IRS Explains How to File DOMA Related Employment Tax Refund Claims
(Parker Tax Publishing: September 25, 2013)

The Supreme Court's decision in U.S. v. Windsor, 2013 PTC 167 (S. Ct. 2013), has opened the door for a flood of amended returns and refund claims, as well as guidance on filing such amended returns and refund claims. It began with Rev. Rul. 2013-17 and continued this week with Notice 2013-61. In Notice 2013-61, the IRS provides procedures for filing claims for refunds or adjustments of overpayments of FICA and income tax withholding with respect to certain benefits provided to same-sex spouses, as well as remuneration paid to same-sex spouses.

Background

A number of income and employment tax provisions provide for exclusions from gross income and wages, respectively, for certain benefits provided to the spouse of an employee. In addition, services performed by an individual in the employ of the individual's spouse that are not in the course of the employer's trade or business or that are domestic services in the employer's private home are excepted from FICA tax under Code Sec. 3121(b)(3)(B). Until the Supreme Court's decision in Windsor, the IRS interpreted Section 3 of the Defense of Marriage Act (DOMA) as prohibiting the IRS from recognizing same-sex marriages for purposes of these provisions. As a result, employers withheld and paid employment taxes with respect to certain benefits provided to the same-sex spouse of an employee because the marriage was not recognized for purposes of the Code, and the benefits were not treated as excludable from gross income or wages for federal income or employment tax purposes. Employers may also have withheld and paid employment taxes on amounts paid for services performed by an individual in the employ of the individual's same-sex spouse without applying the employment tax exceptions for certain remuneration paid to spouses.

In Windsor, the Court held that Section 3 of DOMA is unconstitutional because it violates the principles of equal protection, and the IRS subsequently announced in Rev. Rul. 2013-17 that, for federal tax purposes, (1) the terms spouse, husband and wife, husband, and wife include an individual married to a person of the same sex if the individuals are lawfully married under state law, and the term marriage includes such a marriage between individuals of the same sex; (2) the IRS is adopting a general rule that recognizes a marriage of same-sex individuals that is validly entered into in a state whose laws authorize the marriage of two individuals of the same sex, even if the married couple is domiciled in a state that does not recognize the validity of same-sex marriages; and (3) the terms spouse, husband and wife, husband, and wife do not include individuals (whether of the opposite sex or the same sex) who have entered into a registered domestic partnership, civil union, or other similar formal relationship recognized under state law that is not denominated as a marriage under the laws of that state, and the term marriage does not include such formal relationships.

Compliance Tip: The holdings of Rev. Rul. 2013-17 are applied prospectively as of September 16, 2013. Generally, taxpayers may rely on Rev. Rul. 2013-17 for the purpose of filing original returns, amended returns, adjusted returns, or claims for credit or refund for any overpayment of tax resulting from these holdings, provided the applicable limitations period for filing such claim is still open. Rev. Rul. 2013-17 also provides that if an affected taxpayer files an original return, amended return, adjusted return, or claim for credit or refund in reliance on Rev. Rul. 2013-17, all items required to be reported on the return or claim that are affected by the marital status of the taxpayer must be adjusted to be consistent with the marital status reported on the return or claim.

Rev. Rul. 2013-17 also provides that taxpayers may generally rely on Rev. Rul. 2013-17 retroactively with respect to any employee benefit plan or arrangement or any benefit provided thereunder only for purposes of filing original returns, amended returns, adjusted returns, or claims for credit or refund of an overpayment of tax for employment tax and income tax with respect to employer-provided health coverage benefits or fringe benefits that were provided by the employer and are excludable from income under Code Secs. 106, 117(d), 119, 129, or 132 based on an individual's marital status.

Practice Tip: Thus, if an employee made a pre-tax salary-reduction election for health coverage under a Code Sec. 125 cafeteria plan sponsored by an employer and also elected to provide health coverage for a same-sex spouse on an after-tax basis under a group health plan sponsored by that employer, an affected taxpayer may treat the amounts that were paid by the employee for the coverage of the same-sex spouse on an after-tax basis as pre-tax salary reduction amounts.

