Employment Tax Adjustments, 74233-74245 [E7-25134]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 249 (Monday, December 31, 2007)]
[Proposed Rules]
[Pages 74233-74245]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-25134]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[REG-111583-07]
RIN 1545-BG50


Employment Tax Adjustments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed amendments to regulations 
relating to employment tax adjustments and employment tax refund 
claims. These proposed amendments modify the process for making 
interest-free adjustments for both underpayments and overpayments of 
Federal Insurance Contributions Act (FICA) and Railroad Retirement Tax 
Act (RRTA) taxes and Federal income tax withholding (ITW) under 
sections 6205(a) and 6413(a), respectively, of the Internal Revenue 
Code (Code). These proposed amendments also modify the process for 
filing claims for refund of overpayments of employment taxes under 
sections 6402 and 6414.
    These amendments are proposed in connection with the IRS's 
development of new forms to report adjustments to employment taxes 
which will replace the existing process of reporting adjustments of 
employment taxes on regularly filed employment tax returns. These 
proposed amendments affect taxpayers that file Form 941, ``Employer's 
QUARTERLY Federal Tax Return,'' Form 943, ``Employer's Annual Tax 
Return for Agricultural Employees,'' Form 944, ``Employer's ANNUAL 
Federal Tax Return,'' Form 945, ``Annual Return of Withheld Federal 
Income Tax,'' and Form CT-1, ``Employer's Annual Railroad Retirement 
Tax Return,'' and any related Spanish-language returns or returns for 
U.S. possessions.
    This document contains proposed amendments to regulations relating 
to the return requirements under section 6011 to reflect the changes to 
the adjustment and refund processes, and to reflect additional 
statutory and process updates. This document also contains proposed 
amendments to the regulations under section 6302 to clarify deposit 
obligations with respect to interest-free adjustments of underpayments 
and the effect of adjustments and refunds on the deposit schedule of a 
Form 943 filer.
    This document also provides notice of a public hearing on these 
proposed amendments to the regulations.

DATES: Written or electronic comments must be received by March 27, 
2008. Requests to speak (with outlines of topics to be discussed) at 
the public hearing scheduled for April 17, 2008, must be received by 
March 27, 2008.
    Applicability Dates: See the Proposed Dates of Applicability 
section of the SUPPLEMENTARY INFORMATION.
    Effective Date: See the Proposed Effective Date section of the 
SUPPLEMENTARY INFORMATION.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-111583-07), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
111583-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at www.regulations.gov (IRS-REG-111583-07). The 
public hearing will be held in the Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
please contact Ligeia M. Donis of the Office of Division Counsel/
Associate Chief Counsel (Tax Exempt and Government Entities), (202) 
622-0047; concerning submission of comments, the hearing, and/or to be 
placed on the building access list to attend the hearing, please 
contact Richard Hurst at Richard.A.Hurst@irscounsel.treas.gov or (202) 
622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by February 29, 2008. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in these proposed regulations is in 
Sec. Sec.  31.6011(a)-1, 31.6011(a)-4,

[[Page 74234]]

31.6011(a)-5, 31.6205-1, 31.6402(a)-2, 31.6413(a)-1, 31.6413(a)-2, and 
31.6414-1. This information is required by the IRS to verify compliance 
with return requirements under section 6011, employment tax adjustments 
under sections 6205 and 6413, and claims for refund of overpayments of 
employment taxes under sections 6402 and 6414. This information will be 
used to determine whether the amount of tax has been reported and 
calculated correctly. The likely respondents are employers.
    Estimated total annual reporting and/or recordkeeping burden: 
15,000,000 hours.
    Estimated average annual burden per respondent: 10 hours.
    Estimated number of respondents: 1,500,000.
    Estimated annual frequency of responses: on occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    These proposed regulations are part of the IRS's effort to reduce 
taxpayer burden by permitting employers to make employment tax 
adjustments on a separately filed form as soon as an error is 
ascertained, rather than as a line adjustment on the employer's 
regularly filed employment tax return.
    These proposed regulations amend the Employment Tax Regulations (26 
CFR part 31) under section 6011 relating to the requirement to file a 
return, under sections 6205(a) and 6413(a) relating to the process for 
making adjustments of underpayments and overpayments, respectively, of 
employment taxes, under section 6302 relating to deposit obligations, 
and under sections 6402 and 6414 relating to the process of filing a 
claim for refund for an overpayment of employment taxes. For purposes 
of these proposed amendments to the regulations, the term employment 
taxes means the Federal Insurance Contributions Act (FICA) tax (both 
the Social Security and Medicare portions) imposed on both the employer 
and the employee, the Railroad Retirement Tax Act (RRTA) tax imposed on 
both the employer and employee, and federal income tax withholding 
(ITW). To the extent that other types of withholding are treated as ITW 
under section 3402(a) (that is, gambling withholding, pension 
withholding, and backup withholding as set forth in sections 
3402(q)(7), 3405(f), and 3406(h)(10), respectively), these other types 
of withholding are included in the term ``employment taxes''.

