941X for New Hire Credit Update

IRS no longer behind in processing HIRE Act amended returns:  On the February 3 IRS payroll industry conference call, Debera Salam, Director of Payroll Information and Process Services for Ernst & Young LLP, informed the IRS that several of her clients who recently filed Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, to claim the payroll tax exemption in the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147) had received letters from the IRS stating that there was a backlog in processing these returns and that the returns may not be processed for several months. The payroll tax exemption relieves employers from their share of OASDI taxes (6.2% rate) on wages paid to certain new hires from March 19, 2010 to Dec. 31, 2010. The exemption could not be claimed on Form 941 until the second quarter of 2010. Some employers amended their returns using Form 941-X rather than claiming the exemption on an original Form 941.

The IRS delay in processing the returns was a concern for employers because they have reduced their payroll tax deposits to take into account the credit. Employers were worried that they could receive an IRS notice proposing a federal tax deposit penalty if the amended return was not taken into account. On the March 3 IRS payroll industry conference call, Shelley Dockstader, National Account Manager in IRS Electronic Tax Administration, informed participants that the IRS is now up to date in processing these returns.

IRS official provides some insights on HIRE Act audits:  On the March 3 IRS payroll industry conference call, John Tuzynski, Chief of Employment Tax Operations for the IRS’s Small Business/Self-Employed Division, provided some details on IRS audits of employers who claimed the payroll tax exemption in the Hiring Incentives to Restore Employment Act (HIRE Act, P.L. 111-147). The HIRE Act encouraged companies to hire unemployed workers from Feb. 4, 2010 to Dec. 31, 2010, by exempting certain wages received by the workers from the employer’s 6.2% share of Social Security taxes (payroll tax exemption). A new hire must have been employed for a total of 40 hours or less during the 60-day period ending on the date that the employment began. For employers to claim the exemption, they must have received a statement from the new hire certifying, under penalties of perjury, that he or she was either unemployed during the 60 days before beginning work or, alternatively, worked fewer than a total of 40 hours for anyone during the 60-day period. Employers could use Form W-11, Hiring Incentives to Restore Employment (HIRE) Act Employee Affidavit, or a statement similar to Form W-11, to meet this requirement.

Tuzynski said that the IRS has been asking employers to provide a list of the employees for whom they claimed the payroll tax exemption on Form 941. Employers must provide documentation to support the wages that were paid to the workers and the date that the workers were hired. The audit is centered around Form W-11. The IRS will ask for copies of these forms. If there are only a few workers on Form 941, the IRS is likely to review all of their information. If there are many workers on the return, the IRS is likely to review some of the workers’ information. The IRS may ask if the worker was hired to replace another worker. If so, the IRS may ask why the worker was replaced. The examinations are not random. A return is selected for audit based on something on the return that was of interest to the IRS. Tuzynski said that roughly 1,000 exams are currently being conducted. He has been impressed with the level of compliance by employers. There haven’t been many irregularities on the returns.