[Federal Register Volume 73, Number 127 (Tuesday, July 1, 2008)]
[Rules and Regulations]
[Pages 37371-37382]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-14947]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 31 and 602

[TD 9405]
RIN 1545-BG50


Employment Tax Adjustments

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to 
employment tax adjustments and employment tax refund claims. The final 
regulations 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 regulations 
also modify the process for filing claims for refund of overpayments of 
employment taxes under sections 6402 and 6414.
    This document contains final 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 final 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.

DATES: Effective Date: These final regulations are effective on January 
1, 2009.
    Applicability date: With respect to the regulations under Code 
sections 6205, 6402, 6413, and 6414, these final regulations apply to 
any error ascertained on or after January 1, 2009.

FOR FURTHER INFORMATION CONTACT: Ligeia M. Donis, (202) 622-0047 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-2097. The collection of information 
in these proposed regulations is in Sec. Sec.  31.6011(a)-1, 
31.6011(a)-4, 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.
    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 final regulations are issued 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 
regulations affect taxpayers that file employment tax returns, 
including 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.
    These final 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. These regulations amend the Employment Tax Regulations (26

[[Page 37372]]

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 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 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 reported is necessary; accordingly, 
the interest-free adjustment rules do not apply.

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. 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.
    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 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. 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.
    Since 1960, the regulations under sections 6205 and 6413 have 
provided that employment tax adjustments are made by reporting the 
adjustment on an employer's current period employment tax return. 
Because the adjustment was reported on a current period return, the 
amount of the adjustment was treated as part of the current period's 
liability. Such a process for making adjustments of employment taxes 
presented a number of problems for both employers and the IRS, in large 
part because it required employers to make adjustments for past periods 
in connection with the filing of their current period returns.
    The IRS, as part of the Form 94X Project initiated by the Office of 
Taxpayer Burden Reduction and in response to the request of employers 
and the payroll community, is developing new forms to be used when 
making adjustments of employment taxes. The new forms will reduce the 
employer's burden in making and tracking adjustments and increase the 
IRS's ability to ensure employment tax compliance. The IRS is 
simultaneously revising the process for claiming refunds. These final 
regulations are issued in connection with the IRS's development of such 
new forms which will be used by employers to make overpayment and 
underpayment adjustments to employment taxes or to claim refunds of 
overpaid employment taxes.
    A notice of proposed rulemaking (REG-111583-07, 2008-4 IRB 323, 72 
FR 74233) was published in the Federal Register on December 31, 2007. A 
correction to the notice of proposed rulemaking was published in the 
Federal Register on January 28, 2008 (73 FR 4765). No requests for a 
public hearing were received, therefore, no public hearing was held. 
The IRS received written and electronic comments responding to the 
notice of proposed rulemaking, but none of them requested substantive 
changes to the proposed regulations. The proposed regulations are 
adopted as amended by this Treasury decision. The revisions are 
discussed.

Summary of Comments and Explanation of Provisions

    Several positive comments were received on the proposed 
regulations. No substantive changes to the regulations were requested. 
Several commentators suggested changes for the draft form, Form 941X, 
``Adjusted Employer's QUARTERLY Federal Tax Return or Claim for 
Refund,'' which was released to the public on the IRS Web site (http://www.irs.gov) on March 4, 2008, as a vision draft for comment. The Form 
941X is the first of a series of forms being developed by the IRS in 
conjunction with these regulations. The series of forms will correspond 
to Form 941, Form 943, Form 944, Form 945, and Form CT-1 and will be 
used by employers when making adjustments of employment taxes or 
claiming refunds of employment taxes. The comments on the draft Form 
941X will be taken into account in preparing the final version of the 
form.
    As the IRS has continued to prepare for the implementation of the 
new adjustment and refund claim processes for employment taxes, some 
necessary changes to the proposed regulations were identified and 
incorporated into these final regulations. These changes to the 
proposed regulations are discussed below.

Overview of Final Regulations Under Sections 6205 and 6413

    The final regulations under sections 6205 and 6413 set forth the 
procedures for making interest-free adjustments for underpayments and 
overpayments of employment taxes, respectively. Like the proposed 
regulations, the final regulations under sections 6205 and 6413 have 
been drafted to set up parallel structures according to the type of tax 
being adjusted and when the error is ascertained. Accordingly, the 
final regulations under sections 6205 and 6413 are divided into 
provisions dealing with FICA and RRTA taxes and provisions dealing with 
ITW. The provisions are further broken down based on when the error is 
ascertained, that is, whether the error is ascertained before or after 
a return has been filed.

