TAX NEWS - DECEMber 2009

Social Security and Medicare Taxes and Section 218 Retroactive Payments

State and local governments that have established Section 218 agreements with the Social Security Administration (SSA) can agree to modify these agreements to establish coverage for past years. These modifications can be effective retroactively, going back as much as five years. In most cases, this will require a government entity to make retroactive payments to the IRS for back employment taxes.

In the past, government entities paid these employment taxes using the Form 941c, which is now obsolete. A new process has been developed to facilitate these back payments and prevent erroneous refunds. In cases where the section 218 modification agreement covers only years for which the statute of limitations on assessment remains open, a government entity should use Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, to amend the quarterly employment tax returns and pay the back employment taxes. If the modification covers years where the IRS statute is barred or closed, the government entity will need to initiate a closing agreement with IRS for those barred statute years.

Under section 218(c)(4) of the Social Security Act, an entity covered by a section 218 Agreement and the Social Security Administration can agree to modify the section 218 Agreement. Section 218(e) specifies that coverage may cover a retroactive period of not more than five calendar years. If the government entity executes this agreement, the entity is expected to pay the additional social security and/or Medicare taxes associated with the retroactive coverage.

IRS Statutes of Limitations

Under section 6501(a) and 6501(b)(2) of the Internal Revenue Code, the statute of limitations for assessment of social security and Medicare taxes is three years from the date the returns are deemed filed. When returns are timely filed, the statute runs from April 15th of the year following the calendar year for which the employment tax returns are due and filed. For example, in tax year 2006, a 4th quarter Form 941 return that is timely filed by the due date of January 31, 2007, has a statute that runs until April 15th, 2010.

If a government entity seeks to implement a retroactive modification to a section 218 agreement covering a five-year period, the earliest two years will generally be barred from assessment. To allow payments on the full five-year retroactive period (including the barred statute years), the government entity will be allowed limitations for assessment and agrees to pay the full amount of tax due at the time the closing agreement is executed.

The office of Federal, State and Local Governments will coordinate the closing agreement process for these types of payments and can be contacted in writing at the following address:

Att: FSLG Closing Agreement Coordinator
1111 Constitution Ave.
Washington, D.C. 20224

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