Interest-Free Adjustments

    Generally, the Internal Revenue Code (Code) requires that interest 
be paid to the IRS on any underpayment of tax and that interest be 
allowed and paid to the taxpayer on any overpayment of tax. See 
sections 6601(a) and 6611(a), respectively. An exception to the general 
rule, however, applies uniquely to employment taxes. Where an amount 
other than the correct amount of tax imposed by sections 3101 (employee 
FICA tax), 3111 (employer FICA tax), 3201 (employee RRTA tax), 3221 
(employer RRTA tax), or 3402 (ITW) is reported to the IRS with respect 
to any payment of wages or compensation, sections 6205(a) and 6413(a) 
permit employers to make interest-free adjustments for underpayments 
and overpayments, respectively. Where the correct amount of tax has 
been reported but not paid, no adjustment to the amount is necessary; 
accordingly, the interest-free adjustment rules do not apply.
    The legislative history of the predecessors to sections 6205 and 
6413 indicates that the interest-free adjustment process was envisioned 
as a way to fix errors made in prior return periods as soon as they 
were discovered, without the need to go through more burdensome 
procedures. The adjustment process was designed to permit the employer 
to adjust, without interest, overpayments and underpayments of tax 
without the necessity in the former case of requiring the filing of a 
claim for refund and in the latter case of a notice and demand by the 
IRS for additional tax. Thus, the legislative history shows that 
Congress envisioned a process whereby the employer would correct prior 
errors, separate from the refund and notice and demand processes. 
Moreover, the legislative history indicates that Congress assumed that 
an overpayment adjustment would be accepted by the IRS only after the 
employer had returned to the employee any amount of previously 
overwithheld tax.
    The existing regulations under section 6205(a) set forth the 
procedures for making interest-free adjustments for underpayments of 
employment taxes. They provide that if a return is filed and less than 
the correct amount of employee or employer portions of FICA or RRTA tax 
is reported and paid, the employer shall adjust the underpayment (a) by 
reporting the additional amount due as an adjustment on a current 
return, or (b) by reporting such additional amount on a supplemental 
return. The IRS has not issued guidance or procedures for filing a 
supplemental return, other than indicating that the forms used to 
accept an assessment of employment taxes after an examination (that is, 
Form 2504, ``Agreement and Collection of Additional Tax and Acceptance 
of Overassessment (Excise or Employment Tax)'', and Form 2504-WC, 
``Agreement to Assessment and Collection of Additional Tax and 
Acceptance of Overassessment in Worker Classification Cases (Employment 
Tax)'') constitute supplemental returns for purposes of permitting the 
assessment to be made without interest. See Rev. Rul. 75-464 (1975-2 CB 
474). Accordingly, outside of the examination context, interest-free 
adjustments of employment tax are made on a current return. (See Sec.  
601.601(d)(2)(ii)(b)).
    The reporting of an underpayment of FICA tax or RRTA tax 
constitutes an interest-free adjustment when the underpayment is 
reported on a current return only if the current return is filed on or 
before the last day on which the return is required to be filed for the 
return period in which the error is ascertained. An error is 
ascertained when the employer has sufficient knowledge of the error to 
be able to correct it. If the amount of the underpayment is paid to the 
IRS by the due date for reporting the adjustment, it is paid without 
interest. However, if the underpayment is reported but the amount is 
not paid when due, interest begins to accrue from the due date for 
reporting the adjustment. The rules are the same for adjusting 
underpayments of ITW when less than the correct amount has been 
withheld, except that adjustments on the current return can only be 
made on a return for a return period in the same calendar year in which 
the wages or compensation is paid. Although the regulations do not 
address it, the relevant forms and instructions permit employers to 
adjust administrative errors involving ITW, that is, errors involving 
the inaccurate reporting of the amount withheld, and errors discovered 
as part of an examination for previous calendar years.
    The existing regulations provide that an interest-free adjustment 
for an underpayment may not be made after a taxpayer has received 
notice and

[[Page 74235]]

demand from the IRS for payment of the amount based on an assessment or 
after a taxpayer has received a Notice of Determination of Worker 
Classification.
    An underpayment adjustment may only be made within the period of 
limitations for assessment under section 6501(a) (generally 3 years 
from the date the original return is filed). Section 6501(b)(2) 
provides that, for purposes of section 6501, employment tax returns 
reporting FICA tax or ITW for any return period ending with or within a 
calendar year filed before April 15 of the succeeding calendar year 
will be deemed filed on April 15 of such succeeding calendar year.
    The regulations also provide that where an employer fails to 
collect the correct amount of employee tax (either the employee share 
of FICA tax, the employee share of RRTA tax) or ITW with respect to 
wages or compensation paid during a given return period and discovers 
that error before it files the return for such return period, the 
employer is still required to report and pay the correct amount on a 
timely basis. If the employer fails to report and pay the correct 
amount, any subsequent correction of that error will not qualify as an 
interest-free adjustment. However, if the employer files a FICA tax 
return and should have filed a RRTA tax return, or vice versa, and 
reports and pays less than the correct amount of tax, an interest-free 
adjustment may be made by filing the correct type of return for each 
return period and reporting the additional amount of tax.
    The existing regulations under section 6413(a) set forth the 
procedures for making interest-free adjustments for overpayments of 
employment taxes. They provide that, if an employer ascertains an 
overpayment error within the applicable period of limitations on credit 
or refund, the employer is required to repay or reimburse its employees 
the amount of overcollected employee FICA tax or employee RRTA tax 
prior to the due date of the return for the return period after the 
return period in which the error was ascertained and prior to the 
expiration of the applicable period of limitations. An error is 
ascertained when the employer has sufficient knowledge of the error to 
be able to correct it. An employer ``reimburses'' an employee by 
applying the overwithheld amount against taxes to be withheld on future 
wages. The employer must retain appropriate records to reflect that the 
employee has been repaid or reimbursed and that the employee has not 
filed a claim for refund of such tax or that any filed claim has been 
rejected.
    The applicable period of limitations is set forth in section 6511 
and is generally 3 years from the date the original return was filed or 
2 years from the date the tax was paid, whichever is later. Section 
6513(c)(1) provides that, for purposes of section 6511, employment tax 
returns reporting FICA tax or ITW for any return period ending with or 
within a calendar year filed before April 15 of the succeeding calendar 
year will be deemed filed on April 15 of such succeeding calendar year. 
Section 6513(c)(2) provides that if FICA tax or ITW with respect to 
remuneration or other amount paid during any return period ending with 
or within a calendar year is paid before April 15 of the succeeding 
calendar, for purposes of section 6511 such tax will be deemed paid on 
April 15 of such succeeding calendar year.
    Once an employer repays or reimburses an employee, the employer may 
report both the employee and employer portions of FICA or RRTA tax as 
an overpayment on a current return. The reporting of the overpayment 
constitutes an interest-free adjustment if the overpayment is reported 
on a current return filed on or before the last day on which the return 
is required to be filed for the return period following the return 
period in which the error was ascertained. Because of the requirement 
to repay or reimburse employees, employers are given an extra return 
period in which to repay or reimburse their employees and make the 
adjustment. Similar rules apply for making interest-free adjustments 
for overpayments of ITW, except that an interest-free adjustment may 
only be made if the employer ascertains the error and repays or 
reimburses its employees within the same calendar year that the wages 
were paid and reports the adjustment on a return for such calendar 
year. For example, if an employer who is a Form 941 filer discovers an 
overpayment of ITW on December 15, 2009 for wages paid in June 2009, 
the employer must repay or reimburse its employees by December 31, 2009 
and must report the adjustment on the fourth quarter 2009 Form 941.
    An overpayment adjustment under section 6413(a) must be made within 
the period of limitations for credit or refund of the overpayment, as 
set forth in section 6511 and described above. The adjustment may be 
limited in amount under section 6511(b)(2) as described above. An 
interest-free adjustment for an overpayment may not be made once a 
claim for refund has been filed.
    Currently, an interest-free adjustment, whether for an underpayment 
or an overpayment, is made by entering the amount as a line adjustment 
on a current return and including the amount in calculating the current 
return period's liability on the return. The current return period 
adjustment can be made on Form 941, ``Employer's QUARTERLY Federal Tax 
Return,'' Form 943, ``Employer's Annual Tax Return for Agricultural 
Employees,'' Form 944, ``Employer's ANNUAL Federal Tax Return,'' Form 
945, ``Annual Return of Withheld Federal Income Tax,'' or Form CT-1, 
``Employer's Annual Railroad Retirement Tax Return,'' and on any 
related Spanish-language returns or returns for U.S. possessions. The 
return on which the underpayment or overpayment adjustment is entered 
must include an attached statement explaining the adjustment, 
designating the return period in which the error occurred, and setting 
forth such other information as is required by the regulations and by 
the instructions relating to the return. Form 941c, ``Supporting 
Statement to Correct Information,'' qualifies as such attached 
statement and includes the necessary certifications to establish that 
the employer has satisfied the requirements to repay or reimburse its 
employee for overpayment adjustments and to obtain statements that the 
employee has not filed a claim for refund or that the claim has been 
rejected.