Interest-Free Adjustments

    The final regulations under section 6205 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 the employer discovers such error after filing the 
return, the employer shall

[[Page 37373]]

adjust the resulting 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. The adjustment must be made by the due 
date of the return for the return period in which the error is 
ascertained and the amount of the underpayment must be paid by the time 
the adjustment is made, or interest will begin to accrue from that 
date. An underpayment adjustment may only be made within the period of 
limitations for assessment. For underpayments of ITW where the 
incorrect amount was withheld, subject to limited exceptions, an 
adjustment may be made only for errors ascertained during the calendar 
year in which the wages were paid.
    Under the final regulations 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 or failed to report and pay 
the correct type of tax. The final regulations revise the processes set 
forth in the proposed regulations to accommodate the various 
possibilities of errors in these situations and to ensure the IRS can 
process the adjustments.
    Specifically, under the final regulations, if an employer filed a 
return reporting FICA tax when a return reporting RRTA tax should have 
been filed, the employer can make an interest-free adjustment by filing 
an original return reporting the correct amount of RRTA tax and 
attaching an adjusted return to correct the erroneously reported FICA 
tax. Conversely, if an employer filed a return reporting RRTA tax when 
a return reporting FICA tax should have been filed, the employer can 
make an interest-free adjustment by filing an original return reporting 
the correct amount of FICA tax and attaching an adjusted return to 
correct the erroneously reported RRTA tax. In the latter situation, if 
the employer already filed a return that is used to report FICA tax in 
order to report ITW, the employer can make an interest-free adjustment 
by filing an adjusted return to report the correct amount of FICA tax 
with an adjusted return to correct the erroneously reported RRTA tax. 
The final regulations also add a cross-reference to the regulations 
under section 3503 which provide that if an amount is paid under the 
wrong chapter, that is, an employer erroneously pays FICA tax under 
chapter 21 instead of RRTA tax under chapter 22, or RRTA tax instead of 
FICA tax, the amount erroneously paid shall be credited against the tax 
for which the employer is liable and any balance refunded.
    In addition, the final regulations provide the process by which an 
employer can make an interest-free adjustment if the employer failed to 
file a return for a return period solely because the employer failed to 
treat any individuals as employees. The employer can make an interest-
free adjustment to report the tax due with respect to the reclassified 
workers by filing an original return and an attached adjusted return 
reporting the correct amount of tax, in accordance with the 
instructions for the adjusted return.
    Generally, such reporting will constitute an interest-free 
adjustment in each of these situations if the original return and/or 
adjusted return(s) are filed by the due date of the correct return for 
the return period in which the error is ascertained. The amount 
reported must be paid by the time the original return and/or adjusted 
return(s) are filed or interest will accrue from that date.
    The final 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 expiration of 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. An interest-free adjustment for 
an overpayment may not be made once a claim for refund has been filed.
    The final regulations under section 6413(a) further provide that 
once an employer repays or reimburses an employee to the extent 
required, the employer may report both the employee and employer 
portions of FICA or RRTA tax as an overpayment on an adjusted return. 
The employer must certify on the adjusted return that it has repaid or 
reimbursed its employees to the extent required.
    Under the final regulations, the reporting of the overpayment 
constitutes an interest-free adjustment if the overpayment is reported 
on an adjusted return filed before the 90th day prior to expiration of 
the period of limitations on credit or refund. 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 an 
adjusted return.
    Unlike the proposed regulations, the final regulations do not 
require the employer to repay or reimburse the employee or to adjust 
the overpayment by the due date of the return for the return period 
following the return period in which the error is ascertained. Upon 
further consideration, the IRS determined there was insufficient reason 
to impose a timing restriction other than the period of limitations on 
credit or refund of taxes.
    For both underpayments and overpayments, interest-free adjustments 
are made by reporting the error on a separately filed adjusted return. 
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. In addition, the regulations provide 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 adjusted returns for purposes of permitting the 
assessment to be treated as an interest-free adjustment.
    The IRS intends to issue guidance to provide examples of how the 
final regulations under sections 6205, 6402, 6413, and 6414 apply in 
different factual scenarios.

Deposits, Payments, and Credits

    The final 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. Conversely, if the amount of the adjustment is not paid by 
the time the adjusted return is filed, a penalty under section 6656 for 
failure to deposit may apply because the deposit obligation for such 
taxes is not deemed to be satisfied and the employer may not have 
otherwise satisfied its deposit obligations for accumulated employment 
taxes.

[[Page 37374]]

    In addition, the final 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). The final regulations also added language 
to clarify that new agricultural employers are treated as having 
employment tax liabilities of zero for any lookback period before the 
date the employer started or acquired its business, which is consistent 
with the current rule governing the lookback period for Form 941 and 
Form 944 filers.
    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 employer 
is not entitled to the adjustment (that is, because there is no 
overpayment or because the requirements for making an adjustment were 
not satisfied) or that the credit will be applied to a different return 
period.

Refunds for Overpayments

    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 final 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 of an 
overpayment of FICA or RRTA tax, but require the employer to certify as 
part of the claim process that the employer has repaid or reimbursed 
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. However, the employer is not required to repay or reimburse the 
employee or obtain the written consent of the employee 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, once contacted, will not provide the requested 
consent.
    The final regulations under section 6414 set out the procedures for 
filing a claim for refund of overpaid ITW which 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 refund of an 
overpayment of ITW for an amount the employer deducted or withheld from 
an employee.

Tax Returns or Statements

    The final regulations for reporting employment taxes under section 
6011 reflect the changes to the adjustment and refund processes. The 
final regulations are updated to conform to current law due to the 
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 the current use of Schedule H (Form 1040) as the 
generally prescribed form for reporting wages for domestic service in a 
private home paid in calendar years beginning after December 31, 1994.

Special Analyses

    It has been determined that this Treasury decision 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.
    In accordance with the Regulatory Flexibility Act (5 U.S.C. chapter 
6), this regulation will not have a significant economic impact on a 
substantial number of small entities.
    The final regulations under sections 6011, 6205, 6402, 6413, and 
6414 affect all taxpayers that file employment tax returns. Therefore, 
the IRS has determined that these regulations will have an impact on a 
substantial number of small entities.
    The IRS has determined, however, that the impact on entities 
affected by the final regulations will not be significant. The 
regulations require taxpayers to provide certain information if they 
file adjusted returns to make interest-free adjustments to their 
employment taxes for either underpayments or overpayments or file 
claims for refund for an overpayment of employment tax. The taxpayer 
must 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, evidence of reimbursement, 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 employee's written statement 
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 final regulations 
and has been in existence since the 1960's when the previous 
regulations were promulgated. In addition, the 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 the final 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, the proposed regulations 
preceding these regulations were submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Drafting Information

    The principal author of these 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

[[Page 37375]]

Department participated in their development.

List of Subjects

26 CFR Part 31

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

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 31 and 602 are amended as follows:

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

0
Paragraph 1. The authority citation for part 31 continues to read, in 
part, as follows:


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


0
Par. 2. Section 31.6011(a)-1 is amended by revising the text of 
paragraphs (a)(2), (a)(3), and the section heading and text of 
paragraphs (a)(4) and (c) to read as follows:


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.'' However, Form 943 is the form prescribed for making 
such return in the case of every employer of agricultural workers who 
is required pursuant to Sec.  31.6011(a)-4 to make a return of income 
tax withheld from wages.
    (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.
* * * * *

0
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 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. 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).
* * * * *

0
Par. 4. Section 31.6011(a)-5 is amended by revising paragraph (a) to 
read as follows:

[[Page 37376]]

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, 
is required to comply 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.  
31.6302-1.
    (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.
* * * * *

0
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 underreported and 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 
form prescribed by the IRS 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 adjusted 
return.
    (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),'' Form 2504-WC, ``Agreement to Assessment and Collection of 
Additional Tax and Acceptance of Overassessment in Worker 
Classification Cases (Employment Tax),'' and such other forms as may be 
prescribed by the IRS, 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. 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.
    (9) For the period of limitations upon assessment and collection of 
taxes, see Sec.  301.6501(a)-1.
    (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 the correct amount of 
tax 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

[[Page 37377]]

required by this section and by the instructions relating to the 
adjusted return. 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, without regard to the employer's current filing 
requirements. For example, an employer with a current annual filing 
requirement who is correcting an error on a previously filed quarterly 
return must file the adjusted return by the due date for filing a 
quarterly return for the quarter 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 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, 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 RRTA tax by reporting the correct amount of RRTA tax on 
an original return for reporting RRTA tax for the return period for 
which the incorrect return was filed, accompanied by an adjusted return 
corresponding to the incorrect return that was filed to correct the 
erroneously reported and paid FICA tax. The adjusted return must 
include a detailed explanation of the amounts being reported on the 
original return and the adjusted return and any other information as 
may be required by the regulations in this section and by the 
instructions relating to the adjusted return. The reporting of the 
correct amounts for the period constitutes an adjustment within the 
meaning of this section only if the returns are filed by the due date 
of the return for reporting the RRTA tax for the return period in which 
the error is ascertained. Pursuant to Sec.  31.3503-1, the amount of 
erroneously paid FICA tax will be credited against the underpaid RRTA 
tax. Any remaining underpayment of RRTA tax adjusted in accordance with 
this section must be paid to the IRS by the time the returns are filed 
in accordance with this paragraph. If an adjustment is reported 
pursuant to this section, but the amount of the remaining underpayment 
is not paid when due, interest accrues from that date (see section 
6601).
    (iii) If an employer files a return reporting RRTA tax for a return 
period although the employer was required to file a return reporting 
FICA tax, 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 FICA tax by reporting the correct amount of FICA tax on 
an original return for reporting FICA tax for the return period for 
which the incorrect return was filed (or an adjusted return for 
reporting the FICA tax if an original return was already filed for such 
return period to report the income tax required to be withheld under 
section 3402), accompanied by an adjusted return corresponding to the 
incorrect return that was filed to correct the erroneously reported and 
paid RRTA tax. The adjusted return(s) must include a detailed 
explanation of the amount being reported on the original return and/or 
the adjusted return(s) 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 correct amounts for the period constitutes 
an adjustment within the meaning of this section only if the returns 
are filed by the due date of the return for reporting the FICA tax for 
the return period in which the error is ascertained. Pursuant to Sec.  
31.3503-1, the amount of erroneously paid RRTA tax will be credited 
against the underpaid FICA tax. Any remaining underpayment of FICA tax 
adjusted in accordance with this section must be paid to the IRS by the 
time the returns are filed in accordance with this paragraph 
(b)(2)(iii). If an adjustment is reported pursuant to this section, but 
the amount of the remaining underpayment 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 report the amount due by filing an original return 
required to be filed to report the tax for the return period for which 
the employer failed to file a return, accompanied by an adjusted return 
as provided in the instructions to the adjusted return. The adjusted 
return must include a detailed explanation of the amount being reported 
on the original return and adjusted return and any other information as 
may be required by this section and by the instructions relating to the 
adjusted return. The reporting of the correct amount of tax for the 
return period constitutes an adjustment within the meaning of this 
section only if the original and adjusted returns are filed by the due 
date of the return for reporting such tax 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, without regard to the employer's current 
filing requirements. For example, an employer with a current annual 
filing requirement who is correcting an error on a previously filed 
quarterly return must file the adjusted return by the due date for 
filing a quarterly return for the quarter 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 returns are filed 
in accordance with this paragraph. 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 the correct amount of tax 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

