim.

    • Fax a copy of the claim to Examination. The fax number is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

    • Forward the closed case file to Document Retention following normal procedures.

    Note:

    If unable to fax, mail claim to the following address:
    Internal Revenue Service
    M/S 4160
    1973 N Rulon White Blvd
    Ogden, UT 84404

  3. If the CSX claim has been scanned into the Correspondence Imaging System (CIS):

    • Input all necessary case actions to disallow the claim.

    • Select the "Reroute to Exam" option in CIS.

    • Forward the case to the Ogden Exam printer.

    Note:

    If CIS issues prevent the routing of the case as indicated above, fax a CIS print of the case as outlined in paragraph 2.

21.7.2.5.16.2  (04-14-2011)
CSX Claims - 105c Replies

  1. It has been determined that appeals requests filed in response to CSX claims disallowances will be held in suspense by an Examination group at the Ogden campus pending the final outcome of the Quality Stores, Inc. litigation.

  2. Due to limited physical storage space and to avoid multiple transfers of cases, special handling procedures have been developed to electronically transfer these cases directly to the group responsible for suspense handling instead of sending them as paper cases to Appeals offices.

    Caution:

    The procedures in this section apply only to appeals requests received in response to CSX claims disallowances. For general information on handling of 105c/106c letter replies, see IRM 21.5.3.4.6.2, Appeals and Responses to Letters 105C/106C.

  3. For appeals requests/105c replies filed in response to CSX claims disallowance cases, take the following actions:

    1. Request the related blocking series 98/99 claims disallowance adjustment document to be associated with the case on CIS.

    2. Link the CIS case(s) for the related disallowed claim(s) to the current CIS case with the taxpayer's appeal request.

    3. Suspend the case CAT-A via CIS and identify it as a protective claim. State in the notes that it is a CSX claims disallowance response.

      Exception:

      See (4) below for an exception to this special CAT-A routing procedure when a complete case cannot be sent electronically via CIS.

    4. Exam Classification will select the case and transfer the case electronically to the Examination group responsible for suspense handling.

    5. Once the Exam selects the case, close the case and send Letter 86c. Use the appropriate opening paragraphs and use selective paragraphs "Q" , "d" , "*" , "j" , and "p" .

    1. Include the following text in the two open paragraphs:
      "The examination function will suspend action on your case until the litigation in United States v. Quality Stores, Inc., No. 10-1563, currently before the U.S. Court of Appeals for the Sixth Circuit, is finalized. Although your case is not directly involved in the litigation, it may be affected by the outcome."
      "Please note: the two-year period during which you may file suit in a U.S. District Court or the Court of Federal Claims began with the claim disallowance letter you received and continues to run while your case is suspended by the Examination function. If additional time is needed, you may obtain an extension by using Form 907, Agreement to Extend the Time to Bring Suit."

    2. Include the following information in paragraph "j" : Compliance Services; 8:00 AM; 5:00 PM MT; 801-620-2992.

    3. Include the following contact information in paragraph "p" :
      Internal Revenue Service
      SBSE Compliance Services Mail Stop 4160
      1973 N. Rulon White Blvd
      Ogden, UT 84404

  4. If a complete case cannot be assembled on CIS (for example: the blocking series 98/99 adjustment document was so large that Files provided it in paper rather than scanned format), do not send the case CAT-A and do not send the case to Appeals. Instead, print out all the related documents on the local printer, send case to the address provided above, and send the taxpayer a Letter 86c as per the above instructions.

21.7.2.5.17  (02-08-2010)
FICA/Medicare Claims from Automotive Industry Employees

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

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

  3. All of these claims must be disallowed.

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

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

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

      Note:

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

21.7.2.5.18  (01-01-2005)
Refund Claims/Major League Baseball

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

21.7.2.5.19  (04-27-2010)
Premium Assistance for COBRA Benefits

  1. COBRA gives employees who lose coverage under the employer's group health plan due to a "qualifying event" , one of which is a termination of employment, the right to elect to continue that coverage for a period of time by paying premiums to the employer to continue such coverage. COBRA (under the Code, ERISA, or the Public Health Service Act) generally covers multi-employer health plans and health plans maintained by private-sector or state or local government employers with 20 or more employees. It generally does not apply to churches and certain religious organizations. The American Recovery and Reinvestment Act of 2009 (as modified by subsequent legislation) provides premium assistance for COBRA continuation coverage for certain individuals and their families (referred to as assistance eligible individuals) who lose health plan coverage due to an involuntary termination of employment during the period beginning September 1, 2008 and ending May 31, 2010 and who are eligible for COBRA continuation coverage during this period. The premium assistance also applies to temporary continuation coverage elected under the Federal Employees Health Benefits Program and to continuation coverage under State programs that provide for coverage comparable to COBRA continuation coverage.

  2. A federal subsidy of 65 percent of the COBRA premium is available to assistance eligible individuals. The subsidy is available for up to 15 months. Assistance eligible individuals who elect COBRA continuation coverage are treated as having paid the required COBRA continuation coverage premium if the individual elects COBRA and pays 35 percent of the premium. The 65 percent of the premium not paid by the assistance eligible individual is reimbursed to the employer maintaining the group health plan through a credit against payroll taxes. The employer reports the 65 percent premium assistance provided to assistance eligible individuals on their employment tax return (line 12a of Form 941, line 11a of Form 944, or line 13a of Form 943 of the recently revised forms) once the 35 percent of the premium is paid by, or on behalf of, the assistance eligible individual. The credit is treated as a deposit made on the first day of the return period (year or quarter) which reduces the employer's employment tax liabilities. Employers can apply the credit to offset their federal tax deposits, to generate a refund, or both.

  3. Workers who were involuntarily terminated between September 1, 2008 and February 17, 2009 (date of enactment), but failed to initially elect COBRA or initially elected COBRA coverage and dropped it before February 17, 2009, were required to be given an additional period to elect COBRA and receive the subsidy.