Employers may also generally rely on the holdings in Rev. Rul. 2013-17 for purposes of recognizing same-sex spouses as spouses in applying exceptions from the definition of employment for employment tax purposes.

Adjustments and Claims for Refund for Employment Taxes To reduce administrative burden, Notice 2013-16 provides special administrative procedures for adjustments and claims for refunds or credits for overpayments of employment taxes attributable to same-sex spouse benefits, including overpayments that result from a taxpayer's retroactive application of the holdings in Rev. Rul. 2013-17.

For purposes of Notice 2013-16, same-sex spouse benefits refers to the benefits specified in Rev. Rul. 2013-17 for which amended income tax returns and adjusted employment tax returns or claims for refund or credit may be filed. These benefits are same-sex spouse employer-provided health coverage and fringe benefits that were provided by an employer to a same-sex spouse and are excludable from income under Code Sec. 106, 117(d), 119, 129, or 132 based on an individual's marital status.

For purposes of Notice 2013-16, employment taxes paid on after-tax amounts that were used to purchase health coverage for an employee's same-sex spouse under these circumstances are treated as overpayments of employment taxes.

Employment Tax Returns for Third Quarter of 2013

If an employer withholds employment taxes with respect to same-sex spouse benefits paid to or on behalf of an employee in the third quarter of 2013, ascertains the amount withheld on such benefits, and repays or reimburses the employee for the amount of such taxes before filing the third quarter 2013 Form 941, the employer will not report the wages and withholding on the third quarter 2013 Form 941. If the employer does not repay or reimburse the employee for the amount of the over collection before filing the third quarter 2013 Form 941, the employer must report the amount of the over collection on that return and can use one of two special administrative procedures for 2013 (described in the next section) to make an adjustment or claim a refund for the overpayment.

Adjustments for 2013 on Fourth Quarter 2013 Form 941 or 941-X Notice 2013-61 provides two alternative special administrative procedures for employers that treated the value of same-sex spouse benefits as wages on Forms 941 for the first three quarters of 2013 and that seek to correct overpayments of employment taxes attributable to the benefits.

First Special Administrative Procedure

Under the first alternative, an employer must repay or reimburse its employees for the amount of the overcollected FICA tax and the overcollected income tax withholding with respect to the same-sex spouse benefits for the first three quarters of 2013 on or before December 31, 2013. After repaying or reimbursing the employees, the employer, in reporting amounts on its fourth quarter 2013 Form 941, may reduce the fourth quarter wages, tips, and other compensation reported on line 2, taxable social security wages reported on line 5a (subject to the wage base limitation), and taxable Medicare wages and tips reported on line 5c, by the amount of the same-sex spouse benefits treated as wages for the first three quarters of 2013. Also, the income tax withheld from wages, tips, and other compensation reported on line 3 of Form 941 should be reduced by the amount of income tax withholding with respect to the same-sex spouse benefits that has been repaid or reimbursed to the employees by the end of the calendar year. In addition, if the value of any same-sex spouse benefits was included in taxable wages subject to additional Medicare tax withholding on line 5d, the amount of taxable wages subject to additional Medicare tax withholding on the fourth quarter 2013 Form 941 should be reduced.

OBSERVATION: By taking advantage of the special administrative procedure in Notice 2013-61, the employer will not have to file separate Forms 941-X to correct each of the first three quarters of 2013.

Under Notice 2013-16, the employer may only correct the employer share of FICA tax that corresponds to the employee share of FICA tax that has been repaid or reimbursed to the employees on or before December 31, 2013.