[[Page 37378]]

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 adjusted return. 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, without regard to the employer's current filing 
requirements. For example, an employer with a current annual filing 
requirement who is correcting an error on a previously filed quarterly 
return must file the adjusted return by the due date for filing a 
quarterly return for the quarter 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, unless the underpayment is attributable to 
an administrative error (that is, an error involving the inaccurate 
reporting of the amount actually withheld), section 3509 applies to 
determine the amount of the underpayment, 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 report the amount due by filing an 
original return for the return period for which the employer failed to 
file a return, accompanied by an adjusted return as provided in the 
instructions to the adjusted return. The adjusted return must include a 
detailed explanation of the amount being reported on the original and 
adjusted returns and any other information as may be required by this 
section and by the instructions relating to the adjusted return. The 
reporting of the correct amount of tax for the return period 
constitutes an adjustment within the meaning of this section only if 
the original and adjusted returns are filed by the due date of the 
return for reporting such tax 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, without regard to the employer's current filing 
requirements. For example, an employer with a current annual filing 
requirement who is correcting an error on a previously filed quarterly 
return must file the adjusted return by the due date for filing a 
quarterly return for the quarter 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 if section 3509 applies to determine the 
amount of the underpayment, or if 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 
returns are filed in accordance with this paragraph. 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 employee tax 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 section 3509 applies to determine 
the employer's liability.
    (2) Income tax required to be withheld from wages. If an employer 
collects less than the correct amount of income tax required to be 
withheld from wages during a calendar year, the employer must collect 
the amount of the undercollection on or before the last day of the year 
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. The correct amount of income tax must be reported and paid, as 
provided in paragraph (c) of this section, whether or not the 
undercollection is corrected by a deduction made as prescribed in this 
paragraph (d)(2), and even if the deduction is made after the return on 
which the 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 within the calendar year. If an employer makes an erroneous 
collection of income tax from two or more of its employees, a separate 
settlement must be made with respect to each employee. An 
overcollection of income 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.  31.3403-1. For 
provisions relating to the employer's liability for an underpayment of 
tax unless the employer can show that the income tax against which the 
tax under section 3402 may be credited has been paid, see Sec.  
31.3402(d)-1. This paragraph (d)(2)

[[Page 37379]]

does not apply if section 3509 applies to determine the employer's 
liability.

0
Par. 6. Section 31.6302-0 is amended by adding new entries for Sec.  
31.6302-1 paragraphs (c)(7) and (g)(4)(i) and (ii) to read as follows:


Sec.  31.6302-0  Table of contents.

* * * * *


Sec.  31.6302-1  Federal tax deposit rules for withheld income taxes 
and taxes under the Federal Insurance Contributions Act (FICA) 
attributable to payments made after December 31, 1992.

* * * * *
    (c) * * *
    (7) Exception to the monthly and semi-weekly deposit rules for 
employers making interest-free adjustments.
* * * * *
    (g) * * *
    (4) * * *
    (i) In general.
    (ii) Adjustments and Claims for Refund.
* * * * *

0
Par. 7. Section 31.6302-1 is amended by adding paragraph (c)(7) and 
revising paragraph (g)(4) to read as follows:


Sec.  31.6302-1  Federal tax deposit rules for withheld income taxes 
and taxes under the Federal Insurance Contributions Act (FICA) 
attributable to payments made after December 31, 1992.

* * * * *
    (c) * * *
    (7) Exception to the monthly and semi-weekly deposit rules for 
employers making interest-free adjustments. An employer filing an 
adjusted return under Sec.  31.6205-1 to report taxes that were 
accumulated in a prior return period shall pay the amount of the 
adjustment by the time it files the adjusted return, and the amount 
timely paid will be deemed to have been timely deposited by the 
employer. The payment may be made by a check or money order with the 
adjusted return, by electronic funds transfer, or by other methods of 
payment as provided by the instructions relating to the adjusted 
return.
* * * * *
    (g) * * *
    (4) Lookback period--(i) In general. For purposes of this paragraph 
(g), the lookback period for Form 943 taxes is the second calendar year 
preceding the current calendar year. For example, the lookback period 
for calendar year 1993 is calendar year 1991. New employers shall be 
treated as having employment tax liabilities of zero for any lookback 
period before the date the employer started or acquired its business.
    (ii) Adjustments and Claims for Refund. The employment tax 
liability reported on the original return for the return period is the 
amount taken into account in determining whether the amount of Form 943 
taxes accumulated in the lookback period exceeds $50,000. Any amounts 
reported on adjusted returns or claims for refund pursuant to sections 
6205, 6402, 6413 and 6414 filed after the due date of the original 
return are not taken into account when determining the amount of Form 
943 taxes accumulated in the lookback period. However, prior period 
adjustments reported on Form 943 for 2008 and earlier years are taken 
into account in determining the employment tax liability for the return 
period in which the adjustments are reported.
* * * * *

0
Par. 8. Section 31.6402(a)-1 is amended by revising paragraph (a) to 
read as follows:


Sec.  31.6402(a)-1  Credits or refunds.

    (a) In general. For regulations under section 6402 of special 
application to credits or refunds of employment taxes, see Sec. Sec.  
31.6402(a)-2, 31.6402(a)-3, and 31.6414-1. For regulations under 
section 6402 of general application to credits or refunds, see 
Sec. Sec.  301.6402-1 and 301.6402-2. For provisions relating to 
adjustments without interest of overpayments of taxes under the Federal 
Insurance Contributions Act or the Railroad Retirement Tax Act or 
income tax withholding, see Sec. Sec.  31.6413(a)-1 and 31.6413(a)-2.
* * * * *

0
Par. 9. Section 31.6402(a)-2 is amended by revising paragraph heading 
and text of paragraph (a) and removing paragraph (c) to read as 
follows:


Sec.  31.6402(a)-2  Credit or refund of tax under Federal Insurance 
Contributions Act or Railroad Retirement Tax Act

    (a) Claim by person who paid tax to IRS--(1) In general. (i) Any 
person may file a claim for credit or refund for an overpayment (except 
to the extent that the overpayment must be credited pursuant to Sec.  
31.3503-1) if the person paid to the IRS more than the correct amount 
of 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, employee 
representative RRTA tax under section 3211, or employer RRTA tax under 
section 3221, or interest, addition to the tax, additional amount, or 
penalty with respect to any such tax.
    (ii) The claim for credit or refund must be made in the manner and 
subject to the conditions stated in this section. The claim for credit 
or refund must be filed on the form prescribed by the IRS and must 
designate the return period to which the claim relates, explain in 
detail the grounds and facts relied upon to support the claim, and set 
forth such other information as may be required by this section and by 
the instructions relating to the form used to make such claim. No 
refund or credit pursuant to this section for employer tax will be 
allowed unless the employer has first repaid or reimbursed its employee 
or has secured the employee's consent to the allowance of the claim for 
refund and includes a claim for the refund of such employee tax. 
However, this requirement does not apply to the extent that the taxes 
were not withheld from the employee or, after the employer makes 
reasonable efforts to repay or reimburse the employee or secure the 
employee's consent, the employer cannot locate the employee or the 
employee will not provide consent. No refund or credit of employee FICA 
or RRTA tax overcollected in an earlier year will be allowed if the 
employee has claimed a refund or credit of the amount of the 
overcollection which has not been rejected or if the employee has taken 
the amount of such tax into account in claiming a credit against or 
refund of the employee's income tax, including instances in which the 
employee has included an overcollection of employee FICA or RRTA tax in 
computing a special refund (see Sec.  31.6413(c)-1).
    (iii) For adjustments without interest of overpayments of FICA or 
RRTA taxes, see Sec.  31.6413(a)-2.
    (iv) For corrections of FICA and RRTA tax paid under the wrong 
chapter, see Sec.  31.6205-1(b)(2)(ii) and (iii) and Sec.  31.3503-1.
    (v) 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. 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.
    (vi) For the period of limitations on credit or refund of taxes, 
see Sec.  301.6511(a)-1.
    (2) Statements supporting employer's claims for employee tax. (i) 
Every employer who files a claim for refund or credit of employee FICA 
tax under section 3101 or employee RRTA tax under section 3201 
collected from an employee must certify as part of the claim process 
that the employer has repaid or reimbursed the tax to its employee or 
has secured the employee's written consent to allowance of the

[[Page 37380]]

filing of the claim for refund except to the extent that the taxes were 
not withheld from the employee. The employer must retain as part of its 
records the written receipt of the employee showing the date and amount 
of the repayment, evidence of reimbursement, or the written consent of 
the employee, whichever is used in support of the claim.
    (ii) Every employer who files a claim for refund or credit of 
employee FICA tax under section 3101 or employee RRTA tax under section 
3201 collected from an employee in a calendar year prior to the year in 
which the credit or refund is claimed, also must certify as part of the 
claim process that the employer has obtained the employee's written 
statement 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. 
The employer must retain the employee's written statement as part of 
the employer's records.
* * * * *

0
Par. 10. Section 31.6413(a)-1 is revised to read as follows:


Sec.  31.6413(a)-1   Repayment or reimbursement by employer of tax 
erroneously collected from employee.