  4. Recapture of the subsidy phases in for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Full recapture applies to taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns. The employer/COBRA provider is not responsible for enforcing this limit. Instead, an individual who receives the subsidy and is subject to the phase-out must increase his or her tax liability by the amount of the subsidy to be recaptured.

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

21.7.2.5.19.1  (03-11-2009)
Submission Processing Procedures — COBRA

  1. During original processing, SP will correspond for missing information related to COBRA premium assistance. If an employer/COBRA provider has an entry on line 12a (of Form 941), then it must have an entry on line 12b or vice versa (on Form 941).

  2. If an employer/COBRA provider claims COBRA premium assistance on its original return, both the COBRA premium assistance amount and the number of COBRA recipients will be posted to MF. The COBRA premium assistance will post as a TC 766 CRN 299 and the number of COBRA recipients will be displayed separately.

    Note:

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

21.7.2.5.19.1.1  (03-11-2009)
Premium Assistance for COBRA Benefits — CP 269C

  1. During original processing, if the COBRA premium assistance payments are determined to be questionable, the return will be reviewed to verify the premium assistance amount. Any credit on the module will be held pending the review.

  2. A CP 269C will be sent to the taxpayer informing him the COBRA premium assistance payments claimed on his original return is currently being reviewed. This notice also advises the taxpayer the Service may ask them to provide information substantiating the actual premium assistance payments reported. The notice provides a telephone number (866-879-1228) for the taxpayer to call after 30 days from the date of the notice, if they have not been contacted by the Service.

21.7.2.5.19.2  (04-27-2010)
Employer/COBRA Provider Reporting of Reimbursable COBRA Premiums

  1. The employer/COBRA provider recovers the subsidy provided to assistance-eligible individuals by taking the subsidy amount as a credit on their employment tax return (for example, Form 941) only after they have received the 35 percent premium payment from the individual.

  2. The first quarter of 2009 (if filing Form 941) is the first tax period in which the COBRA premium assistance can be claimed. Forms 941, 941-X, 943, 943-X, 944, and 944-X have been revised to reflect the COBRA premium assistance credit.

  3. Form 941 for 2009 and 2010 reflects two new lines:

    • Line 12a - used to report the COBRA premium assistance provided by the employer/COBRA provider for the assistance eligible individuals who have paid their reduced premiums. This amount should be 65 percent of the total COBRA premiums for assistance eligible individuals and should not include any amounts paid to the employer/COBRA provider by the COBRA assistance eligible individuals.

    • Line 12b - used to report the total number of individuals provided COBRA premium assistance payments reported on line 12a. Each assistance eligible individual who paid a reduced COBRA premium in the quarter should be counted as one individual, whether or not the reduced premium was for insurance that covered more than one assistance eligible individual. Each individual is reported only once per quarter.

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

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

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

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

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

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

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

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

    Note:

    This documentation must be maintained, but will not be required to be submitted to the IRS with Form 941.

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

21.7.2.5.19.3  (03-02-2011)
Adjusting the Account — COBRA

  1. If an employer/COBRA provider needs to correct previously reported COBRA premium assistance, it will need to file the applicable "X" form. This section applies to Forms 941-X, 943-X, and 944-X.

    Note:

    Although taxpayers should check the line 3 certification block and either the line 4c or 5d certification blocks stating the adjustment or claim amounts were not withheld from employee wages, we will accept the applicable "X" form without the Part 2 certifications if the only correction being requested is to previously reported COBRA premium assistance payments (so long as the correction request is otherwise processable). Do not reject the form or contact the taxpayer for the certification information if the only correction being requested is to previously reported COBRA premium assistance payments.

  2. COBRA premium assistance credits not claimed on an original return may be claimed on a return filed for a subsequent quarter in the same calendar year, or may be claimed on the applicable "X" form for the period in which the employer was entitled to the credit.

    Note:

    When processing the "X" form, verify the taxpayer has not claimed the same credit on his original return or on a return for a subsequent period.

  3. Credit Reference Number (CRN) 299 has been validated to adjust premium assistance for COBRA benefits.

    Note:

    The total number of individuals provided COBRA premium assistance payments is not an adjustable field.

  4. Input CRN 299 to adjust this credit when claimed on an adjusted employment tax return. Use a minus (-) when decreasing the COBRA benefit. The CRN 299 will generate a TC 766 (increase) or TC 767 (decrease).

    Note:

    CRN 299 can be input separately or with any combination of other TCs, IRNs, or CRNs.

    Note:

    MF programming was corrected in January of 2011 to recognize that reversals of COBRA refundable credits (CRN 299) are eligible for interest free adjustments under IRC 6205 provisions. When a TC 298 is input along with a CRN 299 reversal, the Interest Computation Date generates a second date field (showing as “COBRA/TAX-HOL>” on IDRS) which the computer will use as the start date for accruals. Prior to the programming correction, COBRA refundable credit reversal procedures included instructions to restrict penalty and interest calculations with TC 340 and TC 270 transactions as appropriate.

  5. The COBRA TC 766 (CRN 299) credit is applied by MF using the first day of the tax period as the credit effective date. If a TP chooses not to count the credit as a payment towards the tax liability amounts incurred during the period and makes the applicable deposits instead, the COBRA credit will generate an overpayment.

  6. The first tax period in which COBRA premium assistance is available is the first quarter 2009. If a request is received for a tax period prior to 200903, disallow the request and send the applicable disallowance letter (105C or 106C).

  7. Use the chart below to determine if COBRA claim is processable.

    If And Then
    TP files Form 941-X claiming COBRA credit The Entity is coded with an Employment Code (EC) "C" Disallow the COBRA portion of the claim by sending the applicable disallowance letter (105C or 106C). Include the following paragraph in the disallowance letter:
    "Our records indicate your entity is a church or qualified church controlled organization exempt from tax under Section 501 and therefore you are exempt from COBRA and do not qualify to claim COBRA subsidy reimbursement " .
    TP files Form 941-X claiming COBRA credit The tax or wage amount for the adjusted quarter is zero dollars Send the claim CAT-A.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    TP files Form 941-X claiming COBRA credit Does not provide the new total number of employees Make two attempts to secure the information by phone if a telephone number is available. Otherwise, follow procedures in IRM 21.5.3.4.2, Tax Decrease or Credit Increase Processing. Use Letter 4384C to reject the claim and identify the missing information in the letter.

