Time for Filing Employment Tax Returns and Modifications to the Deposit Rules

AGENCY:

Internal Revenue Service (IRS), Treasury.

ACTION:

Notice of proposed rulemaking by cross-reference to temporary regulations, notice of proposed rulemaking, and notice of public hearing.

SUMMARY:

In the Rules and Regulations section of this issue of the Federal Register, the IRS is issuing temporary regulations relating to the annual filing of Federal employment tax returns and requirements for employment tax deposits for employers in the Employers' Annual Federal Tax Program (Form 944) (hereinafter referred to as the Form 944 Program). Those temporary regulations provide requirements for filing returns to report the Federal Insurance Contributions Act (FICA) taxes and income tax withheld under section 6011 of the Internal Revenue Code (Code) and §§ 31.6011(a)-1 and 31.6011(a)-4. Those regulations also require employers qualified for the Form 944 Program to file Federal employment tax returns annually. In addition, those regulations provide requirements for employers to make deposits of tax under FICA and the income tax withholding provisions of the Code (collectively, employment taxes) under section 6302 of the Code and § 31.6302-1. The text of those regulations serves, in part, as the text of these proposed regulations. In addition to rules related to the Form 944 Program, these proposed regulations provide an additional method for quarterly return filers to determine whether the amount of accumulated employment taxes is considered de minimis. This document also provides notice of a public hearing.

DATES:

Written or electronic comments must be received by April 3, 2006. Outlines of topics to be discussed at the public hearing scheduled for April 26, 2006 at 10 a.m. must be received by April 5, 2006.

ADDRESSES:

Send submissions to: CC:PA:LPD:PR (REG-148568-04), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-148568-04), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC, or sent electronically, via the IRS Internet site at http://www.irs.gov/regs or via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-148568-04). The public hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations relating to section 6011, Raymond Bailey, (202) 622-4910; concerning the proposed regulations relating to section 6302, Audra M. Dineen, (202) 622-4940; concerning submissions of comments and the hearing, Treena Garrett, (202) 622-7180 (not a toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in the Rules and Regulations section of this issue of the Federal Register amend the Regulations on Employment Taxes and Collection of Income Tax at Source (26 CFR part 31) under sections 6011 and 6302. These amendments are designed to require employers qualified for the Form 944 Program to file Federal employment tax returns annually and to permit most employers in the Form 944 Program to remit their accumulated employment taxes annually with their return. The text of those temporary regulations also serves, in part, as the text of these proposed regulations. The preamble to the temporary regulations explains the temporary regulations and these proposed regulations. These proposed regulations are one part of the IRS's effort to reduce taxpayer burden by requiring certain employers to file Federal employment tax returns annually rather than quarterly and by permitting certain employers to remit employment taxes annually with their return.

De Minimis Deposit Rule

In addition to establishing the Form 944 Program, these proposed regulations will provide a safe harbor for small employers that have an unexpected increase in their deposit liability for a quarterly return period. The proposed regulations provide an alternate method for determining whether the employer's employment tax obligations are de minimis, which is based on its employment taxes due for the prior return period. This special rule applies only to employers filing quarterly tax returns and therefore has no application to the Form 944 Program.

Under the existing regulations, deposits of taxes reported on Form 941, “Employer's Quarterly Federal Tax Return,” generally are due monthly or semi-weekly. If an employer fails to make timely deposits of employment taxes, then, absent reasonable cause, the employer will be subject to the penalty for failure to deposit under section 6656. Currently, § 31.6302-1(f)(4) (the de minimis deposit rule) provides that, for quarterly and annual return periods, if the aggregate amount of employment taxes for the return period is less than $2,500 and that amount is deposited or remitted with a timely filed return for that return period, the amount will be deemed to have been timely deposited and the employer will not be subject to the penalty for failure to deposit. Thus, currently under the de minimis deposit rule, employers remitting their employment taxes with their timely filed quarterly returns will only be deemed to have timely deposited their taxes if the amount of taxes due is less than $2,500 for that quarter. Similarly, under the current de minimis deposit rule, employers remitting their employment taxes with their timely filed annual returns will only be deemed to have timely deposited if the amount of taxes due is less than $2,500 for the entire year.

Under the proposed amendments, employers may remit their employment taxes with their timely filed quarterly returns and be deemed to have timely deposited if the amount of the taxes due for the current quarter or for the prior quarter is less than $2,500. This special rule can be illustrated by the following example: an employer has less than $50,000 in employment taxes reported during the lookback period and is therefore a monthly depositor under § 31.6302-1(b)(2). The employer's employment tax liabilities for the first and second quarters of 2004 were $2,450 and $2,400, respectively. In the third quarter of 2004, however, the employer's employment tax liability was $2,550. Under the existing de minimis deposit rule, if the employer remits the $2,550 with its third quarter return, the amount is not considered timely deposited for that quarter and, therefore, the employer would be assessed the section 6656 penalty for failure to deposit. Modifying the de minimis deposit rule to allow employers to base the determination on the employment taxes due for the immediately preceding quarter provides a safe harbor for employers regarding their deposit obligations. Thus, in this example, when the employer had an increase in its employment tax liability for the third quarter of 2004, its remittance would still be deemed to have been timely deposited because the taxes for the immediately preceding return period were de minimis. The proposed amendment has no application to the One-Day rule in § 31.6302-1(c)(2), which requires employers to make a deposit on the next banking day if they accumulate $100,000 or more of employment taxes.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and because these regulations do not impose a collection of information on small entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. In addition, the IRS and Treasury Department are considering expanding the Form 944 Program in the future and seek comments on the eligibility requirements and how best to change them. All comments will be available for public inspection and copying.

A public hearing has been scheduled for April 26, 2006, beginning at 10 a.m. in the Auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by April 5, 2006. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal authors of these proposed regulations are Raymond Bailey, Audra M. Dineen, and Emly B. Berndt of the Office of the Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division.

List of Subjects in 26 CFR Part 31

• Employment taxes
• Income taxes
• Penalties
• Pensions
• Railroad retirement
• Reporting and recordkeeping requirements
• Social security
• Unemployment compensation

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 31 is proposed to be amended as follows:

PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

Paragraph 1. The authority citation for part 31 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 31.6011(a)-1 is amended by revising paragraph (a)(5) to read as follows: