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Filing the Wrong Withholding Tax Return May Still Start Assessment Period.

(Parker Tax Publishing June 30, 2015)

IRS Field Attorneys advised that where one type of return is required from an employer, but another type is filed, the document filed is still a valid return and will start the period of limitations on assessment if the document meets certain requirements. FAA 20152101F.

Background

In FAA 20152101F, IRS Field Attorneys (IRS) responded to an inquiry regarding the validity of tax returns and running of the period of limitations on assessment under Code Sec. 6501 where employers were required to file one type of return but filed another type. Lawyers in the IRS Office of Chief Counsel concluded that if four specific criteria were met, the filed returns would be valid and the period of limitations would begin as of the deemed filing date.

The IRS addressed this inquiry as it relates to three different scenarios:

Scenario 1: Employer A was required to file a Form 944, Employer's Annual Federal Tax Return, but instead timely filed four Forms 941, Employer's Quarterly Federal Tax Return.

Scenario 2: Employer B was required to file a Form 944, but instead timely filed a Form 941 for the first and second quarters of the tax year, but filed no returns for the third or fourth quarter.

Scenario 3: Employer C was required to file Form 941 for all quarters of the tax year, but instead timely filed a Form 944.

Analysis

Under Code Sec. 6501(a), the limitations period generally begins to run with the filing of a valid return, after which the IRS must make an assessment within three years. Under Code Sec. 6501(b)(2) the filing date is deemed to be April 15 of the succeeding calendar year.

To determine whether a return is valid for assessment period of limitations purposes, courts generally look to see whether the purported return meets four requirements established in Beard v. Comm'r, 82 T.C. 766 (1984) and generally accepted as the "substantial compliance" standard:

(1) Provides sufficient data to calculate the tax liability;

(2) Purports to be a return;

(3) Is an honest and reasonable attempt to satisfy the requirements of the tax law; and

(4) Is executed under penalties of perjury.

With respect to Scenario 1, the IRS advised that, assuming the Forms 941 purport to be returns, are an honest and reasonable attempt to satisfy the filing requirements, are signed under penalty of perjury, and can be used to determine Employer A's annual FICA and income tax withholding liabilities, the Forms 941 meet the Beard formulation and should be treated as valid returns for the purposes of starting the period of limitations on assessment. Because the Forms 941 were timely filed the period of limitations would start to run on April 15 of the succeeding year.

The IRS concluded that for Scenario 2, an argument could be made that the Forms 941 for the first and second quarters of the tax year constitute valid returns under the Beard formulation since they purport to be returns and are signed under penalty of perjury. However, given that Employer B's FICA and income tax withholding liability for the third and fourth quarters will not necessarily be equal to that reported for the first two quarters, the Forms 941 may not be sufficient for purposes of the determining B's annual liability and may not be honest and reasonable attempts to satisfy the tax law. The IRS advised the amounts reflected on the Forms 941 must be assessed within three years of April 15 of the succeeding calendar year.

The IRS advised that for Scenario 3, assuming the Form 944 purports to be a return, is an honest and reasonable attempt to satisfy the filing requirements, can be used to determine C's annual FICA and ITW tax liability, and is signed under penalty of perjury, Employer C's Form 944 meets the Beard formulation and should be treated as a valid return for purposes of the period of limitations on assessment. Because the Form 944 was timely filed, the period of limitations would start to run on April 15 of the succeeding calendar year.

For a discussion on employment tax reporting requirements, including Form 941 and Form 944, see Parker Tax ¶ 216,000. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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