  8. For all claims reporting an increase to COBRA premium assistance, use the following tool (worksheet) to determine CAT-A criteria.

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

    Example:

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

    Example:

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

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ "≡ ≡ ≡ ≡ ≡ ≡ ≡ " ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

21.7.2.5.20  (07-29-2010)
HIRE — Payroll Tax Exemption

  1. Under the Hiring Incentives to Restore Employment (HIRE) Act, enacted March 18, 2010, a new tax benefit is available to employers who hire certain previously unemployed workers ("qualified employees" ) in their trade or business.

  2. The payroll tax exemption provides employers with an exemption from the employer's 6.2 percent share of social security tax on wages paid to qualified employees, effective for wages paid from March 19, 2010, through December 31, 2010. The employee's 6.2 percent share of social security tax, and the employer and employee's shares of Medicare tax still apply to all wages. Qualified employers may elect out of the payroll tax exemption.

  3. A qualified employee is an employee who:

    • Begins employment with a qualified employer after February 3, 2010, and before January 1, 2011,

    • Certifies by signed affidavit, under penalties of perjury, that he or she has not been employed for more than 40 hours during the 60-day period ending on the date he or she begins such employment,

    • Is not employed by the qualified employer to replace another employee of such employer unless such other employee separated from employment voluntarily or was terminated for cause, and

    • Is not a family member of or related in certain other ways to the employer.

  4. A model affidavit (Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit) has been developed for employers to use. Employers are required to secure an affidavit with the same information as the Form W-11, but they are not required to use Form W-11. The Form W-11 or equivalent will not be filed with the IRS, but will be retained by the employer with other tax documents.

  5. Qualified employers:

    • Taxable Businesses and tax-exempt organizations qualify to claim the payroll tax exemption for eligible newly-hired employees.

    • Qualified employers in all five U.S. territories (i.e., American Samoa, Commonwealth of the Northern Mariana Islands, Guam, the US Virgin Islands, and Puerto Rico) that are subject to social security tax also qualify for the payroll tax exemption.

    • Federal, state and local government employers generally do not qualify for the tax exemption. However, public colleges and universities can qualify; Indian tribal governments also qualify.

    • Household employers do not qualify.

  6. The payroll tax exemption is claimed on Form 941, Employer's QUARTERLY Federal Tax Return, beginning with the second quarter of 2010, or annual employment returns (Forms 943 - Agricultural, 944 - Small Business, and CT-1 - Railroad).

  7. The payroll tax exemption that would be applicable to wages paid during the first quarter of 2010 cannot be applied on the first quarter Form 941. Instead, the amount by which the employer's social security tax would have been reduced as a result of applying the exemption to wages paid during the first quarter is treated as a "payment" for the second quarter. The credit for this payment may be claimed only on the second quarter Form 941 (lines 12c - 12e) and may only be claimed with respect to wages paid to qualified employees from March 19, 2010 (the day after the date of enactment), through March 31, 2010. The amount of the credit claimed on Form 941 for the second quarter will be refunded to the employer or may be applied against a liability for a later quarter.

    Note:

    A seasonal employer that does not otherwise have to file Form 941 for the second quarter must file Form 941 for that quarter in order to claim the payroll tax exemption for the amount of the exemption that would have applied to wages paid during the first quarter.

  8. New "Code CC" has been created for box 12 of Form W-2 for employers to identify qualified employees and report the amount of wages and tips covered by the payroll tax exemption. In addition, new box 12b has been created on Form W-3 to report the aggregate of "Code CC" .

  9. The HIRE payroll tax exemption reduces an employer's tax liability on wages paid to qualified employees during the second, third and fourth quarters of 2010. This reduction is effective as of when wages are paid, and the employer is not required to deposit the employer's 6.2 percent share of social security tax on such wages. Therefore, employers should not include the exemption amounts in corresponding liabilities reported on Schedule B (or other tax liability schedules for Forms 941, 943 and 944) for the second, third, or fourth quarters of 2010. In addition, since the HIRE payroll tax exemption could not be claimed for the first quarter, and must instead be claimed as a refundable credit for the second quarter, an employer may reduce its deposits for the second quarter of 2010 by the amount of the first quarter credit (treated as a deposit available on April 1, 2010). However, the refundable HIRE credit amount claimed for the second quarter does not reduce the amount of liability required to be reported on Schedule B (or other tax liability schedules for Forms 941, 943 and 944) for the second quarter of 2010.

  10. Additional resources:

    • Hire Act: Questions and Answers for Employers

    • IR-2010-64 Form to Claim Payroll Tax Exemption for Hiring New Workers Now Available

    • IR-2010-43 Special Payroll Tax Exemption Form Now Available

21.7.2.5.20.1  (03-02-2011)
Adjusting the Account — HIRE

  1. If the qualified employer needs to correct a previously reported payroll tax exemption, it will need to file the applicable "X" form. This section applies to Forms 941-X, 943-X, 944-X, and CT-1X.

    Note:

    If the applicable "X" form is only being filed to correct previously reported HIRE exemption amounts (line 12c of Form 941-X) or the HIRE refundable credit (line 19d of Form 941-X), then the employer must check the line 3 certification box and should check the line 4 or line 5 certification box which states none of the refund or credit was withheld from the employee wages. If the line 3 certification block is checked but no certification box is checked on lines 4 or 5, process the applicable "X" form without contacting the employer for the missing information so long as the adjustment is for HIRE amounts only.

  2. Credit Reference Number (CRN) 296 has been validated to adjust the payroll tax exemption for wages paid to qualified employees from March 19 - 31, 2010 (HIRE refundable credit). New Item Reference Numbers (IRN) have been validated to adjust the applicable tax and wages associated with the payroll tax exemption.

