IRS analyzes whether third-party employment tax returns are sufficient to start assessment statute of limitation.

• Author: Chambers, Valrie

Sec. 6501(a) generally prohibits the assessment of any tax beyond the three-year period after the date a return is filed. If the IRS fails to assess the tax within three years, then it is prohibited from collecting the tax, as well as interest, penalties, or other additions to tax that are collected as part of the tax. The critical act to commence the statute of limitation on assessment is the filing of a return, which is defined in Sec. 6501(a) as "the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit)." Consequently, when a document is filed with the IRS, the characterization of the document as a return can control the assessment statute of limitation and the validity of any subsequent assessment.

Recently, the IRS issued Chief Counsel Advice (CCA) 201438021, in which the Office of Chief Counsel (OCC) analyzed, under four examples, whether an employment tax return prepared and filed by a third party on behalf of an employer was sufficient to commence the period of limitation on assessment for the employer under Sec. 6501.

Third-Party Arrangements

Employers generally are required by Secs. 3402(a) and 3102 to deduct and withhold federal income tax and Federal Insurance Contributions Act (FICA) taxes from wages paid to employees and are separately liable for the employer's share of FICA taxes under Sec. 3111 (collectively referred to as employment taxes). An employer may choose to enter into an agreement with a third party to ensure that the employer's employment tax obligations of withholding, reporting, and payment are satisfied.

One common third-party arrangement is for an employer to request, pursuant to Rev. Proc. 2013-39, that the IRS authorize an agent to file employment tax returns on the employer's behalf under Sec. 3504 using the agent's employer identification number (EIN).

In another common third-parry arrangement, an employer enters into an agreement with a third party to perform the employer's employment tax obligations under the third-party payer's EIN but without receiving authorization from the IRS to do so. In these cases, the IRS may designate certain third-party payers under Regs. Sec. 31.3504-2 to perform the acts required of an employer with respect to wages or compensation paid by the third-party payer to any individual performing services for any employer. The third party becomes the agent of...