CCA 1315023: Employment-tax refund offsets are limited to the employee share

Plain-English summary

Chief Counsel advice considers refunds for taxpayers who originally reported wages as self-employment income and paid self-employment tax. The memo concludes that section 6521 permits the Service to offset those refunds against the employee portion of employment tax when the employment-tax assessment period has expired. The offset cannot include the employer portion, which is governed by section 3111. If the employee assessment period remains open when the refund is authorized, the Service should assess the employee portion instead of applying section 6521.

Ruling snapshot

• Question: Which employment-tax amounts may offset a self-employment-tax refund under section 6521?
• Outcome: Advice given, only the employee portion may be offset when the statutory conditions are met.
• Key authorities: IRC §§ 6521, 3101, 3111, and 6501; Treas. Reg. § 31.3102-1(d).

Full text (IRS public release)

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ID: CCA_2013030715433540 Number: 201315023
Release Date: 4/12/2013
Office: --------------
UILC: 6521.01-01

From: ---------------------
Sent: Thursday, March 07, 2013 3:43:38 PM
To: -----------------
Cc:
Subject: RE: IRC sec 6521 situation

Thanks for your patience with this -- the short answer is that only the employee portion
of the employment taxes can be used to offset the self-employment tax refunds.
Detailed answer follows:

You asked us about refunds being made to taxpayers whose employment status is
being re-determined. These taxpayers originally classified themselves as self-
employed, and reported and paid self-employment taxes on their Form 1040 returns.
Their employers did not withhold or pay employment taxes for them.

Now that they are being re-classified as employees, many of these taxpayers have filed
refund claims to recover the self-employment taxes they erroneously paid. The refund
statute of limitations was open at the time the claims were made. However, the
assessment period of limitations has expired for the employment taxes that these
taxpayers and their employers should have paid.

The Service would like to know if it can offset the refunds of self-employment tax with
the un-assessed employment taxes, and if so, can they apply both the employee and
the employer shares when the do the offset.

We conclude that the Service may offset the self-employment tax refunds through
the application of I.R.C. § 6521, but only with the employee portion of the
employment taxes.

Section 6521 provides:

In the case of the tax imposed by chapter 2 (relating to tax on self-employment
income) and the tax imposed by section 3101 (relating to tax on employees under the
Federal Insurance Contributions Act)—

(1) If an amount is erroneously treated as self-employment income, or if an amount
is erroneously treated as wages, and

(2) If the correction of the error would require an assessment of one such tax and
the refund or credit of the other tax, and
 2

(3) If at any time the correction of the error is authorized as to one such tax but is

prevented as to the other tax by any law or rule of law (other than section 7122,
relating to compromises),

then, if the correction authorized is made, the amount of the assessment, or the
amount of the credit or refund, as the case may be, authorized as to the one tax shall
be reduced by the amount of the credit or refund, or the amount of the assessment, as
the case may be, which would be required with respect to such other tax for the
correction of the error if such credit or refund, or such assessment, of such other tax
were not prevented by any law or rule of law (other than section 7122, relating to
compromises).

The situations you describe appear to meet the requirements of section 6521. First,
income was erroneously treated as self-employment. Second, correction of the error
would require an assessment of employment taxes and a refund or credit of the self-
employment taxes. Finally, assessment of the employment taxes is prevented by the
I.R.C. § 6501 period of limitations on assessment. Thus, you may offset the refunds of
self-employment tax due the employees under 6521.

However, this offset is limited by the language of the statute to “tax imposed by section
3101,” which is the employee portion of the employment taxes. The employer portion is
governed by I.R.C. § 3111. Treas. Reg. § 31.3102-1(d) provides that an employee is
responsible for the employee’s share of employment tax until it is collected from him or
her by the employer. Therefore, in cases like yours, where no employment tax was
collected, the employees remain liable for the § 3101 employee share of tax.

The various provisions of the IRM which address section 6521 correctly reflect that
offset should be limited to the employee share. For example, see IRM 4.23.8.5.3(3),
which gives an example of how a self-employment tax refund should be offset by the
amount of the employee’s share of the tax imposed on that employee under § 3101.

Finally, this approach has also been endorsed by the Tax Court in Beane v.
Commissioner, T.C. Memo. 2009-152 (allowing Service to offset a refund of self-
employment tax with the employee’s portion of unassessed employment taxes).

Please note that if in any given case the assessment statute for the employee portion of
the employment tax has not expired at the time the self-employment tax refunds are
authorized, section 6521 does not apply. In that case, an assessment should be made
against the employee-taxpayer for the employee portion of the tax.

If you have any questions, please let me know.

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