Incomplete Forms 941 Are Not Valid Claims for Employee Retention Credit Refund

(Parker Tax Publishing May 2025)

The Chief Counsel's Office advised that an aggregate Form 941, Employer's Quarterly Federal Tax Return, submitted by a third-party payer (TPP) under the TPP's own employer identification number (EIN) to claim the employee retention credit on behalf of its common law employer clients is not a valid return for the clients if it fails to attach a Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers. The Chief Counsel's Office also concluded that an aggregate Form 941 filed by a TPP under the TPP's own EIN that does not include a Schedule R (Form 941) is not a valid formal, informal, or protective refund claim for the TPP's clients. PMTA 2025-1.

Background

Section 2301 of the CARES Act (Pub. L. 116-136), as originally enacted in 2020, provided the employee retention credit (ERC) for eligible employers that paid qualified wages after March 12, 2020, and before January 1, 2021. The ERC under Section 2301 of the CARES Act was later amended and extended by the Taxpayer Certainty and Disaster Relief Act of 2020 (Relief Act) (Pub. L. 116-260), to qualified wages paid after December 31, 2020, and before July 1, 2021. The American Rescue Plan Act of 2021 (ARP) (Pub. L. 117-2) provide a substantially similar ERC under Code Sec. 3134 with respect to qualified wages paid after June 30, 2021, and before January 1, 2022.

In Section 2301 of the CARES Act, Congress directed the IRS to issue regulations or guidance with respect to the application of the ERC to third party payers (TPPS), including regulations or guidance allowing such TPPs to submit documentation necessary to substantiate the eligible employer status of employers that use such TPPs.

The IRS complied with this directive in Notice 2021-20, which provided information specific to TPPs. Concerning employers who use TPPs to report and pay employment taxes, Notice 2021-20 provides that such employers are entitled to the ERC regardless of their use of a TPP. For certified professional employer organizations (CPEOs) and Code Sec. 3504 agents, the notice provides that, in order to claim the ERC for their clients, these TPPs will need to report the ERC claim for each client on the Schedule R (Form 941), Allocation Schedule for Aggregate Form 941 Filers, that they are already required to attach to their Form 941, Employer's Quarterly Federal Tax Return. For TPP aggregate filers who are not a CPEO or Code Sec. 3504 agent, and who typically do not attach a Schedule R (Form 941) to their aggregate Form 941, the notice provides that, to claim the ERC for their clients, these TPPs will need to also report the ERC claim for each client on a Schedule R (Form 941) attached to their aggregate Form 941. However, they are not required to include on the Schedule R (Form 941) any clients for whom they are not claiming an ERC. The Instructions for Form 941 provide these same requirements that TPP aggregate filers report any ERC claims for their clients on a Schedule R (Form 941) attached to their employment tax return.

Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, is the form designated by the IRS for employers to correct errors and claim refunds for overpayments of tax from a previously filed Form 941. Employers who were eligible for the ERC in a previous calendar quarter but who did not claim the ERC on their original Form 941 filed for that quarter may later claim the ERC on a Form 941-X and receive a refund for any overpayment of tax resulting from the claimed ERC. The Instructions for Form 941-X require that TPP aggregate filers filing Form 941-X to claim the ERC for their clients report any ERC claims for their clients on the Schedule R (Form 941) attached to the Form 941-X.

The IRS has placed a moratorium on the processing of claims for refund submitted on Forms 941-X due to concerns that many taxpayers who have submitted claims for the employee retention credit (ERC) are not entitled to the credits. During the moratorium, the IRS has scanned the Forms 941-X into reviewable documents and determined that approximately 2,700 of the amended returns have been submitted by TPPs without the requisite Schedule R (Form 941) allocating the claimed refund to each common law employer client as required by Notice 2021-20 and the Instructions for Forms 941-X.

The IRS has broad authority to determine what information should be submitted with a tax return, and how that information should be submitted. To determine whether a return is valid, courts look to the test outlined in Beard v. Comm'r, 82 T.C. 766 (1984), aff'd 793 F.2d 139 (6th Cir. 1986). The Beard test requires that: (1) sufficient data be supplied to calculate tax liability; (2) the document purport to be a return; (3) there be an honest and reasonable attempt to satisfy the requirements of the tax law; and (4) the return be executed under penalty of perjury. Id. If a return meets the Beard test (also known as the "substantial compliance" standard), the return is a valid return for purposes of commencing the period of limitations on assessment under Code Sec. 6501.

The Office of Chief Counsel was asked for assistance on the following issues:

(1) Whether an aggregate Form 941 or aggregate Form 941-X submitted by a TPP under the TPP's own employer identification number (EIN) to claim the ERC on behalf of its common law employer clients is a valid return for the TPP's clients if the TPP fails to attach a Schedule R (Form 941).