    Note:

    The number of qualified employees (lines 12a, 12b, and 19c on Form 941-X) is not an adjustable field.

  3. Payroll tax exemption reference numbers:

    Item Reference Numbers (applicable for Forms 941, 943, and 944)
    Number Explanation
    115 Used to adjust exempt wages/tips paid to qualified employees this quarter (line 12c, column 3 of Form 941-X).
    116 Used to adjust tax from exempt wages/tips paid to qualified employees this quarter (line 12c, column 4 of Form 941-X).
    117 Used to adjust exempt wages/tips paid to qualified employees March 19 - 31 (line 19d, column 3 of Form 941-X).
    Credit Reference Number (applicable for Forms 941, 943, 944, and CT-1)
    296 Used to adjust the HIRE refundable credit from exempt wages/tips paid to qualified employees March 19 - 31 (line 19d, column 4 of Form 941-X).

  4. Use CRN 296 to adjust the payroll tax exemption for wages paid to qualified employees from March 19 - 31 (HIRE refundable credit). Use a minus (-) when decreasing the credit. The CRN 296 will generate a TC 766 (increase) or TC 767 (decrease).

    Note:

    CRN 296 can be input separately or with any combination of other TC's, IRNs, or CRNs.

    Note:

    MF programming was corrected in January of 2011 to recognize that reversals of HIRE refundable credits (CRN 296) are eligible for interest free adjustments under IRC 6205 provisions. When a TC 298 is input along with a CRN 296 reversal, the Interest Computation Date generates a second date field (showing as “COBRA/TAX-HOL>” on IDRS) which the computer will use as the start date for accruals. Prior to the programming correction, HIRE refundable credit reversal procedures included instructions to restrict penalty and interest calculations with TC 340 and TC 270 transactions as appropriate.

  5. The payroll tax exemption TC 766 (CRN 296) credit is applied to MF using April 1, 2010 as the credit effective date for both quarterly and annual tax returns. If a TP chooses not to count the credit as payment towards the tax liability amounts incurred during the period and makes the applicable deposits instead, the credit will generate an overpayment.

  6. The payroll tax exemption that would be applicable to wages paid during the first quarter of 2010 (line 12c - 12e on Form 941) is only valid for the second quarter 2010. If a request is received for a tax period other than 201006, no consider the request and follow existing procedures in IRM 21.5.3.4.6.3, No Consideration Procedures.

  7. Use the chart below to determine if the HIRE claim is processable.

    If And Then
    TP files the applicable “X” form claiming the payroll tax exemption (either line 12c or 19d of Form 941-X), ≡ ≡ ≡ ≡ ≡ ≡ The entity is coded with an Employment Code (EC) “F”, “G”, “T”, or “A” Send the claim CAT-A.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    TP files the applicable “X” form claiming an increase to the payroll tax exemption (line 19d, column 4, of Form 941-X), ≡ ≡ ≡ ≡ ≡ The address of record is a foreign address

    Exception:

    the five U.S. territories (i.e., American Samoa, Commonwealth of the Northern Mariana Islands, Guam, the US Virgin Islands, and Puerto Rico) are not considered a foreign address

    		Send the claim CAT-A.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    TP with BOD Code "LM" files the applicable “X” form claiming an increase to the payroll tax exemption (line 12a – 12c on Form 941-X) The amount of tax on line 12c, Column 4 is a tax decrease of ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Send the claim CAT-A.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    TP with BOD Code "SB" or "TE" files the applicable “X” form claiming an increase to the payroll tax exemption (line 12a – 12c on Form 941-X) The amount of tax on line 112c, Column 4 is a tax decrease of ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Send the claim CAT-A.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    TP (any BOD code) files the applicable “X” form claiming an increase to the payroll tax credit for the exempt wages paid to qualified employees March 19 – 31 for tax period 201006 The amount of additional “credit” on line 19d, column 4, of Form 941-X is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ Send the claim CAT-A.
    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
    TP files the applicable “X” form claiming the payroll tax credit for the exempt wages paid to qualified employees March 19 – 31 (lines 19c – 19d on Form 941-X) The tax period is for any period other than 201006 No consider the request and inform the taxpayer the payroll tax exemption that would be applicable to wages paid during the first quarter of 2010 is only valid for the second quarter 2010.

    Note:

    See IRM 21.5.3.4.6.3, No Consideration Procedures, for additional information.

21.7.2.5.21  (10-01-2011)
Affordable Care Act (ACA) of 2010 — Income Exclusion for Loan Forgiveness for Health Professionals

  1. The Affordable Care Act expands a tax exclusion for amounts received by health professionals under loan repayment and forgiveness programs. Prior to the new law, only amounts received under the National Health Service Corps Loan Repayment Program or certain state loan repayment programs eligible for funding under the Public Health Service Act qualified for a tax exclusion.

  2. The Affordable Care Act expands this tax exclusion to include any state loan repayment or loan forgiveness programs intended to increase the availability of health care services in underserved areas or health professional shortage areas and makes this exclusion retroactive to the 2009 tax year.

  3. Health care professionals participating in these programs who have reported income from repaid or forgiven loan amounts on their 2009 returns, possibly after receiving a Form W-2, Wage and Tax Statement, or Form 1099, may be due refunds. Those health care professionals who believe they qualify for this relief should be encouraged to consult their state loan program offices to determine whether the program is covered by the new law.

  4. A health care professional whose employer withheld and paid taxes under FICA on a repaid or forgiven loan covered by the new provision of the Affordable Care Act may request that the employer seek a refund of withheld FICA on the employee’s behalf.

  5. Since the employer also pays a portion of FICA (Social Security and Medicare tax) that is not withheld from the amount paid to the employee, the employer will also be entitled to a refund.

    • To obtain the refund, the employer must file a separate Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, for each Form 941 that needs to be corrected.

    • Employers filing a Form 941-X are also required to file Form W-2c.

