As previously reported, in 2015 the IRS proposed guidance in Notice 2015-15 for obtaining employee consents and written statements required to support an employer's claim for refund or credit of overpaid taxes under the Federal Insurance Contributions Act (FICA) and the Railroad Retirement Tax Act (RRTA). (Tax Alert 2015-346; IRC Section 6402 and Reg. Section 31.6402(a).)

After considering public comments, the IRS now adopts that proposed guidance with minor changes in Revenue Procedure 2017-28.

This guidance applies to employee consents issued on or after June 5, 2017 and does not affect the validity of an employee consent received pursuant to a request made prior to June 5, 2017, assuming the requirements of Reg. Section 31.6402(a)-2 were met.

Following are the changes in included in the final guidelines:

— Time for employee to respond to request for consent. Commentators asked the IRS to reduce the time employees are given to respond to a request for consent to the FICA refund from 45 to 21 days. Out of concern that 21 days is insufficient time for employees to consider and respond, the final guidelines reflect that employee time to respond to a second request for consent is lowered to 21 days.

— Contents of the request for consent. A new requirement is added that all requests for consent must indicate that an employee cannot authorize the employer to claim a refund on the employee's behalf for any overpayment of the 0.9% Additional Medicare Tax. (Employers are not allowed to refund the Additional Medicare tax after the close of the tax year.)

— Use of truncated Social Security Numbers. A truncated taxpayer identification number (TTIN) is allowed in place of the employee's complete Social Security Number (SSN) if the employer presents the employee with a prepopulated consent for signature. A TTIN is not allowed if the employer merely asks employees for their SSN or if employees furnish the SSN when submitting the consent.

Employer process for refunding prior-year FICA overcollections to employees

Before an employer can obtain a refund or adjustment for the employer overpayment of prior-year FICA (or RRTA) tax from the IRS, it must make a reasonable attempt to protect employees' interests in any employee share of the refund. (IRC Section Section 31.6402(a)-2.)

Accordingly, before the IRS will process the employer's refund claim, the employer must first certify that it has obtained employee written statements confirming that employees have not made any previous claims (or the claims were rejected) and will not make future claims for refund or credit of the overcollection.

In addition to obtaining employee written statements, the employer also must do one of the following:

1. Repay or reimburse its employees.

The employer obtains a refund or credit from the IRS for the employer and employee share of the tax by certifying on Form 941-X (or the equivalent) that it has refunded the overpayments to employees and that it has obtained written statements from them. (See Form 941-X, lines 4(a) and 5(a).)

The IRS will refund or credit the taxes (including any applicable interest pursuant to IRC Section 6611) to the employer. The employer is not required to pay any interest over to its employees.

2. Secure the written consent of the employee to allowance of the refund or credit.

If the employer will first file a claim for the FICA/RRTA tax overpayment with the IRS before refunding employees for the overcollection, it must certify on Form 941-X (or the equivalent) that in addition to having secured employee written statements it has obtained employee consent to allowance for the refund or credit. (See Form 941-X, line 5(b).)

If the refund is granted, the IRS will refund the taxes (including any applicable interest pursuant to Section 6611) to the employer, which will then give its employees their share of the refund, including interest. Note that any interest paid to the employee must be reported on Form 1099-INT to the extent the interest exceeds $600.

Recordkeeping requirements

The request for a consent and the employee consent itself (including any required written statement), or the employee's response indicating that the employee does not authorize the employer to claim a refund of FICA taxes on his or her behalf, must be retained as long as their contents may be material in the administration of any internal revenue law, but not less than four years after the date the claim is filed. Copies must be submitted to the IRS if requested. (IRC Section 31.6402(a)-2(a)(2)(i); IRC Section 31.6001-1; IRC Section 31.6001-2; Publication 15, Employer's Tax Guide.)

Electronic communications and recordkeeping

Employers are permitted to establish an electronic system to request, furnish and retain employee consents and written statements, including employee fax submission of the signed documents.

Additionally, employers are permitted to retain requests for consents and employee signed consent forms (including those withdrawing consent) in an electronic format, even if they were originally submitted in a paper format, subject to the requirements of Revenue Procedure 98-25 (1998-1 CB 689), Revenue Procedure 97-22 (1997-1 CB 652) and any subsequently published guidance.

— Accessibility. The electronic system must be reasonably accessible to the employee and must be reasonably designed to preclude anyone other than the employee from giving the employee consent. It must provide the electronic request for consent to the employee in a manner no less understandable than a written paper document.

