22 February 2016 IRS incorrectly assessed many employers for 2012 federal unemployment insurance (FUTA) tax The Treasury Inspector General for Tax Administration (TIGTA), an independent agency responsible for oversight of the Internal Revenue Service (IRS), reviewed the IRS process used in certifying 2012 federal unemployment insurance (FUTA) taxes and issued a report of several exceptions it found. In summary, TIGTA noted that for tax year 2012, 94% of state agencies submitted flawed data to the IRS resulting in employer Form 940 reporting discrepancies which exceeded $200 million. Furthermore, IRS programming errors caused the IRS to erroneously assess FUTA taxes of almost $3.2 million. (TIGTA,Processes Are Needed to Ensure Reliability of Federal Unemployment Tax Certification Files and to Work Multi-State Cases, Reference #2016-40-009.) Effective July 1, 2011 (and through 2016), employers pay a Federal Unemployment Insurance (FUTA) tax of 6.0% against which a maximum credit of 5.4% is allowed for state unemployment insurance (SUI) taxes the employer remits to the state(s). For periods prior to July 1, 2011, the maximum FUTA tax rate was 6.2%. A full or partial loss of the 5.4% credit can occur for several reasons such as (a) an employer failed to make required SUI contributions in full and/or on time, (b) an employer's SUI rate is greater than 5.4%, (c) all wages subject to FUTA tax were not subject to SUI tax, (d) the state lost federal certification due to program violations, or (f) the SUI trust fund has carried a federal loan balance for two or more consecutive years. Employers compute any loss in the FUTA credit on the Form 940 worksheet. If the state as a whole is subject to a FUTA credit reduction, multistate employers report the FUTA credit reduction on Form 940, Schedule A. Because an employer's FUTA credit (and ultimately, its FUTA tax rate) is dependent on SUI taxable wages, tax rate and contribution history for the calendar year, the IRS works with the states to certify that the information as reported by employers on Form 940 matches the records of the state workforce agencies. The IRS sends employer identifying information to the states each year for this purpose. State workforce agencies are required to return matching employer data to the IRS for its review. If there is a discrepancy between the IRS Form 940 data and the data provided by the state(s), a FUTA tax adjustment/assessment may be made against the employer. For tax year 2012, the IRS submitted employer Form 940 identifying information to the state workforce agencies in October 2013 and state workforce agencies were required to submit matching data to the IRS by January 2014. The IRS attempted to close discrepancy cases by September 2015. The statute of limitations under normal circumstances is January 1, 2016. For more information, see IRS Publication 4485, Guide for the Certification of State FUTA Credits (Rev. 10-2013), and the Internal Revenue Manual. By way of review, there was a 0.2% temporary surcharge that Congress allowed to lapse effective on and after July 1, 2011. Therefore, only FUTA taxable wages paid through June 30, 2011, were subject to a maximum FUTA tax of 6.2% while FUTA taxable wages paid after June 30, 2011, were subject to a maximum FUTA tax of just 6.0%. TIGTA discovered that for tax year 2012 over 9,581 employers were incorrectly assessed FUTA tax because the IRS used a FUTA tax rate of 6.2% rather than 6.0% in computing the tax owed. On the recommendation of TIGTA, the IRS "agreed to develop a method to sort and verify cases that require adjustment actions and complete appropriate steps for resolution." The 2011 Form 940 is here. The 2012 Form 940 is available here. Although the statute of limitations for 2012 claims or adjustments for FUTA generally expired on February 1, 2016, it appears based on this TIGTA report that businesses may request abatement or refund of additional FUTA taxes assessed by the IRS due to its improper use of the 6.2% FUTA rate for periods on or after July 1, 2011. Businesses should also consider if refunds or abatement apply to FUTA assessments made for tax years after 2012. The IRS Form 940 state certification program used in validating the employer's FUTA tax rate depends on a data exchange between the IRS and over 50 workforce agencies. Accordingly, businesses should always review their state unemployment insurance accounts for accuracy and verify in detail if an IRS assessment for additional FUTA tax is warranted. Businesses needing an evaluation of their IRS FUTA assessments should contact Kristie Lowery or Debera Salam.
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