    (a) Federal Insurance Contributions Act and Railroad Retirement Tax 
Act--(1) Overcollection ascertained before return is filed. (i) If an 
employer during any return period collects from an employee more than 
the correct amount of employee Federal Insurance Contributions Act 
(FICA) tax under section 3101 or employee Railroad Retirement Tax Act 
(RRTA) tax under section 3201, and if the employer ascertains the error 
before filing the return on which the employee tax is required to be 
reported, repays or reimburses the amount of the overcollection to the 
employee before filing the return for such return period, and obtains 
and keeps as part of its records the written receipt of the employee 
showing the date and amount of the repayment or evidence of 
reimbursement, the employer shall not report on any return or pay to 
the IRS the amount of the overcollection.
    (ii) Any overcollection not repaid or reimbursed to the employee as 
provided in paragraph (a)(1)(i) of this section shall be reported and 
paid to the IRS on the return for reporting such tax for the return 
period in which the overcollection is made. However, the reporting and 
payment of the overcollection may subsequently be treated as an 
overpayment error ascertained after the return is filed for purposes of 
paragraph (a)(2) of this section.
    (iii) For purposes of this paragraph (a)(1), an error is 
ascertained when the employer has sufficient knowledge of the error to 
be able to correct it.
    (2) Error ascertained after return is filed. (i) If an employer 
files a return for a return period on which FICA tax or RRTA tax is 
reported, collects from an employee and pays to the IRS more than the 
correct amount of the employee FICA or RRTA tax, and if the employer 
ascertains the error after filing the return and within the applicable 
period of limitations on credit or refund, the employer shall repay or 
reimburse the employee in the amount of the overcollection prior to the 
expiration of such limitations period. However, this paragraph (a)(2) 
does not apply to the extent that, after reasonable efforts, the 
employer cannot locate the employee, or the employee does not provide 
the employer with the written statement required by Sec.  31.6413(a)-
1(a)(2)(iv). This paragraph (a)(2) has no application in any case in 
which an overcollection is made the subject of a claim by the employer 
for refund or credit under the procedure provided in Sec.  31.6402(a)-
2.
    (ii) If the employer repays the amount of the overcollection to an 
employee, the employer shall obtain and keep as part of its records the 
written receipt of the employee, showing the date and amount of the 
repayment.
    (iii) If the employer reimburses the amount of the overcollection 
to an employee, the employer shall keep as part of its records evidence 
of reimbursement. The employer shall reimburse the employee by applying 
the amount of the overcollection against the employee FICA or RRTA tax 
which attaches to wages or compensation paid by the employer to the 
employee prior to the expiration of the applicable period of 
limitations on credit or refund. If the amount of the overcollection 
exceeds the amount so applied against such employee tax, the excess 
amount shall be repaid to the employee as required by this section.
    (iv) If, in any calendar year, an employer repays or reimburses an 
employee in the amount of an overcollection of employee FICA or RRTA 
tax that was collected from the employee in a prior calendar year, the 
employer shall obtain from the employee and keep as part of its records 
a written statement 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 such 
amount. For this purpose, a claim for refund or credit by the employee 
includes instances in which the employee has included an overcollection 
of employee FICA or RRTA tax in computing a special refund (see Sec.  
31.6413(c)-1).
    (v) For purposes of this paragraph (a)(2), an error is ascertained 
when the employer has sufficient knowledge of the error to be able to 
correct it.
    (vi) For the period of limitations on credit or refund of taxes, 
see Sec.  301.6511(a)-1.
    (vii) For corrections of FICA and RRTA tax paid under the wrong 
chapter, see Sec.  31.6205-1(b)(2)(ii) and (iii) and Sec.  31.3503-1.
    (b) Income tax withheld from wages--(1) Overcollection ascertained 
before return is filed. (i) If an employer during any return period 
collects from an employee more than the correct amount of tax required 
to be withheld from wages under section 3402, and if the employer 
ascertains the error before filing the return on which such tax is 
required to be reported, repays or reimburses the amount of the 
overcollection to the employee before filing the return for such return 
period and before the end of the calendar year in which the 
overcollection was made, and obtains and keeps as part of its records 
the written receipt of the employee showing the date and amount of the 
repayment or evidence of reimbursement, the employer shall not report 
on any return or pay to the IRS the amount of the overcollection.
    (ii) Any overcollection not repaid or reimbursed to the employee as 
provided in paragraph (b)(1)(i) of this section shall be reported and 
paid to the IRS on the return for reporting such tax for the return 
period in which the overcollection is made. However, the reporting and 
payment of the overcollection may subsequently be treated as an 
overpayment error ascertained after the return is filed for purposes of 
paragraph (b)(2) of this section.
    (iii) For purposes of this paragraph (b)(1), an error is 
ascertained when the employer has sufficient knowledge of the error to 
be able to correct it.
    (2) Error ascertained after return is filed. (i) If an employer 
files a return for a return period on which tax required to be withheld 
from wages is reported, collects from an employee and pays to the IRS 
more than the correct amount of the tax required to be withheld from 
wages, and if the employer ascertains the error after filing the return 
but before the end of the calendar year in which the wages were paid, 
the employer shall repay or reimburse the employee in the amount of the