— Paper option must be available upon request. No employee may be required to provide a consent in an electronic format. Thus, the employee must be given the option to provide the employee consent in a paper format. Upon request, the employer must provide a paper copy of any electronic communications to the employee, including the request for consent.

— Penalty of perjury notice. Any electronic system used for purposes of obtaining employee consents must inform the employee that he or she must make the declaration contained in the penalties of perjury statement and that the declaration is made by signing the employee consent.

— Hard copies available upon request. Upon request by the IRS, the employer must supply a hard copy of the electronic employee consent or a response indicating that the employee was not authorizing the employer to claim a refund of FICA taxes on his or her behalf. The employer must include a statement that, to the best of the employer's knowledge and belief, the electronic employee consent or response was furnished by the named employee.

— Electronic signature. Electronic records and signatures are given the same legal effect as their paper counterparts. Any signature should be located immediately below the required penalties of perjury statement. Until further guidance is published, an electronic signature is acceptable as provided below:

— A person (i.e., the signer) must use an acceptable electronic form of signature, including a typed name that is within or at the end of an electronic record, such as typed into a signature block or other acceptable electronic form, or as otherwise identified in IRS published guidance, publications, forms, instructions, or on the irs.gov website

— The electronic form of signature must be executed by a person with the intent to sign the electronic record (e.g., to indicate a person's approval of the information contained in the electronic record)

— The electronic form of signature must be attached to or associated with the electronic record being signed

— There must be a means to identify and authenticate a particular person as the signer

— There must be a means to preserve the integrity of the signed record

Employer reasonable effort requirements

Generally, if the employer has not repaid or reimbursed an employee, a refund for the employer share of the overpaid FICA taxes will not be allowed unless the employer has secured the employee's consent and included a claim for the refund of such employee tax. However, these requirements do not apply if, after the employer's reasonable efforts to obtain the employee's consent, the employer cannot locate the employee or the employee does not furnish either the employee consent or a response indicating that the employee is not authorizing the employer to claim a refund of FICA taxes on his or her behalf.

The employer will be deemed to have made reasonable efforts with respect to a request for consent if:

— Request for consent was solicited by the employer. The employer properly requests consent of the employee as provided in this revenue procedure.

— Electronic request for consent includes acknowledgement of receipt. A request for consent sent electronically provides for an acknowledgment of receipt of the email message. The request must specifically ask the employee to acknowledge receipt of the request for consent (e.g., by clicking on a voting button (YES) or by sending a reply message to the employer). A read-receipt message is not sufficient.

— Record of consent request was retained. The employer retains a record of mailing the request for consent, record of emailing the request for consent (including acknowledgment of receipt of the email message), or record of personal delivery to the employee who does not furnish an employee consent, or a response indicating that the employee was not authorizing the employer to claim a refund of FICA taxes on his or her behalf.

— Undeliverable mail. In the event the mailing is undeliverable, the employer makes an effort to determine the employee's current address and, if a new address is discovered, the employer delivers a request for consent in a paper format to the new address or delivers a request for consent by email or by personal delivery, giving the employee not less than 21 days from the date of the request to reply to the subsequent request.

— Undeliverable email. In the event of an email delivery failure (e.g., the employer is notified that the message the employer tried to send did not reach the employee because of a problem with the email address) or in the event that the employee does not acknowledge receipt of the email message, the employer mails a request for consent in a paper format to the employee's last known address or provides a request for consent to the employee by personal delivery giving the employee not less than 21 days from the date of the request to reply to the subsequent request.

Elements of the employee consent form

The chart below shows the required and optional elements of an employee consent as specified in Revenue Procedure 2017-28.

Employee written statement vs. employee consent — when do they apply?

Both a written statement and consent are required from employees only if the employer will withhold employees' FICA refunds pending its receipt of the full amount (employee and employer portion) from the IRS.

This approach is generally used if there is some uncertainty that the IRS will allow the employer's claim for refund or credit (e.g., a protective FICA refund claim is filed pending the outcome of a court ruling, as in the recent Quality Stores case).

Otherwise, employers generally file a claim with the IRS for refund or credit after they have returned the overcollected amounts to their employees. In this situation, only an employee written statement is required.

In a written statement employees merely certify that they have not made any previous claims (or the claims were rejected) and will not make future claims for refund or credit of the overcollection.

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