IRS Will Correct Erroneous HIRE Act Failure To Deposit Penalty Assessments

IRS SBSE Payroll E-mail, 8/27/10

E-mail from an IRS spokesperson reveals that IRS is currently correcting a problem with how the first quarter HIRE Act credit was applied to the second quarter Form 941,Employer's Quarterly Federal Tax Return. The problem is generating erroneous penalty notices.

Background. Under Code Sec. 3111(d), as amended by the Hiring Incentives to Restore Employment (HIRE) Act (P.L. 111-147), qualified employers are exempted from paying the employer 6.2% share of Social Security (i.e., OASDI) employment taxes on wages paid in 2010 to a newly hired qualified individual. The payroll tax relief applies only for wages paid to qualified individuals after Mar. 18, 2010 and before Jan. 1, 2011.

A qualified individual is one who:

1. begins employment with the employer after Feb. 3, 2010 and before Jan. 1, 2011;

2. certifies by signed affidavit, under penalties of perjury, that he or she hasn't been employed for more than 40 hours during the 60-day period ending on the date employment begins with the qualified employer (use Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit;

3. does not replace another employee of the employer (unless that other employee left voluntarily or for cause); and

4. is not related to the qualified employer in a way that would disqualify the individual for the work opportunity tax credit (WOTC) under Code Sec. 51(i)(1). (Code Sec. 3111(d)(3))

The payroll tax exemption doesn't apply for wages paid during the first calendar quarter of 2010, more narrowly, it doesn't apply for wages paid from March 19 through March 31. Instead, the amount by which the qualified employer's OASDI tax for wages paid during the first calendar quarter of 2010 would have been reduced if the payroll tax exemption had been in effect for the first quarter is treated as a payment against the employer's OASDI tax for the second calendar quarter of 2010. (Code Sec. 3111(d)(5))

Calculation problem and a fix. An IRS spokesperson says there was a problem with how the credit for first quarter wages paid from March 19 through March 31 (Form 941, line 12e) was applied when computing the Failure to Deposit Penalty on the second quarter Form 941. The calculation problem caused IRS to send out erroneous CP 207 and CP 276B notices to some taxpayers. The IRS proposes a federal tax deposit penalty on CP 207. A CP 276B notice asks taxpayers to review their records to determine if they are paying their current payroll taxes on time.

The IRS spokesperson says IRS has corrected the error and plans to revise any erroneous penalty assessments by September 6th.

In May, IRS issued a revised Form 941 (Employer's Quarterly Federal Tax Return) for the second quarter of 2010 to reflect the payroll tax exemption for hiring unemployed workers.

Form 941 Rev. April 2010 (Employer's Quarterly Federal Tax Return) can be viewed at http://www.irs.gov/pub/irs-pdf/f941.pdf.

Instructions to Form 941 Rev. April 2010 (Employer's Quarterly Federal Tax Return) can be viewed at http://www.irs.gov/pub/irs-pdf/i941.pdf.

Research References: For the HIRE Act's payroll tax exemption, see FTC 2d/FIN ¶ H-4687.1; United States Tax Reporter ¶ 31,114; TaxDesk ¶ 541,002.1.