Claims for Refund

    For overpayments of employment taxes, section 6413(b) permits the 
filing of a claim for refund when an interest-free adjustment cannot be 
made. The existing regulations under section 6413(a) provide that an 
adjustment cannot be made after a claim for refund is filed. Under the 
regulatory authority in section 6413(b), the IRS has permitted 
taxpayers to choose between filing a claim for refund pursuant to 
section 6402(a) and making an interest-free adjustment pursuant to 
section 6413(a) to correct an overpayment of employment taxes. The 
preamble to Treasury decision 6472 (1960-2 CB 351), which promulgated 
the existing regulations, indicated an intent to make the overpayment 
adjustment process permissive. An extensive evaluation of these 
regulations in the late 1970's confirmed the optional nature of the 
overpayment adjustment process, and is reflected in Rev. Rul. 81-310 
(1981-2 CB 241). (See Sec.  601.601(d)(2)(ii)(b)).
    Under section 6402(a), the IRS, within the applicable period of 
limitations on credit or refund, may credit the amount of an 
overpayment, including any interest, against any tax liability of the 
person who made the overpayment and

[[Page 74236]]

shall, subject to certain offsets, refund any balance to such person. A 
claim for refund under section 6402(a) must be filed within the period 
of limitations on credit or refund as set forth in section 6511. Such 
refund may be limited in amount pursuant to section 6513(c)(2). Claims 
for refund are not granted automatically and the IRS is not required to 
act on the refund claim. Section 6532(a) provides that a taxpayer 
cannot file a suit for refund before the expiration of 6 months from 
the date of filing a claim for refund unless the IRS renders a decision 
on the claim within that time. The taxpayer must file suit within 2 
years of the date the claim was disallowed.
    The existing regulations under section 6402(a) set out the 
procedures for filing a claim for refund of overpaid FICA and RRTA 
taxes. The regulations permit an employer to file a claim for refund 
for an overpayment of FICA or RRTA tax, but require the employer to 
include a statement that the employer has repaid the employee's share 
of FICA or RRTA tax to the employee or has secured the written consent 
of the employee to allowance of the refund or credit. The employer must 
retain appropriate records reflecting that it has repaid its employee 
or obtained the employee's consent and that the employee has not filed 
a claim for refund of such tax or that any filed claim has been 
rejected.
    Section 6414 permits refunds of ITW only to the extent the amount 
of the ITW overpayment was not actually deducted and withheld from an 
employee. The existing regulations under section 6414 set out the 
procedures for filing a claim for refund of overpaid ITW and are 
similar to the procedures for filing a claim for refund of overpaid 
FICA or RRTA tax, except that an employer may not file a claim for an 
overpayment of ITW for an amount the employer deducted or withheld from 
an employee.
    An employer makes a claim for refund by filing Form 843, ``Claim 
for Refund and Request for Abatement'', with a Form 941c attached (or 
an equivalent statement). Form 941c includes the amounts to be refunded 
and the necessary certifications to establish that the employer has 
repaid the employee or obtained the employee's consent to filing the 
claim for refund, and has obtained a statement that the employee has 
not filed a claim for refund or that the claim has been rejected.

Reason for Amendments

    The current process for adjusting underpayments or overpayments of 
employment taxes raises a number of issues both for employers and the 
IRS, primarily because the current process requires employers to make 
adjustments to past return periods in connection with the filing of 
their current returns. The IRS believes it will reduce the burden for 
taxpayers, as well as improve tax administration, if the adjustment 
process for employment tax returns is revised by creating a separate 
``adjusted return'' to make adjustments to past return periods that can 
be filed independently of a return for any other return period.

Explanation of Provisions

Adjusted Return Replaces Current Return Process

    The proposed amendments change the process by which employers can 
make interest-free adjustments to correct underpayments or overpayments 
of employment tax. The proposed amendments to the regulations eliminate 
the existing process that uses the current return to make adjustments 
and replace it with a new process which will use a separately filed 
adjusted return to make adjustments. Unlike Form 941c, the new adjusted 
return will not be filed as an attachment to a current return and will 
not affect the liability reported on the current return.
    The proposed amendments to the regulations also eliminate any 
reference to the use of supplemental returns to make adjustments. The 
proposed amendments provide that Forms 2504 and 2504-WC will be treated 
as adjusted returns under the same rationale and criteria that they 
have been treated as supplemental returns under Rev. Rul. 75-464. Thus, 
corrections reported on these forms following an examination will 
continue to be eligible for interest-free adjustment treatment. See 
Sec.  601.601(d)(2)(ii)(b).
    The proposed amendments to the regulations do not affect the 
existing rules on correcting undercollections of employee tax (either 
the employee share of FICA or RRTA tax), or ITW when an employer 
discovers the error during the return period in which the 
undercollection occurred. In such case, the employer must report and 
pay the correct amount on a timely basis as if the correct amount of 
tax had been collected. If the employer fails to report and pay the 
correct amount, any subsequent correction of that error will not be an 
interest-free adjustment.