    Note:

    These claims will only be identifiable if the TP states in the explanation the specific reason for filing. Some possible explanations may be "excluded student loan amount under 2010 Health Care Act" , "Affordable Care Act" or "Student Loan Forgiveness" .

  6. These returns will be centralized in Accounts Management (AM) at the Ogden campus. Once these claims are identified and you are not part of the centralized team, route accordingly.

    1. If you receive a paper case, route to:
      Internal Revenue Service
      ARKA Building
      1973 North Rulon White Blvd
      Ogden, UT 84404
      Attn: MS 6552

    2. If you receive a case that has already been scanned into CIS, reassign to the Ogden Campus IDRS number 0443004314 and notate on AMS/CIS "Affordable Care Act" .

  7. The procedures below are for the Ogden AM centralized team only:

    1. Follow existing procedures in IRM 21.7.2 to make the applicable adjustments.

    2. Beginning July 1, 2010. In addition to inputting the applicable adjustment, TC 971 action code 389 must be input via CC REQ77 in order to track these applicable claims. This 971 code must be input on the specific tax module for which the applicable adjusted return was filed.

    3. Organization, Function, and Program (OFP) Code 710-84381 must be used when working these ACA claims.

21.7.2.6  (01-01-2005)
CT-1, CT-2 Railroad Tax Returns

  1. This section contains information on:

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

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

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

    • Railroad Retirement Board (RRB) Employer Status Determinations

  2. A revised Memorandum of Understanding (MOU) was executed by RRB and IRS in March 2010 (Agreement between RRB and IRS (2010)) to govern data sharing between the two agencies.

21.7.2.6.1  (01-01-2005)
What are Forms CT-1 and CT-2?

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

    • The MFT is 09

    • Tax Class 7

    • Document Code 11

  2. Form CT-2 is used to report railroad retirement taxes imposed on compensation received by employee representatives and has been processed at the CSPC since 07/01/2002. It is a quarterly return filed in the employee representative's SSN (Social Security Number). Return is due the last day of the second month following the end of the quarter. Claims or other correspondence received at other campuses must be routed or coordinated as detailed in IRM 21.7.2.6.4.1.

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

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

21.7.2.6.2  (01-01-2005)
Imposition of Tax (Forms CT-1)

  1. The Railroad Retirement Tax Act (RRTA) imposed two taxes on employee income, and three excise taxes on employers.

    1. Employer must collect tax from each employee.

    2. An employer who does not collect employee tax is liable for that tax.

  2. Forms CT-1 do not include any listing of employees' names, account numbers, or amount of compensation paid (except for statements attached to support adjustments to Tier l and Tier ll taxes for prior periods). The railroad employer provides wage information reports directly to the Railroad Retirement Board (RRB).

21.7.2.6.3  (01-01-2005)
Imposition of Tax (Forms CT-2)

  1. RRTA imposes taxes listed below on employee representatives.

    • Tier I taxes based on compensation (Tier l taxes are the same as reported on Forms CT-1.)

    • Tier ll taxes based on compensation (Taxes are determined on the same wage base limitation as that on Form CT-1.)

      Note:

      Railroad Unemployment Repayment Tax (RURT) was no longer applicable after the first two quarters of 1993.

      Note:

      The Railroad Retirement and Survivors' Improvement Act of 2001 (RRSIA of 2001) repealed the railroad retirement supplemental annuity tax paid by railroad employers. Since tax year 2002, railroad employers and employee representatives are no longer liable for this supplemental tax.

21.7.2.6.4  (01-01-2005)
Forms CT-1 and CT-2 Research

  1. This section discusses research on Forms CT-1 and CT-2.

21.7.2.6.4.1  (01-12-2006)
Forms CT-1 Are Processed at Cincinnati Submission Processing Campus

  1. Forms, claims or correspondence received at other campuses must be routed or coordinated with:

    IRS
    Large Corp/Technical Unit
    Stop 537G
    201 W. Rivercenter Blvd.
    Covington, KY 41011

  2. For inquiries received via the toll-free line, prepare Form 4442/e4442 and fax to the Technical Unit at:

    • 859-669-5018, Team 401, or

    • 859-669-4776, Team 402.

21.7.2.6.4.2  (01-07-2011)
Form CT-1 Tax Rates

  1. There are separate tax rates for Tier l and Tier ll taxes for both employers and employees, and a separate tax rate for supplemental annuity taxes for employers only. Taxes are determined on an annual basis and are due when compensation is paid, not when the payroll period ends.

  2. Tier l taxes are equivalent to FICA taxes. Since there are separate wage bases, separate lines appear on the return. Since 1994, the Medicare portion of the Tier l tax is 1.45% of all compensation for both the employer and employee (2.9% total).

  3. The Tier l portion equivalent to the social security portion, is 6.2% for both employer and employee (12.4% total) based on the table below:

    Tax Year Taxable Amount
    2001 On the first $80,400
    2002 On the first $84,900
    2003 On the first $87,000
    2004 On the first $87,900
    2005 On the first $90,000
    2006 On the first $94,200
    2007 On the first $97,500
    2008 On the first $102,000
    2009 - 2011 On the first $106,800

  4. Section 101 of the Hiring Incentives to Restore Employment (HIRE) Act enacted March 18, 2010 created a payroll tax exemption for the employer's share of social security taxes on wages paid to certain previously unemployed workers from March 19, 2010 through December 31, 2010. This payroll tax exemption also applied to the employers 6.2% share of Tier I railroad retirement taxes for wages paid to qualified employees reported on Form CT-1 (but not to taxes reported on Form CT-2). The employee's 6.2 percent share of Tier I tax (figured up to the wage limit), and the employer and employee's shares of Medicare Tier I taxes still applied to all wages. See IRM 21.7.2.5.20, HIRE — Payroll Tax Exemption, for more information.

    Caution:

    Credit Reference Number (CRN) 296 was validated for Forms CT-1 (tax period 201012 only) for allowance of the HIRE refundable credit arising from employment of qualified employees for the period of March 19, 2010 through March 31, 2010. However, the Item Reference Numbers (IRNs) 115, 116, and 117 discussed in the IRM cross referenced above do not apply to Form CT-1.

