Rev. Rul. 81-310

ISSUE 1

May the Internal Revenue Service refund to the employer both the employer's and the employee's share of Federal Insurance Contributions Act (FICA) tax if the employee furnishes to the employer a written consent to the allowance of the refund and a written statement that the employee has not claimed and will not claim a refund or credit of the employee's share?

ISSUE 2

May the Service refund the employer's share of the FICA tax if the employee does not furnish the consent and statement after the employer has made a reasonable attempt to obtain them?

ISSUE 3

Should interest be allowed if refunds are made to the employer in the above situations?

FACTS

Employer X has a voluntary plan for making payments to employees on account of sickness. The payments made under the plan are not wages for purposes of computing employer and employee FICA taxes. During the first quarter of 1980, X became aware that payments made to employees on account of sickness during the calendar years, 1977, 1978, and 1979 had been erroneously treated as wages in computing employer and employee FICA taxes for such years.

X obtained from its records the name and address of each employee from whom it had collected more than the correct amount of employee tax. On August 9, 1980, X sent each employee a request for a written consent to the allowance of a refund of the amount of the overcollection. X also requested from each employee a written statement that the employee had not claimed and would not claim a credit or refund of this amount. Each request specified that if an employee's response has not been received by the employer within 45 days of mailing, the employee will be considered to have refused to provide the consent and statement.

As of September 25, 1980, 100 employees had furnished written consents and statements and 50 had not furnished them. On September 25, 1980, X filed claims for refund of both employer and employee FICA tax overpayments with respect to the 100 employees who had furnished consents and statements, and claims for refund of employer FICA tax overpayments with respect to the 50 employees who had not furnished consents and statements.

LAW AND ANALYSIS

Section 6413(a) of the Internal Revenue Code provides that if more than the correct amount of employer or employee FICA tax is paid on any payment of remuneration, proper adjustments, of both the tax and the amount to be deducted must be made, without interest, as prescribed by regulations.

Section 31.6413(a)-2(a)(1) of the Employment Tax Regulations provides that after an employer repays or reimburses an employee in the amount of an overcollection, the employer may claim credit for the amount in the manner, and subject to the conditions, stated in section 31.6402(a)-2. The credit constitutes an adjustment, without interest, if the amount of the credit is entered on a return for a period ending on or before the last day of the return period following the return period in which the error was ascertained. No credit or adjustment for an overpayment may be entered on a return after a claim for refund of such an overpayment is filed.

Section 31.6413(a)-2(a)(2) of the regulations provides that an employer may claim credit for the amount of overpaid employer FICA tax in the manner, and subject to the conditions, stated in section 31.6402(a)-2. The credit constitutes an adjustment, without interest, if the amount of the credit is entered on the same return on which the employer adjusts a corresponding overpayment of employee tax.

Section 6413(b) of the Code provides that if more than the correct amount of employer or employee FICA tax is paid on any remunerations, and the overpayment cannot be adjusted under section 6413(a), the amount of the overpayment must be refunded as prescribed by regulations. Section 31.6413(b)-1 of the regulations refers to sections 31.6402(a)-1 and 2 for provisions relating to refunds of employer and employee FICA tax.

Section 6402(a) of the Code provides that the Secretary may credit the amount of any overpayment against any internal revenue tax liability of the person who made the overpayment and will refund any balance to that person.

Section 31.6402(a)-2(a)(2) of the regulations provides that every claim filed by an employer for refund or credit of employee tax must include a statement that the employer has repaid the tax to the employee or has secured the written consent of the employee to the allowance of the refund or credit. If the claim relates to employee tax collected in a year prior to the year in which the credit or refund is claimed, the employer must also submit a statement that it has obtained from the employee a written statement (a) that the employee has not claimed refund or credit of the amount of the overcollection, or if so, such claim has been rejected, and (b) that the employee will not claim refund or credit of such amount.

In Atlantic Department Stores, Inc. v. United States, 557 F.2d 957 (2d Cir. 1977), the court considered whether the Service had to honor refund claims for overpaid employer FICA tax that were submitted by an employer who had taken no action to enable its employees to recover the corresponding overpayment of employee FICA tax. The court held that the legislative history of section 6413 of the Code and the regulations under sections 6402(a) and 6413(a) established an obligation for the employer to first adjust the overpayment of employee tax with its employees and then claim a credit or refund from the Service.

Atlantic Department Stores did not directly consider whether securing employee consents to the allowance of refunds in accordance with section 31.6402(a)-2 of the regulations would fulfill this duty to first adjust overpaid employee FICA tax. Securing an employee consent and filing a refund claim under section 31.6402(a)-2 based on the consent is not an "adjustment" as that term is used in section 6413(a) of the Code and the applicable regulations. However, when the employer notifies its employees of the overpaid employee FICA tax and requests their consents to its filing a refund claim on their behalf, it has made reasonable efforts to protect their interests. Therefore, for purposes of the principle recognized in Atlantic Department Stores, the employer's request for employee consents should be treated as fulfilling the duty to "adjust" employee overpayments. If the employees then furnish consents and the necessary statements, the employer may claim a refund of both the employer and the employee FICA tax overpayments. If, after the employer's reasonable effort to secure consents or statements, the employees do not furnish them, the employer may claim a refund of the overpaid employer FICA tax, since it can establish that it made reasonable efforts to recover for its employees the corresponding employee tax overpayments.

Section 6611(a) of the Code provides the general rule that interest will be allowed and paid on any overpayment of any internal revenue tax, including overpayments of FICA tax. However, section 6612(b) cross-references to section 6413(a) for provisions prohibiting interest on certain tax adjustments. Section 6413(a) provides an exception to this general rule by dictating that interest is not paid when FICA tax overpayments are adjusted. Section 31.6413(a)-2(a)(1) of the regulations, however, specifically prohibits making an adjustment after a claim for refund is filed. Thus, when a claim for refund is filed, the payment of interest is not restricted by section 6413(a) because an adjustment under section 6413(a) is no longer possible. Because section 6413(b) contains no prohibition on the payment of interest, interest should be paid on FICA tax refunds obtained in accordance with sections 6413(b) and 6402(a).

HOLDINGS

ISSUE 1

The Service may refund to X both employer and employee FICA tax with respect to an employee who furnished a written consent to the allowance of the refund and a written statement that the employee has not and will not claim a refund or credit of such amount.

ISSUE 2

The Service may refund to X employer FICA tax with respect to an employee who did not furnish the requested consent and statement.

ISSUE 3

Interest should be allowed under section 6611 of the Code on the refunds in both situations described above.

¹ Also released as News Release IR-81-133, dated December 3, 1981.