Time for Filing Adjusted Return

    An employer may file an adjusted return correcting an underpayment 
or an overpayment as soon as the employer ascertains the underpayment 
or overpayment error, rather than waiting to report the adjustment with 
the regularly filed employment tax return. The adjusted return for an 
underpayment may only be filed within the applicable period of 
limitations for assessing the underpayment, and the adjusted return for 
an overpayment may only be filed before the 90th day prior to the 
expiration of the applicable period of limitations on credit or refund. 
If the original return reporting FICA tax or ITW for the return period 
in which the wages were paid was timely filed and the taxes were timely 
paid, the limitations period for both assessment and credit or refund 
begins to run on April 15 of the year following the year in which the 
wages were paid and ends three years after that. Thus, for example, if 
wages are paid on June 6, 2009, and an original employment tax return 
reporting those wages is filed July 31, 2009 and the reported taxes are 
timely paid, the period of limitations for assessment or for credit or 
refund would expire April 15, 2013. An adjusted return reporting an 
underpayment must be filed by April 15, 2013. An adjusted return 
reporting an overpayment must be filed by January 15, 2013, the date 
which is 90 days before the expiration of the period of limitations on 
credit or refund. A claim for refund for the same overpayment will be 
timely if filed by April 15, 2013.
    The proposed amendments to the regulations provide that an 
adjustment will be interest-free only if it is reported on an adjusted 
return within a certain amount of time after it is discovered. 
Specifically, the adjusted return reporting an underpayment must be 
filed by the due date of the return for the return period in which the 
error is ascertained; the amount of the underpayment must be paid by 
the time the adjusted return is filed, or interest will begin to accrue 
from the date the adjusted return is filed. In addition, subject to 
limited exceptions, for underpayments of ITW where the incorrect amount 
was withheld, an adjusted return may be filed only for errors 
ascertained during the calendar year in which the wages were paid and 
must be filed by the due date of the return for the return period in 
which the error is ascertained. In addition, for overpayments of ITW 
where the incorrect amount was withheld, the adjusted return may be 
filed only for errors ascertained during the calendar year in which the 
wages were paid, the employer must repay or reimburse the employees 
within the same calendar year that the wages were paid, and the 
adjusted return must be filed by the due date of the return for the 
return period

[[Page 74237]]

following the return period in which the error is ascertained.

Treatment as Interest-Free Adjustment Where Original Return Never Filed

    The proposed amendments to the regulations also provide that 
interest-free adjustments for underpayments of FICA tax, RRTA tax, and 
ITW are available under certain circumstances where the underpayment 
arises because the employer failed to file an original return. As in 
the existing regulations, an interest-free adjustment is available if 
an employer filed a FICA tax return when a RRTA tax return should have 
been filed, or vice versa. In addition, interest-free adjustment 
treatment is generally available if an employer failed to file a return 
for a return period solely because the employer failed to treat any 
individuals as employees. The latter interest-free adjustment provision 
was originally proposed in 1992 (EE-12-92, 57 FR 58423) and is being 
re-proposed as part of these proposed amendments to the regulations. 
The proposed regulations in EE-12-92 will be withdrawn once these 
proposed amendments to the regulations are finalized.
    To constitute an interest-free adjustment in these circumstances, 
the employer must file an original return of the correct type for each 
return period for which the employer failed to file the correct return 
and report on the return the additional amount of tax. Generally, such 
reporting will constitute an interest-free adjustment if the return is 
filed by the due date of the return for the return period in which the 
error is ascertained. The amount reported must be paid by the time the 
original return is filed or interest will accrue from that date.

Repayment or Reimbursement of Employees Required for Interest-Free 
Adjustments of Overpayments

    When an overpayment error is ascertained, the proposed amendments 
to the regulations retain the rule that the employer must repay or 
reimburse the employee's share of FICA or RRTA tax before making the 
overpayment adjustment of both the employees' and employer's taxes. 
Such repayment or reimbursement must occur by the due date of the 
return for the return period following the return period in which the 
error is ascertained and within the applicable period of limitations on 
credit or refund. However, the requirement to repay or reimburse does 
not apply to the extent that taxes were not withheld from the employee 
or if, after reasonable efforts, the employer cannot locate the 
employee; in such case, the employer may make an adjustment for only 
the employer share of FICA or RRTA tax. The adjusted return reporting 
the overpayment may only be filed once the employer has repaid or 
reimbursed its employees to the extent required. The employer must 
certify on the adjusted return that it has repaid or reimbursed its 
employees to the extent required. Because repayment or reimbursement of 
overwithheld ITW must be made within the same calendar year, and annual 
Forms 943, 944, and 945 are normally filed after the close of the 
calendar year, there can be no repayment or reimbursement of ITW after 
filing such annual returns. Thus, no overpayment adjustments of ITW can 
generally be made for such returns, except for administrative errors, 
that is, errors involving the inaccurate reporting of the amount 
actually withheld. Note that in the case of backup withholding reported 
on Form 945, repayment of erroneous withholding is not required and is 
permitted only in certain circumstances. See Sec.  31.6413(a)-3.

Deposits, Payments, and Credits

    The proposed amendments to the regulations under section 6302 
provide that an employer making an interest-free adjustment must pay 
the amount of the adjustment by the time it files an adjusted return; 
such timely payment will satisfy the employer's deposit obligations 
with respect to the adjustment. In addition, the proposed amendments to 
the regulations governing agricultural employers (Form 943 filers) 
provide that for purposes of determining the amount of accumulated 
taxes in the employer's lookback period (which determines the 
employer's deposit schedule), adjustments to tax liability made 
pursuant to the filing of adjusted returns or claims for refund will 
not be taken into account. This rule is consistent with the rule 
already in effect with respect to Form 941 and Form 944 filers that 
adjustments to prior return periods are not taken into account in 
determining the employment tax liability for such prior return period. 
See Sec.  31.6302-1T(b)(4).
    For interest-free adjustments of underpayments, the amount must be 
paid when the adjusted return is filed. If the amount is not paid when 
the adjusted return is filed, interest will begin to accrue as of the 
date the adjusted return is filed.
    Consistent with the legislative history of section 6413, the 
adjusted overpayment amount will be applied as a credit toward payment 
of the employer's liability for the calendar quarter (or calendar year 
for annual returns being adjusted) in which the adjusted return is 
filed, unless the IRS notifies the employer that the credit will be 
applied to a different return period or that the employer is not 
entitled to the adjustment under applicable laws or procedures.

Refunds for Overpayments

    As in the existing regulations, in lieu of making an interest-free 
adjustment for an overpayment, employers may file a claim for refund 
pursuant to section 6402 or 6414 for the amount of the overpayment. 
Furthermore, if an employer cannot make an interest-free adjustment 
with respect to an overpayment because the period of limitations for 
claiming a credit or refund for such overpayment will expire within 90 
days or because the IRS has otherwise notified the employer that it is 
not entitled to the adjustment, the employer may recover the 
overpayment only by filing a claim for refund. The proposed amendments 
to the regulations under section 6414 continue to provide that an 
employer can only file a claim for refund for ITW that was not withheld 
from the employee. Prior to filing a claim for refund under section 
6402 for FICA or RRTA tax, employers must either repay or reimburse the 
employees or obtain the employees' consents to the allowance of the 
refund, except to the extent that the overpayment does not include 
taxes withheld from the employee or, after reasonable efforts, the 
employer cannot locate the employee or the employee will not provide 
the requested consent. The employer must certify that it has either 
repaid or reimbursed the employee or obtained the employee's consent to 
the extent required.
    Under the proposed amendments to the regulations, employers will 
file the prescribed form to claim a refund. However, Form 941c will no 
longer be used as an attachment to a claim for refund.

Tax Returns or Statements

    This notice of proposed rulemaking also proposes amendments to the 
regulations for reporting employment taxes under section 6011 to 
reflect the changes to the adjustment and refund processes. In 
particular, the proposed amendments remove references to Form 941c from 
the regulations under section 6011 because Form 941c will no longer be 
used. The proposed amendments also remove references to other obsolete 
tax returns, add references to current tax returns in use, and make 
minor stylistic changes to the text of the regulations.
    The proposed amendments also update the section 6011 regulations to 
conform to current law due to the

[[Page 74238]]

enactment of section 3510, added to the Code by section 2(b)(1) of the 
Social Security Domestic Employment Reform Act of 1994 (Public Law 103-
387), which mandates annual returns for domestic service employment 
taxes, and to reflect current procedures. Schedule H (Form 1040), 
rather than Form 942, is the prescribed form for reporting wages for 
domestic service in a private home paid in calendar years beginning 
after December 31, 1994. If an employer is required to file Form 941, 
Form 943, or Form 944, the employer may choose to report wages with 
respect to domestic workers on Form 941, Form 943, or Form 944, instead 
of reporting such wages on Schedule H (Form 1040).

Proposed Effective Date

    The amendments to the regulations as proposed will be effective on 
the date they are published as final regulations in the Federal 
Register.

Proposed Dates of Applicability

    With respect to the regulations under Code sections 6205, 6302, 
6402, 6413, and 6414, the regulations, as proposed, apply to any error 
ascertained on or after January 1, 2009.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations.
    Because the regulations under section 6302 do not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply.
    The proposed amendments to the regulations under section 6011, 
6205, 6402, 6413, and 6414 affect all taxpayers that file employment 
tax returns. Therefore, the IRS has determined that these proposed 
amendments will have an impact on a substantial number of small 
entities.
    The IRS has determined, however, that the impact on entities 
affected by the proposed amendments to the regulations will not be 
significant. The proposed amendments to the regulations require 
taxpayers who file employment tax returns and who make interest-free 
adjustments to their employment taxes for either underpayments or 
overpayments or who file claims for refund for an overpayment of 
employment tax to provide an explanation setting forth the basis for 
the correction or the claim in detail, designating the return period in 
which the error was ascertained and the return period being corrected, 
and setting forth such other information as may be required by the 
instructions to the form. In addition, for adjustments of overpayments 
and for claims for refund, taxpayers must also obtain and retain the 
written receipt of the employee showing the date and amount of the 
repayment, or the written consent of the employee. For purposes of 
overpayment adjustments and claims for refund of employee FICA and RRTA 
tax overcollected in an earlier year, the employer must also obtain and 
retain the written statement from the employee providing that the 
employee has not claimed refund or credit of the amount of the 
overcollection, or if so, such claim has been rejected, and that the 
employee will not claim refund or credit of the amount.
    This collection of information is not new to the proposed 
regulations and has been in existence since the 1960s, when the 
existing regulations were promulgated. In addition, the proposed 
amendments to the regulations are being made in conjunction with a 
project of the Office of Taxpayer Burden Reduction which seeks to 
revise the process for making corrections to employment tax returns to 
make it less burdensome to taxpayers. The filing of a claim for refund 
and the making of an interest-free adjustment pursuant to both the 
existing and proposed regulations are voluntary on the part of 
taxpayers.
    Based on these facts, the IRS hereby certifies that the collection 
of information contained in these regulations will not have a 
significant economic impact on a substantial number of small entities. 
Accordingly, a regulatory flexibility analysis is not required.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The Treasury Department and the IRS request comments on the 
clarity of the proposed rules and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying. A public hearing has been scheduled for April 17, 2008, at 10 
a.m., in the Auditorium, Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Due to building security procedures, 
visitors must enter at the Constitution Avenue entrance. In addition, 
all visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit comments and 
an outline of the topics to be discussed and the time to be devoted to 
each topic by March 27, 2008.
    A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Ligeia M. 
Donis of the Office of the Division Counsel/Associate Chief Counsel 
(Tax Exempt and Government Entities). However, other personnel from the 
IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social security, 
Unemployment compensation.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 31 is proposed to be amended as follows:

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE 
SOURCE

    Paragraph 1. The authority citation for part 31 continues to read, 
in part, as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 31.6011(a)-1 is amended by revising paragraphs 
(a)(2), (a)(3), (a)(4) and (c) to read as follows:

[[Page 74239]]

Sec.  31.6011(a)-1  Returns under Federal Insurance Contributions Act.

