On May 28, 2020, the IRS issued Notice 2020-35, postponing deadlines for more time-sensitive actions until July 15, 2020. Notice 2020-35 is the latest in a series of IRS notices issued since mid-March providing for delays under the authority of section 7508A due to the COVID-19 emergency declaration. Specifically, the relief relates to employment tax returns and returns filed by employee benefit plans exempt organizations due on or after March 30, 2020, and before July 15, 2020. The big news arising out of the notice—although certainly not broadcast by the IRS—pertains to the extension of the period for correcting errors that occurred in prior calendar years until July 15, 2020. This extension of time until July 15, 2020, permits employers to correct errors ascertained with respect to calendar year 2016 employment taxes, which ordinarily would have to have been corrected on or before April 15, 2020—the day on which the period of limitations would otherwise have lapsed.
Relief for Employers under Notice 2020-35 Builds on Earlier Notice
Of interest to all employers, Notice 2020-35 works in tandem with Notice 2020-23 to extend key due dates for employers to correct employment tax errors for prior periods. In general, section 6501(b)(2) deems the quarterly Forms 941 to be filed for a particular calendar year on April 15 of the succeeding calendar year. Accordingly, the statute of limitations for 2016 employment tax returns would have expired on April 15, 2020. However, Notice 2020-23 extended the date on which employers may file a claim for refund for 2016 employment tax overpayments otherwise required to be filed by April 15, 2020, until July 15, 2020. For years after 2016, the statute of limitations for both the refund and assessment of employment taxes remains open for some time (e.g., the statute of limitations remains open for 2017 until April 15, 2021).
Notice 2020-35 also provides additional relief for employers with respect to the correction of employment tax errors for prior quarters that were ascertained by an employer in the first quarter of 2020. Ordinarily, an employer must correct errors resulting in an underpayment of employment taxes during an earlier calendar quarter by filing a Form 941-X (i.e., reporting the error and paying the additional taxes) by the due date of the return for the calendar quarter in which the error is ascertained. Underpayment errors corrected within this period may be corrected without interest or late deposit penalties. An error is treated as ascertained when the employer has sufficient knowledge of the error to be able to correct it.
In the case of the discovery of an earlier employment tax error during the first calendar quarter of 2020, the due date for filing the Form 941-X would, absent the relief granted by the IRS, have been April 30, 2020, for employment tax errors relating to the years 2017 through 2019. As discussed above, the statute of limitations under section 6501(b)(2) would have required any employment tax corrections for 2016 to have been filed by April 15, 2020. Thus, Notice 2020-35 extends that deadline under the interest-free adjustment procedures to file corrections for errors during calendar years 2016 through 2019 that were ascertained during the first calendar quarter of 2020 until July 15, 2020. Notice 2020-35 does not extend the deadline for the correction of errors during calendar years 2017 through 2019 ascertained during the second calendar quarter of 2020, since the deadline is July 31, 2020. Again, employers must have ascertained employment tax errors during 2016 in the first calendar quarter of 2020 to take advantage of the relief in Notice 2020-35 and must file Form 941-X by July 15, 2020, to do so because the statute of limitations will expire on that date. The Instructions to the Form 941-X provide important and useful information regarding employment tax corrections and the interest-free adjustment rules.
Other Relief under Notice 2020-35
Notice 2020-35 also provides certified professional employer organizations (“CPEOs”) with relief. Notice 2020-35 temporarily waives the mandate that a certified professional employer organization (“CPEO”) must file certain employment tax returns and accompanying schedules through the end of the year. The waiver applies to a CPEO’s quarterly federal tax returns for the second, third, and fourth quarters of 2020.
Moreover, Notice 2020-35 alerts employers that it will disregard the period from March 30, 2020, to July 15, 2020, in calculations of any interest or penalty for an employee benefit plan’s failure to file excise tax returns or to pay the excise tax postponed by the notice. Employers should note, however, that interest and penalties on those delayed filing and payment obligations will begin to accrue on July 16. With respect to pre-approved defined benefit plans, the deadline for certain actions including the adoption of a pre-approved defined benefit plan that was approved based on the 2012 Cumulative List has been postponed until July 31, 2020.
Recap of Earlier IRS Notices Granting Delays Due to COVID-19
On March 18, the IRS issued Notice 2020-17 to postpone the due date for certain federal income tax payments up to prescribed amounts due on April 15, 2020, until July 15, 2020. Just two days later, the IRS superseded Notice 2020-17 by issuing Notice 2020-18, which restated and expanded the relief provided in the earlier notice. In particular, Notice 2020-18 delayed tax payments due on April 15, 2020, until July 15, 2020, without any limitation as to the amount of the tax due, and it delayed the deadline for filing federal income tax returns due on April 15, 2020, until July 15, 2020, without the requirement to file extensions for the specified delay.
On March 27, 2020, the IRS issued Notice 2020-20 to postpone payments required to be made on April 15, 2020, for U.S. gift and generation-skipping transfer tax and the related return requirement for such taxes until July 15, 2020, without the need to file an extension for the specified delay.
One April 9, 2020, the IRS issued Notice 2020-23, which significantly expanded the prior relief. The notice applies to all taxpayers with a federal tax payment obligation and a federal tax return or other form filing obligation (e.g., Forms 1040, 1120, 1065, 1041, 706, 709, 990-T, 990-PF, and 990-W with other required schedules and forms as attachments) due on or after April 1, 2020, and before July 15, 2020. The notice postpones the payment and return filing obligations until July 15, 2020. In addition, the notice postpones the performance of time-sensitive actions identified in either Treas. Reg. § 301.7508A-1(c)(1)(iv) – (vi) or Rev. Proc. 2018-58 (“Specified Time-Sensitive Actions”) that are due on or after April 1, 2020, and before July 15, 2020, until July 15, 2020. Although the notice is silent regarding employment taxes, this relief extends the due date for filing Forms 941-X, as discussed above. The IRS confirmed this effect in a Q&A posted on the IRS website. However, the notice does not extend the time for filing the first quarter 2020 Form 941 or the deadline for making deposits of employment taxes. The relief for Specified Time-Sensitive Actions also includes the filing of refund claims, refund suits, and Tax Court petitions.