Rev. Proc. 2001-28: Correcting Employment Tax Errors

The Internal Revenue Service (IRS) provides specific procedures for employers to correct errors on previously filed employment tax returns. Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, is the designated form for employers who have under or overpaid employment taxes to make corrections. This process allows for adjusting tax liabilities and, in the case of underpayments, may allow for an interest-free adjustment if specific conditions are met. Understanding this corrective mechanism is important for maintaining compliance with federal tax obligations.

Eligibility for Interest-Free Adjustments

To qualify for an interest-free adjustment on an underpayment, an employer must meet several conditions established by the IRS. A primary requirement is that the employer must discover the error.

Another condition is that the employer must have filed the original employment tax return (Form 941) for the period in which the error occurred. This process is not available for non-filers; it is strictly a method for correcting a previously submitted, albeit incorrect, return. The correction must also be made before the statute of limitations on assessment expires. Generally, the IRS has three years from the date a return is filed to assess additional tax, so corrections for underpayments must be made within this window. To claim a refund for an overpayment, an employer generally has three years from the date the original Form 941 was filed or two years from the date the tax was paid, whichever is later.

The employer is required to report the adjustment on Form 941-X for the tax period when the wages were paid. Failing to use the correct form or to provide a complete and accurate explanation of the error can jeopardize the interest-free treatment. Finally, the full amount of the underpaid tax must be paid when the Form 941-X is filed.

Information and Documentation for Correction

Before an employer can proceed with a correction, specific information and documentation must be gathered and prepared. The first step is to pinpoint the exact prior quarter or quarters that contain the error. This requires a careful review of payroll records to identify which specific Form 941, Employer’s QUARTERLY Federal Tax Return, was filed incorrectly.

Once the period is identified, the employer must calculate the precise amount of the underpayment or overpayment. This calculation needs to be broken down by tax type, such as misreported federal income tax, Social Security tax, and Medicare tax. For Social Security, this involves both the employee and employer shares.

The designated form for making these corrections is Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. Employers must use this specific form for each quarter being corrected; attempting to fix an error by amending a previously filed Form 941 is not the proper procedure. The most current version of Form 941-X should always be obtained directly from the IRS website.

The form uses a columnar format where the employer enters the amounts as originally reported on Form 941, the correct amounts, and the difference between the two. The form also requires a detailed written explanation of how the error was discovered and what it entailed, such as a miscalculation of taxable wages or an incorrect tax rate application.

The Adjustment and Payment Process

After Form 941-X is completed, the final steps involve submission and payment. The completed Form 941-X must be filed with the IRS. For faster and more secure processing, the IRS encourages filing Form 941-X electronically through the Modernized e-File (MeF) system. Alternatively, it can be mailed to the service center listed in the form’s instructions.

To secure interest-free treatment for an underpayment, the full amount of the additional tax reported on Form 941-X must be paid at the same time the form is filed. If the form is submitted without the corresponding payment, the adjustment will be processed, but the employer will lose the benefit of the interest waiver. The IRS will then treat it as an underpayment and issue a bill for the tax plus accrued interest.

Payment can be made through various methods, including the Electronic Federal Tax Payment System (EFTPS) or by mail with a check or money order.

Once the Form 941-X and any required payment are submitted, the IRS will process the adjustment. The agency will review the form and the explanation provided. If the correction is accepted as filed, the employer’s account will be updated. The employer may not receive a specific confirmation notice if the adjustment is processed without issue but can verify the account status through their own records or by contacting the IRS.