    (a) * * *
    (2) Employers of agricultural workers. Every employer who pays 
wages for agricultural labor with respect to taxes imposed by the 
Federal Insurance Contributions Act must make a return for the first 
calendar year in which the employer pays such wages and for each 
subsequent calendar year (whether or not wages are paid) until the 
employer has filed a final return in accordance with Sec.  31.6011(a)-
6. Form 943, ``Employer's Annual Federal Tax Return for Agricultural 
Employees,'' is the form prescribed for making the annual return 
required by this section, except that, if the employer's principal 
place of business is in Puerto Rico, or if the employer has employees 
who are subject to income tax withholding for Puerto Rico, the return 
must be made on Form 943-PR, ``Planilla para la Declaraci[oacute]n 
ANUAL de la Contribuci[oacute]n Federal del Patrono de Empleados 
Agr[iacute]colas.''
    (3) Employers of domestic workers. Schedule H (Form 1040), 
``Household Employment Taxes,'' is the form prescribed for use by every 
employer in making a return as required under paragraph (a)(1) of this 
section in respect of wages, as defined in the Federal Insurance 
Contributions Act, paid by the employer in any calendar year for 
domestic service as defined in section 3510. Schedule H (Form 1040) is 
generally filed as an attachment to an income tax return, however, if 
the employer does not otherwise have an obligation to file an income 
tax return, Schedule H (Form 1040) may be filed as a separate return. 
If, however, the employer is required under paragraph (a)(1) of this 
section to make a return on Form 941, ``Employer's QUARTERLY Federal 
Tax Return,'' or under paragraph (a)(2) of this section to make a 
return on Form 943, ``Employer's Annual Federal Tax Return For 
Agricultural Employees,'' or under paragraph (a)(5) of this section to 
make a return on Form 944, ``Employer's ANNUAL Federal Tax Return,'' 
the employer may choose instead to report wages with respect to 
domestic workers on such Form 941, Form 943 or Form 944. If such wages 
are included on Form 941, Form 943 or Form 944, the employer must also 
include Federal unemployment tax for the employee(s) on Form 940, 
``Employer's Annual Federal Unemployment (FUTA) Tax Return,'' under the 
provisions of Sec.  31.6011(a)-3.
    (4) Employers in Puerto Rico, the U.S. Virgin Islands, Guam, 
American Samoa, or the Commonwealth of the Northern Mariana Islands. 
Form 941-PR, ``Planilla para la Declaraci[oacute]n Federal TRIMESTRAL 
del Patrono,'' (or Form 944-PR, ``Planilla para la Declaraci[oacute]n 
Federal ANUAL del Patrono,'' if the IRS notified the employer that the 
Form 944-PR must be filed in lieu of Form 941-PR) is the form 
prescribed for use in making the return required under paragraph (a)(1) 
(or (a)(5)) of this section in the case of every employer whose 
principal place of business is in Puerto Rico, or if the employer has 
employees who are subject to income tax withholding for Puerto Rico. 
Form 941-SS, ``Employer's QUARTERLY Federal Tax Return (American Samoa, 
Guam, the Commonwealth of the Northern Mariana Islands, and the U.S. 
Virgin Islands),'' (or Form 944-SS, ``Employer's ANNUAL Federal Tax 
Return (American Samoa, Guam, the Commonwealth of the Northern Mariana 
Islands, and the U.S. Virgin Islands),'' if the IRS notified the 
employer that Form 944-SS must be filed in lieu of Form 941-SS) is the 
form prescribed for use in making the return required under paragraph 
(a)(1) (or (a)(5)) of this section in the case of every employer whose 
principal place of business is in the U.S. Virgin Islands, Guam, 
American Samoa, or the Commonwealth of the Northern Mariana Islands, or 
if the employer has employees who are subject to income tax withholding 
for these U.S. possessions. However, Form 941 (or Form 944 if the IRS 
notified the employer that Form 944 must be filed in lieu of Form 941) 
is the form prescribed for making such return in the case of every such 
employer who is required pursuant to Sec.  31.6011(a)-4 to make a 
return of income tax withheld from wages.
* * * * *
    (c) Adjustments and refunds. For rules applicable to adjustments 
and refunds of employment taxes, see sections 6205, 6402, 6413, and 
6414, and the applicable regulations.
* * * * *
    Par. 3. Section 31.6011(a)-4 is amended by revising paragraph 
(a)(2) to read as follows:


Sec.  31.6011(a)-4  Returns of income tax withheld.

    (a) * * *
    (2) Wages paid for domestic service. Schedule H (Form 1040), 
``Household Employment Taxes,'' is the form prescribed for making the 
return required under paragraph (a)(1) of this section with respect to 
income tax withheld, pursuant to an agreement under section 3402(p), 
from wages paid for domestic service in a private home of the employer. 
Schedule H (Form 1040) is generally filed as an attachment to an income 
tax return; however, if the employer does not otherwise have an 
obligation to file an income tax return, Schedule H (Form 1040) may be 
filed as a separate return. The preceding sentence shall not apply in 
the case of an employer who has chosen under Sec.  31.6011(a)-1(a)(3) 
to use Form 941, ``Employer's QUARTERLY Federal Tax Return,'' Form 943, 
``Employer's Annual Tax Return for Agricultural Employees,'' or Form 
944, ``Employer's ANNUAL Federal Tax Return,'' as the return with 
respect to such payments for purposes of the Federal Insurance 
Contributions Act. For the requirements relating for Schedule H (Form 
1040) with respect to qualified State individual income taxes, see 
Sec.  301.6361-1(d)(3)(iv) of this chapter.
* * * * *
    Par. 4. Section 31.6011(a)-5 is amended by revising paragraph (a) 
to read as follows:


Sec.  31.6011(a)-5  Monthly returns.

    (a) In general--(1) Requirement. The provisions of this section are 
applicable in respect of the taxes reportable on returns required 
pursuant to Sec.  31.6011(a)-1 or Sec.  31.6011(a)-4. An employer (or 
other person) who is required by Sec.  31.6011(a)-1 or Sec.  
31.6011(a)-4 to make quarterly or annual returns on any such form 
shall, in lieu of making such quarterly or annual returns, make returns 
of such taxes in accordance with the provisions of this section if the 
employer is so notified in writing by the IRS. Every employer (or other 
person) notified by the IRS shall make a return for the calendar month 
in which the notice is received, for each of the prior calendar months 
in the return period, and for each calendar month afterwards (whether 
or not wages are paid in any such month) until the employer has filed a 
final return or is required to make quarterly or annual returns 
pursuant to notification as provided in paragraph (a)(2) of this 
section. Each return required under this section shall be made on the 
form prescribed for making the return which would otherwise be required 
of the employer (or other person) under the provisions of Sec.  
31.6011(a)-1 or Sec.  31.6011(a)-4, except that, if some other form is 
furnished by the IRS for use in lieu of such prescribed form, the 
return shall be made on such other prescribed form. The IRS may notify 
any employer (or other person)--
    (i) Who by reason of notification as provided in Sec.  301.7512-1 
of this chapter (Regulations on Procedure and Administration), is 
required to comply

