Background. It can happen to any church. The church treasurer inadvertently remits excess payroll taxes to a local bank. The church claims that the excess payment was sent in error and would like the excess refunded right away, before the Form 941 is filed for the quarter. Is the church entitled to an “expedited refund” before it files a Form 941 for the quarter in which the excess payment was made? No, concluded the IRS in a recent ruling.
Section 6413 of the tax code states that if more than the correct amount of tax is paid, then “proper adjustments” shall be made, without interest, in such manner and at such times as the income tax regulations prescribe. The IRS ruled that employers generally cannot obtain a refund until after they file the Form 941 for the quarter in question. It observed,
An overpayment is the amount by which a payment of tax exceeds the correct total amount of the taxpayer’s liability for a tax period or any amount that was assessed or collected after the expiration of the applicable period of limitations. The tax regulations contemplate quarter year tax periods for taxes under FICA and withholding from wages even though these tax payments are required to be made each deposit period within the quarter. These types of deposits are prepayments, and as such, an overpayment of such prepayments cannot be determined in the absence of the close of the quarter and the filing of a quarterly Form 941 (“Employer’s Quarterly Federal Tax Return”). The regulations do not indicate that the IRS is authorized to grant an expedited refund [prior to the due date of the applicable Form 941]. Therefore, under existing refund procedures, a refund of overpaid withholding tax cannot usually be granted until after the close of the quarter and after a quarterly Form 941 claiming the refund has been filed.
The IRS did concede, however, that if an overpayment of payroll taxes creates a “significant hardship,” then an employer may apply for relief by submitting Form 911.
Relevance to church treasurers. Here are the points to keep in mind:
1. Your church is entitled to a refund if its pays more payroll taxes than are required by law.
2. A request for a refund of excess payroll tax payments generally is made on Form 941. This is easily done. The correct amount of payroll taxes is reported on line 13 of this form. The amount of payroll taxes actually paid is reported on line 14. If line 14 is greater than line 13 for any quarter, then you report the excess on line 16 of Form 941 and then elect to either have the excess applied to your next quarter’s tax liability or have it refunded to you. You are free to select either option. If you elect to apply the excess to your next quarter’s tax liability, you include the excess amount along with actual withholdings on line 14 of the next quarterly Form 941.
3. The IRS pays no interest on overpayments of payroll taxes. So, check your payroll tax deposits carefully to be sure you are not overpaying.
4. If you deposit payroll taxes with a bank, do not contact the bank to request a refund. Only the IRS can issue a refund, in the manner described in this article.
5. If an overpayment of payroll taxes creates a “significant hardship” for your church, you have two options. First, call the IRS at 1-800-829-1040 to request an “expedited refund” (payable before you file the Form 941 for that quarter). Second, file Form 911 (“Application for Taxpayer Assistance Order”) with the Taxpayer Advocate. If the Taxpayer Advocate determines that a significant hardship exists, then he or she may issue a Taxpayer Assistance Order to resolve the hardship. IRS Letter Ruling 200152045.
Key point. If you pay your payroll taxes electronically using the EFTPS system, then in some cases you may be able to “reverse” an erroneous overpayment of payroll taxes if you act promptly, using the so-called “automated clearinghouse rules” (ACH). Check with your depository bank for details. Refunds cannot be paid using the EFTPS system. If you miss the deadline for reversing an erroneous overpayment, then you can use the existing tax refund procedures outlined above which usually do not authorize the IRS to grant a refund until after the close of the quarter and after a quarterly return claiming the refund has been filed. If, however, an overpayment results in a significant hardship, the church may contact the IRS directly for assistance or file a Form 911 with the Taxpayer Advocate.
This article first appeared in Church Treasurer Alert, March 2002.