  5. Section 601 of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the employee tax rate for social security taxes from 6.2 percent to 4.2 percent for wages paid January 1, 2011 through December 31, 2011. This payroll tax rate reduction also applies to the employee's share of Tier I railroad retirement taxes reported on Form CT-1 and on Form CT-2. The employer's 6.2 percent share of Tier I tax (figured up to the wage limit), and the employer and employee's shares of Medicare Tier I taxes still apply to all wages. Due to late passage of the legislation, employers may have difficulty in promptly implementing the reduced employee Tier I tax rate. Employers were instructed to implement the new 4.2 percent employee tax rate as soon as possible but not later than January 31, 2011. Employers were further instructed to correct any overwithholding of taxes on a subsequent pay period but not later than March 31, 2011. Since it is anticipated that the tax rate reduction will be incorporated into the 2011 Form CT-1 and Form CT-2 versions, no special adjustment procedures to account for the tax rate change are expected.

  6. Tier ll taxes are based on table below.

    Tax Year Employer/Employee % On the first:
    2001 16.1%/4.9% $59,700
    2002 15.6%/4.9% $63,000
    2003 14.2%/4.9% $64,000
    2004 13.1%/4.9% $65,100
    2005 12.6%/4.4% $66,900
    2006 12.6%/4.4% $69,900
    2007 12.1%/3.9% $72,600
    2008 12.1%/3.9% $75,900
    2009 - 2011 12.1%/3.9% $79,200

  7. Until January 1, 2002, employers paid a supplemental annuity work-hour tax based on the number of work-hours for which compensation was paid to each employee, unless employer is exempt from the tax. The table below contains the rate for each year.

    Tax Year Work-Hour Tax
    1999 27 cents times the number of work-hours
    2000 26.5 cents times the number of work-hours
    2001 26 cents times the number of work-hours

    Note:

    The Railroad Retirement and Survivors' Improvement Act of 2001 (RRSIA of 2001) repealed the railroad retirement supplemental annuity tax paid by railroad employers. Since tax year 2002, railroad employers and employee representatives are no longer liable for this supplemental tax.

    1. An employer was permitted to use a safe harbor number for calculating work-hours for employees. The safe harbor number was 164 hours for 2001. In years prior to 2001, the employer would check the appropriate box on Form CT-1 allowing them to use this election in the subsequent year. Due to RRSIA of 2001, these boxes no longer exist on Form CT-1.

    2. If the employer was exempt from supplemental annuity work-hour tax, then the employer was subject , instead, to an excise tax equal to the supplemental annuity paid to each employee plus a percentage for administrative costs. The tax amount was determined quarterly by RRB. The employer was notified of the amount due on Form G-241. The employer was required to attach this form to Form CT-1. Due to RRSIA of 2001 this was repealed for periods beginning after tax year 2001.

21.7.2.6.5  (01-01-2005)
Forms CT-1 and CT-2 Procedures

  1. Forward CT-1 cases in debit status to Cincinnati Accounts Management Campus (CAMC) and take the following actions:

    1. Input a STAUP for 8 cycles.

    2. Send Letter 86C to advise taxpayer the case is being transferred to CAMC.

    3. Note on routing form that a STAUP for 8 cycles was input and Letter 86C was sent.

21.7.2.6.5.1  (01-07-2011)
Form CT-1 Tax Adjustments

  1. IRN 070 is necessary for adjusting the total of railroad retirement tax.

  2. Returns for 199412 and subsequent do not reflect the taxpayer's original liability (assessed with TC 150) in the field ADJ-RR-RETIRMNT.

    If Then
    A TC 290 is input Field reflects the TC 290 amount only.
    A TC 291 is input Field shows nothing (unless a previous TC 290 was input).
    Adjusting these returns Do not rely on this field to determine current tax liability, add the original assessment plus all increases; and then subtract all decreases to compute taxpayer's current tax liability.

  3. Credit Reference Number (CRN) 296 was validated for Forms CT-1 (tax period 201012 only) for allowance of the HIRE refundable credit arising from employment of qualified employees for the period of March 19, 2010 through March 31, 2010. See IRM 21.7.2.5.20, HIRE — Payroll Tax Exemption, for more information.

    Caution:

    Item Reference Numbers (IRNs) 115, 116, and 117 discussed in the IRM cross referenced above do not apply to Form CT-1.

21.7.2.6.5.2  (01-01-2005)
Form CT-1 Duplicate Filing Cases

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

  2. Use approved local procedures when working duplicate filing cases involving tax decreases.

  3. Input TC 29X with IRN 070 in appropriate BS.

  4. Route claims received involving large case controls to the area office where the railroad is located.

21.7.2.6.5.3  (01-01-2005)
Interest Free Adjustments

  1. If an employer has made an undercollection and underpayment of taxes for a prior period under the IRC Sections listed below, employer may be entitled to an interest free adjustment, per REG. 31.6205-1. (See IRM 21.7.2.4.6.2, Interest Free Adjustments (Employment Tax Returns), for additional information.)

    • IRC Section 3101, FICA tax on employees

    • IRC Section 3111, FICA tax on employers

    • IRC Section 3201, RRTA tax on employees

    • IRC Section 3221, RRTA tax on employers

  2. The interest-free adjustment rules under section 6205 do not apply to the employee representative tax under IRC 3211 reported on Form CT-2.

21.7.2.6.5.4  (10-01-2011)
Form CT-1 Deposits

  1. As of January 1, 2011, taxes must be deposited by using Electronic Funds Transfer (EFT) if the tax liability equals or exceeds the designated threshold amount shown in the table below. See IRM 20.1.4.2.1, Electronic Funds Transfer (EFT), for more information.

    Tax Period Ending $ Threshold
    200112 and subsequent 2,500
    199912 and 200012 1,000
    199812 and prior 500

  2. Prior to January 1, 2011, many employers were permitted to make their federal tax deposits at an authorized financial institution accompanied by an FTD coupon.