[[Page 74240]]

with the provisions of such Sec.  301.7512-1; or
    (ii) Who failed to--
    (A) Make any return required pursuant to Sec.  31.6011(a)-1 or 
Sec.  31.6011(a)-4;
    (B) Pay tax reportable on any such form; or
    (C) Deposit any such tax as required under the provisions of Sec.  
31.6302(c)-1.
    (2) Termination of requirement. The IRS, in its discretion, may 
notify the employer in writing that the employer shall discontinue the 
filing of monthly returns under this section. If the employer is so 
notified, the IRS will provide the employer with instructions for 
filing the final monthly return. Afterwards, the employer shall make 
quarterly or annual returns in accordance with the provisions of Sec.  
31.6011(a)-1 or Sec.  31.6011(a)-4.
* * * * *
    Par. 5. Section 31.6205-1 is amended to read as follows:


Sec.  31.6205-1  Adjustments of underpayments.

    (a) In general. (1) An employer who has undercollected or underpaid 
employee Federal Insurance Contributions Act (FICA) tax under section 
3101 or employer FICA tax under section 3111, employee Railroad 
Retirement Tax Act (RRTA) tax under section 3201 or employer RRTA tax 
under section 3221, or income tax required under section 3402 to be 
withheld, with respect to any payment of wages or compensation, shall 
correct such error as provided in this section. Such correction may 
constitute an interest-free adjustment as provided in paragraph (b) or 
(c) of this section.
    (2) No correction will be eligible for interest-free adjustment 
treatment if the failure to report relates to an issue that was raised 
in an examination of a prior return period or if the employer knowingly 
underreported its employment tax liability.
    (3) Every correction under this section of an underpayment of tax 
with respect to a payment of wages or compensation shall be made on the 
prescribed form that corresponds to the return being corrected. The 
form, filed in accordance with this section and the instructions, will 
constitute an adjusted return for the return period being corrected.
    (4) Every adjusted return on which an underpayment is corrected 
pursuant to this section shall designate the return period in which the 
error was ascertained and the return period being corrected, explain in 
detail the grounds and facts relied upon to support the correction, and 
set forth such other information as may be required by the regulations 
in this section and by the instructions relating to the form.
    (5) For purposes of this section, an error is ascertained when the 
employer has sufficient knowledge of the error to be able to correct 
it.
    (6) No correction will be eligible for interest-free adjustment 
treatment pursuant to this section after the earlier of the following:
    (i) Receipt from the IRS of notice and demand for payment thereof 
based upon an assessment.
    (ii) Receipt from the IRS of a Notice of Determination of Worker 
Classification (Notice of Determination) in connection with such 
underpayment. Prior to receipt of a Notice of Determination, the 
taxpayer may, in lieu of making a payment, make a cash bond deposit 
that would have the effect of stopping the accrual of any interest, but 
would not deprive the taxpayer of its right to receive a Notice of 
Determination and to petition the Tax Court under section 7436.
    (7) Subject to the exceptions specified in paragraphs (a)(2) and 
(a)(6) of this section, Form 2504, ``Agreement and Collection of 
Additional Tax and Acceptance of Overassessment (Excise or Employment 
Tax),'' and Form 2504-WC, ``Agreement to Assessment and Collection of 
Additional Tax and Acceptance of Overassessment in Worker 
Classification Cases (Employment Tax),'' constitute adjusted returns 
for purposes of this section.
    (8) For provisions related to furnishing employee statements and 
corrected employee statements reporting wages and withheld taxes, see 
sections 6041 and 6051 and Sec. Sec.  1.6041-2 and 31.6051-1 of this 
chapter. For provisions relating to filing information returns and 
corrected information returns reporting wages and withheld taxes, see 
sections 6041 and 6051 and Sec. Sec.  1.6041-2 and 31.6051-2 of this 
chapter.
    (b) Federal Insurance Contributions Act and Railroad Retirement Tax 
Act--(1) Undercollection ascertained before return is filed. If an 
employer collects less than the correct amount of employee FICA or RRTA 
tax from an employee with respect to a payment of wages or 
compensation, and if the employer ascertains the error before filing 
the return on which the employee tax with respect to such wages or 
compensation is required to be reported, the employer shall 
nevertheless report on the return and pay to the IRS the correct amount 
of employee tax. If the employer does not report and pay the correct 
amount of tax on a timely basis in these circumstances, the employer 
may not later correct the error through an interest-free adjustment.
    (2) Error ascertained after return is filed. (i) If an employer 
files a return on which FICA tax or RRTA tax is required to be 
reported, and reports on the return less than the correct amount of 
employee or employer FICA or RRTA tax with respect to a payment of 
wages or compensation, and if the employer ascertains the error after 
filing the return, the employer shall correct the error through an 
interest-free adjustment as provided in this section. The employer 
shall adjust the underpayment of tax by reporting the additional amount 
due on an adjusted return for the return period in which the wages or 
compensation was paid, accompanied by a detailed explanation of the 
amount being reported on the adjusted return and any other information 
as may be required by this section and by the instructions relating to 
the form. The reporting of the underpayment on an adjusted return 
constitutes an adjustment within the meaning of this section only if 
the adjusted return is filed within the period of limitations for 
assessment for the return period being corrected, and by the due date 
for filing the return for the return period in which the error is 
ascertained. For purposes of the preceding sentence, the due date for 
filing the adjusted return is determined by reference to the return 
being corrected. The amount of the underpayment adjusted in accordance 
with this section must be paid to the IRS by the time the adjusted 
return is filed. If an adjustment is reported pursuant to this section, 
but the amount of the adjustment is not paid when due, interest accrues 
from that date (see section 6601).
    (ii) If an employer files a return reporting FICA tax for a return 
period although the employer was required to file a return reporting 
RRTA tax, or vice versa, and reports on the return less than the 
correct amount that should have been reported on the return required to 
be filed, and if the employer ascertains the error after filing the 
return, the employer shall correct the error through an interest-free 
adjustment as provided in this section. The employer shall adjust the 
underpayment of tax by reporting the additional amount due on an 
original return for the correct tax for the return period for which the 
incorrect return was filed, accompanied by a detailed explanation of 
the amount being reported on the original return and any other 
information as may be required by the regulations in this section and 
by the instructions relating to the form. The reporting of the 
additional amount for