(2) Whether an aggregate Form 941-X submitted by a TPP under the TPP's own EIN to claim the ERC on behalf of its common law employer clients is a formal claim for refund if the TPP fails to attach a Schedule R (Form 941).

(3) Whether an aggregate Form 941-X submitted by a TPP under the TPP's own EIN to claim the ERC on behalf of its common law employer clients is an informal claim for refund if the TPP fails to attach a Schedule R (Form 941).

(4) Whether an aggregate Form 941-X submitted by a TPP under the TPP's own EIN to claim the ERC on behalf of its common law employer clients is a protective claim for refund if the TPP fails to attach a Schedule R (Form 941).

PMTA 2025-1

The Office of Chief Counsel advised that:

(1)An aggregate Form 941 or Form 941-X submitted by a TPP under the TPP's own EIN to claim the ERC on behalf of its common law employer clients is not a valid return for the clients if the TPP fails to attach a Schedule R (Form 941).

The Chief Counsel's Office reasoned that, where the TPP aggregate filer does not attach a Schedule R (Form 941) to its aggregate Form 941, the IRS has no way of knowing the Form 941 is an aggregate return, and no way of determining to which client(s) the taxes and payments reported on the return should be allocated. Because of this omission, the data sufficiency requirement under the Beard test for determining whether a return is valid is not satisfied and the Form 941 does not constitute a valid return for the TPP's clients for purposes of commencing the period of limitations on assessment under Code Sec. 6501 for the TPP's clients. Similarly, the Chief Counsel's Office advised that if a TPP aggregate filer attempts to amend its originally filed aggregate Form 941 (that did have a Schedule R (Form 941) attached) using Form 941-X and does not attach a Schedule R (Form 941) to this Form 941-X, the data sufficiency requirement has not been satisfied.

(2)An aggregate Form 941-X submitted by a TPP under the TPP's own EIN to claim the ERC on behalf of its common law employer clients is not a valid formal claim for refund for the TPP's clients if the TPP fails to attach a Schedule R (Form 941).

Notice 2021-20 provides that all TPP aggregate filers claiming the ERC for their clients must report ERC claims for each client on a Schedule R (Form 941) attached to their Form 941. In addition, the Instructions for Form 941-X explicitly require attaching a Schedule R (Form 941). The Chief Counsel's Office advised that a TPP that submits an aggregate Form 941-X without an attached Schedule R (Form 941) does not comply with the requirement in Reg. Sec. 301.6402-2(b) that a refund claim must provide "facts sufficient to apprise" the IRS of the basis of the claim. The Chief Counsel's Office reasoned that the list of the TPP's clients included on the aggregate Form 941-X and amount of the claim attributable to each is only available on a Schedule R (Form 941). Without a Schedule R (Form 941) an aggregate Form 941-X does not set forth the specific taxpayers for whom the claim is filed and the specific amount of each claim for each specific taxpayer.

(3)An aggregate Form 941-X submitted by a TPP under the TPP's own EIN to claim the ERC on behalf of its common law employer clients is not an informal claim for refund for the TPP's clients if the TPP fails to attach a Schedule R (Form 941).

An informal refund claim is a timely filed refund request that satisfies all of the essential informational requirements of a claim for refund but otherwise fails to satisfy a formal requirement. A timely filed refund request can be an informal claim if it has a written component, is sufficient to put the IRS on notice that a refund is sought, and focuses the IRS's attention on the merits of the claim. The Chief Counsel's Office advised that, without a Schedule R (Form 941), a TPP's aggregate Form 941-X does not include sufficient information on the basis for the refund that is being claimed. Information about the employers include on the aggregate Form 941-X and the portion of the total claim attributable to each would only be available if the aggregate Form 941-X included the information on the Schedule R (941). The Chief Counsel's Office explained that the IRS cannot determine which taxpayers are claiming a refund, and therefore cannot focus its attention on the merits of the claim, without that information.

(4)An aggregate Form 941-X submitted by a TPP under the TPP's own EIN to claim the ERC on behalf of its common law employer clients is not a valid protective claim for refund for the TPP's clients if the TPP fails to attach a Schedule R (Form 941).

The Chief Counsel's Office advised that an aggregate Form 941-X submitted a Schedule R (Form 941) would not by itself qualify as a protective claim by the TPP's clients. Protective claims are filed to preserve a taxpayer's right to claim a refund when the refund is contingent on future events that may not be ascertainable until after the period of limitation expires. Protective claims are filed when there is active litigation or expected changes in the law, where one element of the claim (usually the amount of the claim) is not certain within the limitations period. According to the Chief Counsel's Office, a Form 941-X submitted without a Schedule R (Form 941) would not constitute a valid protective claim for the TPP's clients absent further explanation, because the form and its required attachment are not subject to pending litigation or unclear events that may affect an element of the claim.

For a discussion of the employee retention credit, see Parker Tax ¶104,460.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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