For the repayment or reimbursement of overwithheld social security tax and the corresponding reduction for taxable social security wages reported on Form 941, line 5a, the employer must take into account that adjustments of social security tax are limited to the tax paid on that portion of the value of the same-sex spouse benefits that, when added to other social security wages and tips for the year, does not exceed the social security wage base for 2013 ($113,700). Accordingly, if for a particular employee the value of same-sex spouse benefits was included in social security wages and, after the exclusion of the value of the same-sex spouse benefits from wages for 2013, the remaining social security wages of the employee are equal to or greater than $113,700, then no refund, credit, or adjustment of social security tax can be made for 2013 for that employee.

OBSERVATION: Notice 2013-61 provide procedures to ensure that use of the special administrative procedure for the 2013 fourth quarter Form 941 does not result in a mismatch between total taxes reported on line 10 (total taxes after adjustments) and total liability for the quarter reported on line 16 for a monthly schedule depositor or on Schedule B (Form 941) for a semiweekly schedule depositor, the employer should use the following procedures:

Second Special Administrative Procedure

Under the second alternative, an employer that does not repay or reimburse employees for the amount of withheld FICA and income taxes with respect to same-sex spouse benefits provided in 2013 on or before December 31, 2013, and thus, files the 2013 fourth quarter Form 941 without making the adjustment, may correct overpayments of FICA taxes with respect to same-sex spouse benefits paid in 2013 using Form 941-X. Under this option, an employer may file one Form 941-X for the fourth quarter of 2013 to make adjustments or claim refunds or credits of overpayments of FICA taxes with respect to same-sex spouse benefits paid in all quarters of 2013, provided the employer has satisfied the usual requirements for filing Form 941-X, including repaying or reimbursing the overcollected employee FICA tax to employees (or, for refund claims, securing consents from employees), and obtaining the required written statements from employees. The employer should write WINDSOR in dark, bold letters across the top margin of page 1 of Form 941-X. Only corrections made under this special administrative procedure may be shown on this Form 941-X. An employer may not make an adjustment for an overpayment of income tax withholding for a prior calendar year unless the overpayment is attributable to an administrative error. An employer may not claim a refund or credit for an overpayment of income tax withholding if the tax was deducted and withheld from the employee.

Caution: This second special administrative procedure for 2013 cannot be used with regard to income tax withheld from employees with respect to same-sex spouse benefits in 2013 because an employer can use this Form 941-X procedure only if the employer did not repay or reimburse employees for the amount of withheld taxes with respect to same-sex spouse benefits provided in 2013 on or before December 31, 2013. In such case, employees will receive credit for the income tax withheld for purposes of determining any entitlement to a refund of income tax paid with respect to same-sex spouse benefits provided in 2013 when they file Form 1040, U.S. Individual Income Tax Return.

Adjustments or Claims for Refund for Years before 2013

Notice 2013-16 also provides a special administrative procedure for employers to make adjustments or claims for refund or credit of overpayments of FICA taxes paid with respect to same-sex spouse benefits for any year before 2013 for which the statute of limitations on credits or refunds has not expired. Under this procedure, the employer must take into account the applicable social security wage base in determining the overpayment of FICA taxes for the prior year being corrected. The employer may file one Form 941-X for the fourth quarter of the prior year. This fourth quarter Form 941-X would include the adjustments or refunds for all overpayments of employment taxes with respect to same-sex spouse benefits provided during such prior year, including overpayments reflected in the Forms 941 for the first three quarters of the year.

An employer may not make an adjustment for an overpayment of income tax withholding for a prior calendar year unless the overpayment is attributable to an administrative error. An employer may not claim a refund or credit for an overpayment of income tax withholding if the tax was deducted and withheld from the employee. Accordingly, this special administrative procedure for prior years cannot be used for income tax withheld from employees with respect to same-sex spouse benefits in prior years. Employees may receive refunds of income tax paid with respect to same-sex spouse benefits in prior years by filing Form 1040X, Amended U.S. Individual Income Tax Return. As indicated above, an employer filing a claim for refund or credit or making adjustments for prior years must file Forms W-2c for the prior years. Forms W-2c will assist employees in claiming a refund of income tax.

Parker Tax Publishing Staff Writers

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