[[Page 74241]]

the period constitutes an adjustment within the meaning of this section 
only if the return is filed by the due date of the return for reporting 
the correct tax for the return period in which the error is 
ascertained. The amount of the underpayment adjusted in accordance with 
this section must be paid to the IRS by the time the return is filed. 
If an adjustment is reported pursuant to this section, but the amount 
of the adjustment is not paid when due, interest accrues from that date 
(see section 6601).
    (3) Return not filed because of failure to treat individual as 
employee. If an employer fails to file a return for a return period 
solely because the employer failed to treat any individuals properly as 
employees for the return period (and, therefore, failed to withhold and 
pay any employer or employee FICA or RRTA tax with respect to wages or 
compensation paid to the employees), and if the employer ascertains the 
error after the due date of the return, the employer shall correct the 
error through an interest-free adjustment as provided in this section. 
The employer shall adjust the underpayment of tax by reporting the 
amount due on an original return for the return period for which the 
employer failed to file a return, accompanied by a detailed explanation 
of the amount being reported on the original return and any other 
information as may be required by this section and by the instructions 
relating to the form. The reporting of the correct amount of tax for 
the return period constitutes an adjustment within the meaning of this 
section only if the return is filed by the due date of the return for 
reporting such tax for the return period in which the error is 
ascertained. The amount of the underpayment adjusted in accordance with 
this section must be paid to the IRS by the time the return is filed. 
If an adjustment is reported pursuant to this section, but the amount 
of the adjustment is not paid when due, interest accrues from that date 
(see section 6601).
    (c) Income tax required to be withheld from wages--(1) 
Undercollection ascertained before return is filed. If an employer 
collects less than the correct amount of income tax required to be 
withheld from wages under section 3402, and if the employer ascertains 
the error before filing the return on which the withheld tax is 
required to be reported, the employer shall nevertheless report on the 
return and pay to the IRS the correct amount of tax required to be 
withheld. If the employer does not report and pay the correct amount of 
tax on a timely basis in these circumstances, the employer may not 
correct the error through an interest-free adjustment.
    (2) Error ascertained after return is filed. If an employer files a 
return on which income tax required to be withheld from wages is 
required to be reported and reports on the return less than the correct 
amount of income tax required to be withheld, and if the employer 
ascertains the error after filing the return, the employer shall 
correct the error through an interest-free adjustment as provided in 
this section. The employer shall adjust the underpayment of tax by 
reporting the additional amount due on an adjusted return for the 
return period in which the wages were paid, accompanied by a detailed 
explanation of the amount being reported on the adjusted return and any 
other information as may be required by this section and by the 
instructions relating to the form. The reporting of the underpayment on 
an adjusted return constitutes an adjustment within the meaning of this 
section only if the adjusted return is filed by the due date for filing 
the return for the return period in which the error is ascertained. For 
purposes of the preceding sentence, the due date for filing the 
adjusted return is determined by reference to the return being 
corrected. However, an adjustment may only be reported pursuant to this 
section if the error is ascertained within the same calendar year that 
the wages to the employee were paid, unless the underpayment is 
attributable to an administrative error, that is, an error involving 
the inaccurate reporting of the amount actually withheld, or the 
adjustment is reported on a Form 2504 or Form 2504-WC. The amount of 
the underpayment adjusted in accordance with this section must be paid 
to the IRS by the time the adjusted return is filed. If an adjustment 
is reported pursuant to this section, but the amount of the adjustment 
is not paid when due, interest accrues from that date (see section 
6601).
    (3) Return not filed because of failure to treat individual as 
employee. If an employer fails to file a return for a return period 
solely because the employer failed to treat any individuals properly as 
employees for the return period (and, therefore, failed to withhold and 
pay any income tax required to be withheld from wages), the employer 
shall correct the error through an interest-free adjustment as provided 
in this section. The employer shall adjust the underpayment of tax by 
reporting the correct amount on an original return for the return 
period for which the employer failed to file a return and pay the tax 
to the IRS. The reporting of the correct amount of tax for the return 
period constitutes an adjustment within the meaning of this section 
only if the return is filed by the due date of the return for reporting 
such tax for the return period in which the error is ascertained. 
However, an adjustment may only be reported pursuant to this section if 
the error is ascertained within the same calendar year that the wages 
to the employee were paid or section 3509 applies to determine the 
amount of the underpayment. The amount of the underpayment adjusted in 
accordance with this section must be paid to the IRS by the time the 
adjusted return is filed. If an adjustment is reported pursuant to this 
section, but the amount of the adjustment is not paid when due, 
interest accrues from that date (see section 6601).
    (d) Deductions from employee--(1) Federal Insurance Contributions 
Tax Act and Railroad Retirement Tax Act. If an employer collects less 
than the correct amount of employee FICA or RRTA tax from an employee 
with respect to a payment of wages or compensation, the employer must 
collect the amount of the undercollection by deducting the amount from 
remuneration of the employee, if any, paid after the employer 
ascertains the error. Such deductions may be made even though the 
remuneration, for any reason, does not constitute wages or 
compensation. The correct amount of an undercollection of employee tax 
from an employee must be reported and paid, as provided in paragraph 
(b) of this section, whether or not the undercollection is corrected by 
a deduction made as prescribed in this paragraph (d)(1), and even if 
the deduction is made after the return on which the employee tax must 
be reported is due. If such a deduction is not made, the obligation of 
the employee to the employer with respect to the undercollection is a 
matter for settlement between the employee and the employer. If an 
employer makes an erroneous collection of employee tax from two or more 
of its employees, a separate settlement must be made with respect to 
each employee. An overcollection of employee tax from one employee may 
not be used to offset an undercollection of such tax from another 
employee. For provisions relating to the employer's liability for the 
tax, whether or not it collects the tax from the employee, see Sec.  
31.3102-1(d). This paragraph (d)(1) does not apply if

[[Page 74242]]

section 3509 applies to determine the employer's liability.
    (2) Income tax required to be withheld from wages. If an employer 
collects