Guest blogger Professor Bryan Camp provides an analysis of the President’s recent Executive Order on payroll taxes, which suggests that the IRS may lack the authority to implement the EO. Christine
Carl’s post yesterday inspired me to look at §7508A and the regulations more closely. It is not clear to me how the IRS will be able to implement Executive Order (“EO”) “Deferring Payroll Tax Obligations.”
Section 7508A gives the IRS broad discretion. Subsection (a) provides that “the Secretary may specify a period of up to 1 year that may be disregarded in determining, under the internal revenue laws, in respect of any tax liability of such taxpayer.”
When a tax statute gives the IRS broad discretion to do something, you need to look to regulations to see how the Treasury Department has limited or cabined that discretion. It is no different here. Treas. Reg. 301.7508A-1(a) explicitly says “This section provides rules by which the Internal Revenue Service (IRS) may postpone deadlines for performing certain acts with respect to taxes….”
So what are those rules? Well, subsection (b) sets out the rules for what periods of time will be postponed. Subsection (c) then explains the rules for which acts are eligible for postponement. Subsection (d) defines which taxpayers are eligible to be covered by any postponements the IRS gives out.
read more...It’s subsection (c) which creates the problem here for the IRS to implement the EO. Specifically, Treas. Reg. 301.7508A-1(c)(1) provides that any postponement “applies to the following acts performed by affected taxpayers” and then lists several acts. Paragraph (c)(1)(i) says this:
Paying any income tax, estate tax, gift tax, generation-skipping transfer tax, excise tax (other than firearms tax (chapter 32, section 4181); harbor maintenance tax (chapter 36, section 4461); and alcohol and tobacco taxes (subtitle E)), employment tax (including income tax withheld at source and income tax imposed by subtitle C or any law superseded thereby), any installment of those taxes (including payment under section 6159 relating to installment agreements), or of any other liability to the United States in respect thereof, but not including deposits of taxes pursuant to section 6302 and the regulations under section 6302;
You see the emphasized language? It limits the IRS discretion under §7508A. It says the IRS cannot postpone the time for making “deposits of taxes pursuant to section 6302.”
So let’s go look at §6302. Subsection (a) says what the purpose of this statute is: “If the mode or time for collecting any tax is not provided for by this title, the Secretary may establish the same by regulations.”
Remember that the taxes the EO directs the IRS to postpone are the taxes imposed by §3101(a) (and the equivalent portion of employment taxes imposed under the Railroad Retirement Act at section 3201). Section 3101(a) imposes a 6.2 % Social Security tax on employees, which is withheld from their wages under the rules in §3102. But §3102 says nothing about timing. Therefore, you have to look at the rules under §6302 and its regulation to find the rules for timing.
You find the timing rules in Treas. Reg. 31.6302-1. Subsection (a) gives the basic timing rules and subsection (e) explicitly ties those rules to the employment taxes imposed by §3101.
Do you see the problem for the IRS? The EO says “postpone withholding of employee’s share of employment taxes.” But §7508A, as implemented by the regulations, does not permit the IRS to postpone the deposits required by §6302 which, under it’s regulations, include all the amounts withheld from employee’s paychecks under §3102 to satisfy the tax imposed by §3101.
Alert readers will notice that the blockage occurs in a regulation. That means that Treasury could modify that regulation. But the IRS certainly cannot do this on its own via a Notice or any other guidance document. It would have to go through Treasury and, most likely, go out as a Temp. Reg.
Whoever wrote that EO should have checked with a tax advisor. As usual, it may be me who is missing something, so I would love to hear others’ thinking on this.
I appreciate the very well thought through analysis of the EO. But, his was a political ac and should be viewed in that context, apparently designed to get negotiations to move forward. We will see soon if it accomplished the mission of not.
If I were going to argue against this, I would argue that there isn’t an issue because if an employer has deducted no payroll taxes from an employee’s paycheck, the employer has no requirement to deposit anything. If an employer has no obligation to deposit anything, then it doesn’t matter what the rules say for when it needs to be deposited.
Yes, and this is proved by the 6302 regs themselves, providing that the deadlines apply only to employment taxes that are “accumulated” – and by Rev. Rul. 75-191, confirming that no late-deposit penalties apply because deposits are not “late” under 6302 when the taxes are not withheld. BUT- if an employer dares to withhold but not deposit- a suggesting floating around the press and internet, there are for sure huge penalties- under 6656 (10% for the late deposits) and 6662 (40% of the non-deposited taxes owed for the quarter, reflected on a Form 941).
There have been a number of instances in the past where the government has taken actions that, technically, violate the statute or a regulation, but if they amount to nonenforcement, no taxpayer is affected adversely particularly enough to have standing to challenge the action. In this case (as when Treasury gave two banks a dubious free pass on § 382 in 2007), Congress might get hot & bothered, but in an election year Speaker Pelosi is not going to be running into court to demand that taxpayers pay more money currently.
If this is only a deferral in the sense that whatever is not paid over in 2020 will have to be paid over in 2021, it is not a permanent forgiveness of this tax. The more interesting question is what happens if the Democrats hammer at that point in the campaign and the President then signs an executive order that waives the 2020 tax permanently. That is obviously contrary to the statute, but the Supreme Court’s decision in the DACA case makes it awfully difficult for a future administration to change the rule without full APA Notice & Comment or legislation, and politicly either one of those is a nightmare.
Yes- per the 6302 regs themselves, which apply only to “accumulated” taxes, and Rev. Rul. 75-191.