Small businesses may find that their federal payroll tax filing form changes from year to year from Form 941 (filed quarterly) to Form 944 (filed annually). While the Form 944 was meant to be a simplifying concession to small businesses, often business owners may not understand the notice they receive regarding which form should be filed or, just as possible, the notice may end up being lost in the mail.

So that begs the question—what impact does filing the wrong form have on the statute of limitations for the IRS to assess taxes? IRS Field Service Advice 20152101F provides some answers to that question.

Generally a taxpayer is eligible to file Form 944 annually in lieu of filing quarterly Forms 941 if the employer’s estimated annual employment tax liability is $1,000 or less. While such employers may file Form 941 quarterly in lieu of Form 944, such employers must notify the IRS that they are “opting out” of the Form 944 before they can begin to file Forms 941. [Reg. §31.6011(a)-1(a)(5)]

Employers that are eligible to file Form 944 are notified by the IRS of that fact. Employers are not to file Form 944 until they are notified of their eligibility by the IRS. Similarly employers who are notified they are eligible to begin filing Form 944 must begin doing so for the following year.

To “opt out” and file Forms 944 in lieu of Form 941 an employer must follow the procedures outlined in Revenue Procedure 2009-51. [Reg. §31.6011(a)-1(a)(5)(ii)] Similarly, an employer that previously has been required to file Form 941 but will qualify for Form 944 in the current year may request to switch to Form 944.

Until such a proper request is made and accepted by the IRS the employer must continue to file the Forms 941. Generally a timely election out must be made by March 15 of the year in question unless it is the employer’s first tax year in which case the request must be submitted on or before the first day of the first require Form 941 for the year in question.

With that as background, the specific questions to be answered, as posed in the memorandum, are as follows:

· Where one type of federal tax return is required from the employer, but another type is filed, is the filed return valid?

· Where one type of federal tax return is required from the employer, but another type is filed, on what date does the period of limitations on assessment under I.R.C. § 6501 begin to run?

The triggering of the statute of limitations for IRS assessments is not strictly governed by whether the taxpayer filed the specific form in questions. Rather, the memorandum notes:

To determine whether a return is valid for assessment period of limitations purposes, courts generally look to see whether the purported return meets four requirements: the document (1) provides sufficient data to calculate tax liability; (2) purports to be a return; (3) is an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) is executed under penalty of perjury. See Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff'd per curiam, 793 F.2d 139 (6th Cir. 1986). The Beard formulation is generally known as the "substantial compliance" standard. If a return meets the "substantial compliance" standard, the return is a valid return for purposes of the period of limitations on assessment. Even if a taxpayer files its return on an incorrect form, the return can nevertheless start the running of the three-year period for the Service to make an assessment as long as the return meets these four requirements. See, e.g., Germantown Trust Co. v. Commissioner, 309 U.S. 304, 310 (1940) (determining that the use of an incorrect form triggered the assessment period of limitations). "Of crucial importance is whether the return, as filed, included sufficient information to allow the [Service] to compute the taxpayer's liability." Atlantic Land & Improvement Co. v. United States, 790 F.2d 853, 858 (11th Cir. 1986).

To address the question of whether “substantial compliance” has been achieved, the memorandum provides three different scenarios and the consequences of each.

In the first fact pattern the taxpayer is required to file a Form 944 (Employer’s Annual Federal Tax Return) but instead files four quarterly Forms 941s (Employer’s Quarterly Federal Tax Return) for the year in question.

In this situation the memorandum concludes the following:

Assuming the Forms 941 purport to be returns, are an honest and reasonable attempt to satisfy the filing requirements, are signed under penalty of perjury, and can be used to determine A's annual FICA and ITW tax liability, the Forms 941 meet the Beard formulation and should be treated as valid returns for purposes of starting the period of limitations on assessment. Because the Forms 941 were filed before April 15 of the succeeding year, the deemed filing date under I.R.C. § 6501(b)(2) is April 15 of the succeeding calendar year.

In the second situation the taxpayer again was supposed to file Form 944, but this time files Form 941 only for the first and second quarter of the year. The taxpayer files no report with relation to payments made for the third and fourth quarter. So where does the taxpayer, who now has reported only half of what would have been on the proper form, stand in terms of the statute?

The memorandum provides the following (redacted) answer:

An argument can be made that the Forms 941 for the first and second quarters of the taxable year constitute valid returns under the Beard formulation since they purport to be returns and are signed under penalty of perjury. However, given that B's FICA and ITW tax liability for the third and fourth quarters will not necessarily be equal to that reported for the first two quarters, the Forms 941 arguably are not sufficient for purposes of the determining B's annual FICA and ITW tax liability and may not be honest and reasonable attempts to satisfy the tax law. The amounts reflected on the Forms 941 must be assessed within three years of April 15 of the succeeding calendar year. * * *

The three asterisks indicate that a portion of the answer has been removed by the IRS when the FSA was released. Clearly what is missing is the time frame for assessing the amounts not shown on the Forms 941 (that is the third and fourth quarters).

In addition, the IRS does have a footnote reference that also applies to this situation:

There are factual circumstances, however, in which the filing of two Forms 941 could meet the necessary criteria for an annual employment tax return (e.g., if the employer's business is seasonal).

Taken as a whole, it seems that the IRS feels that the answer to whether there is a fully open statute of limitations on the amounts that would have been reported in quarters 3 and 4, or whether the IRS would be deemed to be “on notice” is a “facts and circumstances” situation.

Obviously the adviser should assume that the statute would be open if a clients presents with this fact pattern, but if the client shows up with the IRS already on the scene the adviser should consider possible arguments regarding why the statute might close three years after April 15 of the year following the filing of the Forms 941 for taxes for the entire year.

The third example is when the employer files the Form 944 for a year in which filng the Form 941 was required.

In that case the memorandum concludes:

Assuming the Form 944 purports to be a return, is an honest and reasonable attempt to satisfy the filing requirements, can be used to determine C's annual FICA and ITW tax liability, and is signed under penalty of perjury, C's Form 944 meets the Beard formulation and should be treated as a valid return for purposes of the period of limitations on assessment. Because the Form 944 was timely filed, the deemed filing date is April 15 of the succeeding calendar year.