Payroll In Practice: 10.28.2024

Question: The instructions for Form 941-X say the form may be used to file either an adjusted employment tax return or a claim for refund or abatement. Per the instructions, the adjustment process must be used if the employer is reporting both over- and underreported amounts. Does this mean the employer cannot claim a refund even if the net changes result in an overpayment?

Answer: The determination as to whether an adjustment or refund claim must or may be made is not based on the net balance due or refund amount, although this information is important. Other issues are involved, including interest-free adjustments for underreported amounts, timely tax deposits, and the time the Internal Revenue Service needs to review claims for refunds.

Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, is used to amend a previously filed Form 941, Employer’s Quarterly Federal Tax Return. This includes Form 941 errors in reporting the amount of taxable wages, tips, or other compensation that are reported in connection with Social Security, Medicare, and additional Medicare taxes; income tax and additional Medicare tax withholding; the qualified small business payroll tax credit for increasing research activities; various other taxes; Covid-related credits; and employee reclassification.

Treasury regulations require a detailed explanation of the grounds and facts relied upon to support each correction to Form 941. Line 43 of Form 941-X provides some space for a detailed explanation of the changes. If the space provided is insufficient, additional sheets may be attached.

The grounds and facts relied on to support each correction should be described in detail. Corrections to reported tax amounts are entered on Form 941-X in Column 4, on Lines 7 to 22 and 25 to 26c. Corrections made to informational amounts entered on Lines 6, 28 to 32, and 35 to 40 should also be described on Line 43.

Employers may discover and correct a single amount reported incorrectly on a previously filed Form 941. The reported amount may exceed the correct amount which is overreported tax, or may be less than the correct amount, which is underreported tax. Alternatively, several errors may be found on the original Form 941 involving different reported amounts, such as income tax wages and Social Security tax, or several errors related to the same reported amount.

Discovery of different errors related to a particular quarter may occur in different subsequent quarters and involve filing multiple Forms 941-X for corrections to the original Form 941.

Each error and corresponding correction constitute a separate item. The Line 43 explanation should include the affected Form 941-X line numbers, the date the error was discovered, and the amount and cause of the error.

In the case of both over- and underreported amounts, the employer must also check the box on Line 41 to indicate that at least some corrections entered reflect both over- and underreported amounts.

Employers must use the adjustment method on any Form 941-X that reports errors involving underreported amounts or a combination of under- and overreported amounts. Alternatively, an employer may file two Forms 941-X if errors involving both under- and overreported amounts were discovered for the same quarter. One form would use the adjustment method for the underreported amounts and the other would use the refund claim method for the overreported amounts.

If a Form 941-X reports only errors involving overreported amounts, employers may use either method.

The due dates differ for returns claiming underreported amounts and those claiming only overreported amounts. To take advantage of the interest-free adjustment rules, the employer must file a Form 941-X adjusting underreported amounts by the due date for Form 941 for the quarter the error was discovered. Any undeposited tax must be deposited by the date the Form 941-X is filed.

A Form 941-X reporting only overpayments may be filed anytime within the three-year period of limitations for corrections. However, the claim method must be used if the 941-X is filed within 90 days of the expiration of the period of limitations.

This column does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., or its owners.

Author Information
Patrick Haggerty is the owner of a tax practice in Chapel Hill, North Carolina, and an enrolled agent licensed to practice before the Internal Revenue Service. The author may be contacted at phaggerty@prodigy.net.

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