[[Page 37381]]

overcollection prior to the end of the calendar year. However, this 
paragraph does not apply to the extent that, after reasonable efforts, 
the employer cannot locate the employee.
    (ii) If the employer repays the amount of the overcollection to an 
employee, the employer shall obtain and keep as part of its records the 
written receipt of the employee, showing the date and amount of the 
repayment.
    (iii) If the employer reimburses the amount of the overcollection 
to an employee, the employer shall keep as part of its records evidence 
of reimbursement. The employer shall reimburse the employee by applying 
the amount of the overcollection against the tax under section 3402, 
which otherwise would be required to be withheld from wages paid by the 
employer to the employee in the calendar year in which the 
overcollection is made. If the amount of the overcollection exceeds the 
amount so applied against such tax, the excess amount shall be repaid 
to the employee as required by this section.
    (iv) For purposes of this paragraph (b)(2), an error is ascertained 
when the employer has sufficient knowledge of the error to be able to 
correct it.

0
Par. 11. Section 31.6413(a)-2 is revised to read as follows:


Sec.  31.6413(a)-2  Adjustments of overpayments.

    (a) In general. (1) An employer who has overcollected or overpaid 
employee Federal Insurance Contributions Act (FICA) tax under section 
3101 or employer FICA tax under section 3111, employee Railroad 
Retirement Tax (RRTA) tax under section 3201 or employer RRTA tax under 
section 3221, or income tax required under section 3402 to be withheld, 
and has repaid or reimbursed the amount of the overcollection of such 
tax to the employee, 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) Every correction under this section of an overpayment of tax 
shall be made on the form prescribed by the IRS 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.
    (3) Every adjusted return on which an overpayment is corrected 
pursuant to this section shall certify that the employer has repaid or 
reimbursed its employee, except where taxes were not withheld from the 
employee or where, after reasonable efforts, the employer cannot locate 
the employee. Every adjusted return 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 this section and Sec.  31.6413(a)-1 and by the instructions 
relating to the adjusted return. Every adjusted return, filed by an 
employer, for overpayment of employee FICA tax under section 3101 or 
employee RRTA tax under section 3201 collected from an employee in a 
calendar year prior to the year in which the adjusted return is filed, 
must also certify that the employer has obtained the employee's written 
statement 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.
    (4) For purposes of this section, an error is ascertained when the 
employer has sufficient knowledge of the error to be able to correct 
it.
    (5) 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. 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.
    (b) Federal Insurance Contributions Act and Railroad Retirement Tax 
Act--(1) Overcollection ascertained before return is filed. If an 
employer collects more than the correct amount of employee FICA or RRTA 
tax from an employee, 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, and repays or reimburses 
the employee under Sec.  31.6413(a)-1(a)(1), the employer shall not 
report on any return or pay to the IRS the amount of the 
overcollection. If the employer does not repay or reimburse the amount 
of the overcollection under Sec.  31.6413(a)-1(a)(1) before filing the 
return, the employer must report the amount of the overcollection on 
the return. However, the payment of the overcollection may subsequently 
be treated as an overpayment error ascertained after the return is 
filed for purposes of paragraph (b)(2) of this section.
    (2) Error ascertained after return is filed--(i) Employee tax. If 
an employer files a return for a return period on which FICA tax or 
RRTA tax is required to be reported and reports on the return more than 
the correct amount of employee FICA or RRTA tax, and if the employer 
ascertains the error after filing the return, and repays or reimburses 
the employee the amount of the overcollection of employee tax, as 
provided in Sec.  31.6413(a)-1(a)(2), the employer may correct the 
error through an interest-free adjustment as provided in this section. 
The employer shall adjust the overpayment of tax by reporting the 
overpayment 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 as required by 
paragraph (a)(3) of this section. Except as provided in paragraph (d) 
of this section, the reporting of the overpayment on an adjusted return 
constitutes an adjustment within the meaning of this section only if 
the adjusted return is filed before the expiration of the period of 
limitations on credit or refund. The employer shall take the adjusted 
amount as a credit towards payment of employment tax liabilities for 
the return period in which the adjusted return is filed unless the IRS 
notifies the employer that the adjustment is not permitted under 
paragraph (d) of this section.
    (ii) Employer tax. If an employer files a return for a return 
period on which FICA or RRTA tax is required to be reported and reports 
on the return more than the correct amount of employer FICA or RRTA 
tax, and if the employer ascertains the error after filing the return, 
the employer may correct the error through an interest-free adjustment 
as provided in this section. The employer must first repay or reimburse 
the employee the amount of any overcollection of employee tax, if any, 
as required by Sec.  31.6413(a)-1(a)(2), before making the adjustment 
for the employer tax. The employer shall adjust the overpayment of tax 
by reporting the overpayment 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 as required by paragraph (a)(3) of this section. Except as 
provided in paragraph (d) of this section, the reporting of the 
overpayment on an adjusted return constitutes an adjustment within the 
meaning of this section only if the adjusted return is filed before the 
expiration of the period of limitations on credit or refund. The 
employer shall take the adjusted amount as a credit towards payment of 
employment tax liabilities for the return