  3. RRBLINK was used to make payments until December 31, 2007 when that processing system was discontinued.

21.7.2.6.5.5  (01-01-2005)
Form CT-1 Discrepancy Report

  1. RRB performs a yearly reconciliation of tax, and reports any discrepancies using CT-1 Discrepancy Report to the SB/SE Speciality Tax Program Analyst. See Agreement between RRB and IRS (2010), Section 6.1(d).

  2. Forward any inquiries related to this procedure to the CT-1 specialist at the address cited in IRM 21.7.2.6.4.1. Forms CT-1 are Processed at Cincinnati Submission Processing Campus.

21.7.2.6.5.6  (10-01-2008)
Unexplained Adjustment on Form CT-1 (CP 177)

  1. For tax periods beginning January 1, 2009 and subsequent, CP 177 will no longer be generated due to the implementation of Form CT-1 X. The effective date for this new form and process is for errors ascertained on or after January 1, 2009.

    Note:

    These instructions are being left in the IRM to accommodate returns filed for tax periods ending December 31, 2008 and prior.

  2. When taxpayer fails to adequately explain a credit of ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ claimed on Form CT-1, or when taxpayer files a Form CT-1 and claims an adjustment to prior periods of ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , credit is tentatively allowed. C&E enters CCC "C" which generates a CP 177. CP 177 requests an explanation from the taxpayer for the amount claimed.

  3. Process responses to CP 177 as follows:

    If Then
    Taxpayer's reply indicates the adjustment should be partially or totally disallowed Adjust the tax based on taxpayer's reply. (Also adjust penalties and interest, if necessary.)
    No reply is received Disallow the credit and notify taxpayer of adjustment.
    Taxpayer adequately explains adjustment Close case as no change and advise taxpayer.

21.7.2.6.5.7  (01-01-2006)
Claims (Forms CT-1)

  1. Forward claims involving tax decreases with non administrative errors to CAMC On-Site Classification, as Category A.

  2. Forward all excess Tier I and Tier II claims filed by employees or employers to the address shown in IRM 21.7.2.6.4.1.

  3. Excess Tier I and Tier II tax claims received by the employee are worked following the procedures outlined in IRM 21.7.2.4.6.4.2, Excess FICA Tax Withheld-Employee Claims for Refund.

  4. Route claims involving large case control (taxes of $1,000,000 or more) to the area office where the railroad is located.

21.7.2.6.5.8  (01-01-2005)
RRB Employer Status Determinations

  1. The RRB may determine that a railroad has been reporting and paying FICA taxes in error. The employer may then file a claim or make an adjustment using Form 941-X to remove the FICA taxes in previous years and request they be applied to their Railroad Retirement Tax account (Form CT-1). Employers are instructed to file Form CT-1X, Adjusted Employer's Annual Railroad Retirement Tax Return or Claim for Refund. If the employer had not filed Form CT-1 for the prior period, see IRM 21.7.2.6.5.9. They may also file an amended Form 940 for refund of FUTA taxes based on the RRB determination.

  2. Do not work these claims or correspondence in sites other than Cincinnati. If a claim or correspondence is received, forward to CAMC as indicated in IRM 21.7.2.6.4.1. If determination letters from Chief Counsel are received, forward to:

    IRS
    Entity Stop 343G
    201 W. Rivercenter Blvd.
    Covington, KY 41011

21.7.2.6.5.9  (10-01-2008)
Incorrect Type of Return Filed – RRTA vs. FICA

  1. There are instances where taxpayer files Form 941/944 but should file Form CT-1, or vice versa.

  2. If the employer should have filed a Form CT-1 to report RRTA taxes, the employer can make an interest-free adjustment by filing an original return, Form CT-1, reporting the correct amount of RRTA tax and attaching an adjusted return (Form 941-X/944-X/CT-1X) to correct the erroneously reported FICA tax.

    Example:

    Taxpayer files Form 941 for the 201103, 201106, and 201109 quarters. At the end of the year, the taxpayer realizes he filed incorrect Forms 941 for the first three quarters of 2010 and should have filed Form CT-1. Instruct the taxpayer to file an original Form CT-1 for 201112 and include RRTA for the entire year (including what was previously reported on Forms 941. Also, instruct the taxpayer to file Forms 941-X for each of the first three quarters of 2011.

21.7.2.6.5.10  (11-08-2010)
Form CT-1X - Adjusted Employer's Annual Railroad Retirement Tax Return or Claim for Refund

  1. Form CT-1X is filed to correct taxes previously reported on Form CT-1. Taxpayers can choose to either file:

    • An adjusted employment tax return, or

    • A claim

    Note:

    If the taxpayer does not check a box in Part 1 (or checks both boxes) and the Form CT-1X reflects a tax decrease, make two attempts to contact the taxpayer by phone to determine whether they intended to follow the adjustment process or the claim process. If unable to contact the taxpayer by phone, verify which set of certification box(es) were checked. If the taxpayer checked the adjustment certification(s) or checked both the adjustment certification(s) and the claim certification(s), process as an adjusted employment tax return. If the taxpayer checked only the claim certification(s), process as a claim for refund.

    Reminder:

    When contacting the taxpayer or authorized representative, follow taxpayer authentication guidelines in IRM 21.1.3 .

  2. Taxpayers are required to complete the applicable certification box based on their selection in Part 1 of Form CT-1X.

    Example:

    If the TP checks box 1 in Part 1, then they must check the applicable certification box(es) on line 4. If TP checks box 2 in Part 1, then they must check the applicable certification box(es) on line 5

    Note:

    If the TP checks an incorrect certification box based on the information in Part 1, continue processing the claim based on the information provided in Part 1.

