IRS Letter on Recovery of Erroneous Withholding
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
OFFICE OF CHIEF COUNSEL
May 15, 2003
Stuart A. Sirkin
Director, Corporate Policy and Research Department
Pension Benefit Guaranty Corporation
1200 K Street, N.W., Suite 250
Washington, D.C. 20005-4026
You recently asked for our assistance regarding a pension plan's recovery of erroneous withholding of income tax on account of a pension distribution after the amount withheld has been remitted to the Internal Revenue Service. Our analysis follows.
Background: Under section 3405(c) of the Internal Revenue Code, a plan administrator ("payor") is required to withhold 20 percent for federal income tax at the time a distribution that is eligible for rollover is made from a pension plan to a participant or beneficiary, if the distribution is not rolled over. Sometimes a pension distribution to an individual is returned to the payor as undeliverable after the payor has withheld federal income tax and remitted it to the Internal Revenue Service.
You have informed us that if the individual qualifies as a "missing participant" (a term that includes both participants and beneficiaries) under the PBGC's Missing Participants Program, the payor must either purchase an annuity for the individual or transfer the individual's "designated benefit" to the PBGC. You state that under the program, the annuity or amount transferred to the PBGC must reflect the missing participant's total benefit without any reduction for tax withholding. Thus, you note, the payor will typically wish to get a refund from the IRS of the amount erroneously withheld.
Solution: A payor may obtain a refund of an erroneously withheld amount by filing Form 843, Claim for Refund and Request for Abatement, and Form 941c, Supporting Statement to Correct Information. (A payor may make an adjustment only within 3 years of the return due date or the date the return was filed, whichever is later. For this purpose, the due date of Form 945, Annual Return of Withheld Federal Income Tax, is April 15 of the year after the close of the tax year.) The payor should read the instructions for Form 843 and Form 941c; the information below is to assist the payor in filling out only portions of these forms.
|Form 843 - Put the payor's name under "Name of Claimant." Check the "Employment" box in line 3a, and the "Form 945" box in line 3b. On line 5, cite "administrative error" as an explanation, explain why it is an administrative error, and show computation of the tax refund amount. (Note that Internal Revenue Manual section 22.214.171.124.11.1(2) states in relevant part that administrative error occurs with regard to "income tax ... on payments such as lump sum distributions, where tax was withheld and reported in one year but payment was mailed to an individual who did not have the ability ... to receive the payment in the year" the tax was withheld. This rule applies if payment was returned as undeliverable in a subsequent year.)|
Form 941c - In Part I, Signature and Certification, check box 4 - "None of this refund or credit was withheld from employee wages." (The payor uses this box to verify that the payor and the missing participant do not both claim credit for the same tax that is to be refunded.) In Part V, Explanation of Adjustments, note that the adjustment is the result of "administrative error." (If you do not indicate that the adjustment is the result of administrative error, the IRS will disallow the adjustment.)
The payor should attach the Form 941c to the Form 843, and mail to the Internal Revenue Service Center where the payor filed Form 945 with the amount of tax withheld.
We hope this information will be helpful to you.
Branch Chief, CC:TEGE:EB:QP1
Internal Revenue Service