[[Page 37382]]

period in which the adjusted return is filed unless the IRS notifies 
the employer that the adjustment is not permitted under paragraph (d) 
of this section.
    (c) Income tax withheld from wages--(1) Overcollection ascertained 
before return is filed. If an employer collects more than the correct 
amount of income tax required to be withheld from wages, and if the 
employer ascertains the error before filing the return on which the tax 
is required to be reported, and repays or reimburses the employee under 
Sec.  31.6413(a)-1(b)(1), the employer shall not report on any return 
or pay to the IRS the amount of the overcollection. If the employer 
does not repay or reimburse the amount of the overcollection under 
Sec.  31.6413(a)-1(b)(1) before filing the return, the employer must 
report the amount of the overcollection on the return. However, the 
reporting and payment of the overcollection may subsequently be treated 
as an overpayment error ascertained after the return is filed for 
purposes of paragraph (c)(2) of this section.
    (2) Error ascertained after return is filed. If an employer files a 
return for a return period on which income tax required to be withheld 
from wages is required to be reported and reports on the return more 
than the correct amount of income tax required to be withheld, and if 
the employer ascertains the error after filing the return, and repays 
or reimburses the employee in the amount of the overcollection as 
provided in Sec.  31.6413(a)-1(b)(2), the employer may correct the 
error through an interest-free adjustment as provided in this section. 
The employer shall adjust the overpayment of tax by reporting the 
overpayment 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 as required in paragraph (a)(3) 
of this section. Except as provided in paragraph (d) of this section, 
the reporting of the overpayment on an adjusted return constitutes an 
adjustment within the meaning of this section. If the amount of the 
overcollection is not repaid or reimbursed to the employee under Sec.  
31.6413(a)-1(b)(2), there is no overpayment to be adjusted under this 
section. However, the employer may adjust an overpayment of tax 
attributable to an administrative error, that is, an error involving 
the inaccurate reporting of the amount withheld, pursuant to this 
section. The employer shall take the adjusted amount as a credit 
towards payment of employment tax liabilities for the return period in 
which the adjusted return is filed unless the IRS notifies the employer 
that the adjustment is not permitted under paragraph (d) of this 
section.
    (d) Adjustments not permitted--(1) In general. If an adjustment 
cannot be made, a claim for refund or credit may be filed in accordance 
with Sec.  31.6402(a)-2 or Sec.  31.6414-1.
    (2) 90-day exception. No adjustment in respect of an overpayment 
may be made if the overpayment relates to a return period for which the 
period of limitations on credit or refund of such overpayment will 
expire within 90 days of filing the adjusted return.
    (3) No adjustment after claim for refund filed. No adjustment in 
respect of an overpayment may be made after the filing of a claim for 
credit or refund of such overpayment under Sec.  31.6402(a)-2.
    (4) No adjustment after IRS notification. No adjustment may be made 
upon notification by the IRS that the adjustment is not permitted.

0
Par. 12. Section 31.6414-1 is amended by revising paragraph (a) to read 
as follows:


Sec.  31.6414-1  Credit or refund of income tax withheld from wages.

    (a) In general. (1) Any employer who pays to the IRS more than the 
correct amount of income tax required to be withheld from wages under 
section 3402 or interest, addition to the tax, additional amount, or 
penalty with respect to such tax, may file a claim for refund of the 
overpayment in the manner and subject to the conditions stated in this 
section on the form prescribed by the IRS. The claim for refund must 
designate the return period to which the claim relates, explain in 
detail the grounds and facts relied upon to support the claim, and set 
forth such other information as may be required by the regulations in 
this section and by the instructions relating to the form used to make 
such claim. No refund to the employer will be allowed under this 
section for the amount of any overpayment of tax which the employer 
deducted or withheld from an employee.
    (2) 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. 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.
    (3) For interest-free adjustments of overpayments of income tax 
withheld from wages, see Sec.  31.6413(a)-2.
* * * * *

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 13. The authority citation for part 602 continues to read in part 
as follows:

    Authority: 26 U.S.C. 7805.


0
Par. 14. In Sec.  602.101, paragraph (b) is amended by adding the 
following entry in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers

* * * * *
    (b) * * *

------------------------------------------------------------------------
 CFR part or section where identified and
                 described                     Current OMB control No.
------------------------------------------------------------------------
 
                                * * * * *
31.6011(a)-1..............................  1545-2097
31.6011(a)-4..............................  1545-2097
31.6011(a)-5..............................  1545-2097
31.6205-1.................................  1545-2097
31.6402(a)-2..............................  1545-2097
31.6413(a)-1..............................  1545-2097
31.6413(a)-2..............................  1545-2097
31.6414-1.................................  1545-2097
 
                                * * * * *
------------------------------------------------------------------------


Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: June 23, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E8-14947 Filed 6-30-08; 8:45 am]
BILLING CODE 4830-01-P