21.7.2.6.5.10.1  (11-08-2010)
Form CT-1X Decreases - Adjusted Employment Tax Return

  1. Verify all required items on Form CT-1X are complete, such as:

    • Name, address, and EIN

    • Calendar year being corrected

    • Part 1 Box 1 is checked

    • Applicable certification is checked on line 4a, 4b or 4c

    • Detailed explanation

    • Signature

  2. If a certification box is not checked, make two attempts to secure the information by phone if a telephone number is available. Otherwise, follow procedures in IRM 21.5.3.4.2, Tax Decrease or Credit Increase Processing. Use Letter 4384C to reject the claim and identify the missing information in the letter.

    Caution:

    The individual contacted by phone must be authorized to prepare taxpayer's employment tax returns. Document the case history with the date, time, name of individual contacted, and information obtained from the individual.

  3. If a taxpayer files an adjusted employment tax return within 90 days of the expiration of the Period of Limitations, the adjustment must be converted to a claim for refund and the taxpayer must be notified.

    1. To convert an adjustment to a claim, notate the following remarks on the Form CT-1X:
      "90 day - Claim."

    2. Generate Letter 4384C to the TP explaining the adjustment has been converted to a claim.

    Note:

    See IRM 21.7.2.6.5.10.2 to process claim as a refund and refer to IRM 21.7.2.4.6.5 for additional information on 90 day - Claims.

  4. Do the following:

    1. Input TC 291, HC 1, BS 20 for the amount of decrease along with IRN 070.

      Note:

      Overpayments arising from adjustments made under these procedures are subject to offset. Omit Hold Code 1 with the adjustment and allow the computer to systemically offset the credit if it will be fully absorbed by an outstanding balance due. Otherwise, if conditions prevent the computer from completing the offset, or if only part of the credit needs to be offset, manual offsets using TC 820/TC 700 transactions will be required.

      Caution:

      For tax decreases with an unreversed FTD penalty, see IRM 20.1.4.21.5.

    2. Transfer the applicable overpayment using TC 830/710 to the period in which the Form CT-1X was filed.

      Caution:

      To prevent interest from generating, use the later of the return due date of the tax period being adjusted or the availability date of the overpayment as the transaction date of the TC 830 and use the due date of the return the credit is being applied to as the transaction date of the TC 710. See IRM 21.5.8.4.3(3), Determining Correct Credit Transfer Format, for more information.

    3. If the entire credit is not available to be transferred, generate Letter 4384C to the taxpayer. Explain why the entire amount was not available (for example, there was a balance due on the tax period being adjusted or the credit is being offset to a balance due on another tax period).

21.7.2.6.5.10.2  (11-08-2010)
Form CT-1X Decreases - Claim

  1. Verify all required items on Form CT-1X are complete, such as:

    • Name, address, and EIN

    • Calendar year being corrected

    • Part 1 Box 2 is checked

    • Applicable certification is checked on line 5a, 5b, 5c or 5d

    • Detailed explanation

    • Signature

  2. If a certification box is not checked, make two attempts to secure the information by phone if a telephone number is available. Otherwise, follow procedures in IRM 21.5.3.4.2, Tax Decrease or Credit Increase Processing. Use Letter 4384C to reject the claim and identify the missing information in the letter.

    Caution:

    The individual contacted by phone must be authorized to prepare taxpayer's employment tax returns. Document the case history with the date, time, name of individual contacted, and information obtained from the individual.

    Exception:

    Claims filed without consent. If taxpayer has not checked a box on line 5 and states (in the explanation or in response to our contact) they are not required to obtain the consents prior to filing the claim and the claim is ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , send claim CAT-A. Exam will correspond with the taxpayer to secure applicable certifications. In certain situations, taxpayers may not have repaid or reimbursed their employees or obtained their consents prior to filing a claim (Form CT-1X). However, they must certify they have repaid or reimbursed their employees or obtained consents before the Service can accept the claim. See Instructions for Form CT-1X for more information.

  3. Input TC 291, BS 20 and the appropriate IRN's for the amount of the decrease.

    Caution:

    For tax decreases with an unreversed FTD penalty, see IRM 20.1.4.21.5.

  4. If the entire credit is not available to be refunded to the taxpayer, generate Letter 4384C to the taxpayer explaining the discrepancy.

21.7.2.6.5.10.3  (03-02-2011)
Form CT-1X Increases - Adjusted Employment Tax Return

  1. Verify all required items on Form CT-1X are complete.

  2. Check for the date the taxpayer discovered the error. If not entered on page 1, review the explanation.

    Note:

    ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ , if the ascertained date is not provided and a telephone number is available, make two attempts to contact taxpayer by phone to obtain the information. If the ascertained date cannot be obtained by phone, input the adjustment as a TC 290.

    Exception:

    If you receive a Form CT-1X for the immediately preceding tax year prior to the due date for the current tax year (for example, a Form CT-1X reporting a tax increase for tax year 2009 received on or before February 28, 2011), it is not necessary to contact the taxpayer for an ascertained date. In that situation, input a TC 298 with the applicable interest computation date. See IRM 21.7.2.4.6.2, Interest Free Adjustments (Employment Tax Returns), for more information.

  3. Use the table below to make your adjustment(s).

    If Then
    Return is filed by the due date of the return for the period in which the taxpayer discovered the reporting error Input TC 298, BS 20 and the correct interest computation date (INTCMP-DT). See IRM 21.7.2.4.6.2 and example below for additional information.
    Return is not filed by the due date of the return for the return period in which the error was ascertained or "date you discovered errors" was blank or the date error was discovered was not furnished in Part 4 Input TC 290 with BS 20.

    Example:

    An employer discovers an error on February 1, 2011 and files a Form CT-1X which is received by the IRS on March 1, 2011 for the 09/200912 tax period. The interest computation date would be March 1, 2011.

  4. Adjust the FTD penalty when using either a TC 290 (see IRM 20.1.4.21.3) or a TC 298 (see IRM 20.1.4.21.5).

    Note:

    See IRM 20.1.4.21.5.1, Amended ROFTL (Forms 941-X, 943-X, 944-X, 945-X, and CT-1X), when using a TC 298 or TC 291 and an amended ROFT was provided with the adjusted return.

  5. Be sure any payments are credited to period(s) where the tax is being assessed.


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