CCA Explains When Taxpayers Qualify For Interest-Free Adjustments On Worker Misclassifications

Chief Counsel Advice 201109025

In a Chief Counsel Advice (CCA) dealing with the issue of worker misclassification, IRS has provided guidance on the time frame for paying prior period federal income tax withholding and FICA taxes without incurring any interest charges.

Observation: Chief Counsel Advice 201109025 is one of the brief e-mail CCA memos that IRS now releases. Although many of these are of little or no interest to practitioners, some, such as Chief Counsel Advice 201109025, provide valuable insight on how IRS attorneys view technical and procedural tax questions and issues.

Background on interest-free adjustments. Generally, interest must be paid to IRS on any underpayment of tax. However, Reg. §31.6205-1(a) allows certain FICA or withholding tax underpayments from previous periods to be corrected on an interest-free basis if the employer files an amended return in the 94X series (e.g., 941-X, 944-X) to report the error, and the taxes are paid in full by the last day for filing the employment tax return for the quarter in which the error is “ascertained.” The employer is required to enter the date the error was “discovered” on the “94X” form, and to provide in detail the grounds and facts relied on to support the correction.

Form SS-8. The date the error was “discovered” is also provided on Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Employers and workers may submit Form SS-8 to IRS to receive a determination regarding an employee's worker status (i.e., employee vs. independent contractor).

CCA's conclusion. In the CCA, IRS notes that the SS-8 determination letter will provide the date that the error was “discovered,” but the standard used in Reg. §31.6205-1(a) for interest-free adjustments is the date when the error was “ascertained.” IRS says that an error is “ascertained” when the employer has sufficient information to correct it. The SS-8 determination letter will not always control the “ascertained” date (e.g., the employer may need to determine which employees are similarly situated and/or go through its records to obtain information to fill out Form 941-X), though some employers may have sufficient information at that point to determine the “ascertained” date. IRS notes that, in all cases, the employer must be able to prove when the error was ascertained for purposes of making an interest-free adjustment.

References: For interest payable by employer on tax not withheld, see FTC 2d/FIN ¶S-5526; United States Tax Reporter ¶62,054; TaxDesk ¶559,519; TG ¶71569.