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Self-Employment Tax Omissions Aren't 'Mathematical Or Clerical' Errors

JUL. 15, 1997

FSA 1997-54

DATED JUL. 15, 1997
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Citations: FSA 1997-54

 

Date: July 15, 1997

 

 

Refer Reply to: CC:DOM:FS:PROC:TL-N-1802-97

 

GRJohnson

 

 

INTERNAL REVENUE SERVICE MEMORANDUM

 

 

TO:

 

District Counsel Rocky Mountain CC:WR:DEN

 

Attn: Sara J. Barkley

 

 

FROM:

 

Assistant Chief Counsel (Field Service) CC:DOM:FS:PROC

 

 

SUBJECT:

 

* * * Notice of Deficency Requirements for Self-Employment Tax

 

Adjustments

 

 

[1] This memorandum is in response to your request for Field Service Advice, dated April 14, 1997, regarding the above referenced subject matter.

 

DISCLOSURE LIMITATION

 

 

[2] Field Service Advice constitutes return information subject to I.R.C. section 6103. Field Service Advice contains confidential information subject to the attorney-client and deliberative process privileges and if prepared in contemplation of litigation, subject to the attorney work product privilege. Accordingly, the Examination, Appeals, or Counsel recipient of this document may provide it only to those persons whose official tax administrative duties with respect to this case require such disclosure. In no event may this document be provided to Examination, Appeals, Counsel or other persons beyond those specifically indicated in this statement. Field Service Advice may not be disclosed to taxpayers or their representatives.

[3] Field Service Advice is not binding on Examination or Appeals and is not a final case determination. Such advice is advisory and does not resolve Service position on an issue or provide the basis for closing a case. The determination of the Service in the case is to be made through the exercise of the independent judgment of the Field office with jurisdiction over the case.

 

[4] ISSUES

 

 

1. Whether the taxpayer's failure to report a self-employment tax liability on the self-employment income reported on an income tax return is a mathematical or clerical error as described in I.R.C. section 6213(b)(1), allowing the Service to assess the tax without following the normal deficiency procedures?

2. Whether the Service may use the summary assessment procedures when the taxpayer does not report any self-employment tax because he or she claims an exemption under a minister's waiver, but has not submitted the required Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners?

CONCLUSIONS

 

 

1. The Service may not summarily assess using the procedures of I.R.C. section 6213(b)(1) self-employment taxes in situations where a taxpayer files a federal income tax return and reports self-employment income, but does not report any self- employment tax.

2. The Service may not summarily assess using the procedures of I.R.C. section 6213(b)(1) self-employment taxes in situations where the taxpayer claims an exemption from self-employment tax under a minister's waiver, but has not submitted a Form 4361.

FACTS

 

 

[5] Recently, the District Director, Rocky Mountain, has received federal income tax returns report from taxpayers that appear to income from self employment, but do not report any self-employment tax liability. The returns are filed in a variety of forms, ranging from Form 1040 (U.S. Individual Income Tax Return) with attached Schedules C (Profit or Loss From Business) or F (Profit or Loss from Farming) reporting net income self-employment and failing to report the self-employment tax liability, to Form 1040-EZ (Income Tax Return for Single and Joint Filers with No Dependents) which simply omits the self-employment tax or reports nonemployee compensation as though it were not income subject to self-employment tax. The District Director is also receiving income tax returns from taxpayers claiming an exemption from self-employment tax under the ministers' exemption or as a member of a religious group opposed to social security, who have not filed the required Form 4361 (Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners).

 

LAW AND ANALYSIS

 

 

ISSUE 1

[6] In general, I.R.C. section 6213(a) prohibits the assessment and collection of a deficiency until a notice of deficiency has been mailed to a taxpayer and certain statutory steps are taken before the Service collects the deficiency.

[7] Under prior law, there was an exception to the standard notice of deficiency procedures that permitted the Service to summarily assess any additional tax resulting from a correction of "a mathematical error appearing on the return." In such a situation, the taxpayer had no right to claim an abatement of the tax, although the Service ordinarily would abate the tax if the taxpayer substantiated the claim. This summary assessment provision was modified as a result of the enactment of section 1206 of the Tax Reform Act of 1976, Pub.L. 94-455, 90 Stat. 1520, 1703-04 (1976). The reasons for the change are described in the following portion of the legislative history:

 

Questions have been raised as to whether the Service has used its mathematical errors summary assessment powers in cases where their use is not authorized by statute. The Service maintains that it properly uses this procedure in categories of cases where most taxpayers do not dispute the Service's conclusions, thereby substantially reducing administrative and other costs.

The Service has told your committee that the deficiency notice procedure is significantly more costly than the mathematical error procedure, both in terms of personnel and processing costs and in terms of taxes. On the other hand, your committee has concluded that the Service should not be able to proceed summarily where the Service may have erred in its determination.

In balancing these considerations, your committee decided (1) to provide greater protection for taxpayers who wish to contest Internal Revenue Service summary assessments in mathematical error cases, by restricting the Service's powers in such cases, and (2) to clarify the kinds of cases in which the Service could use this restricted summary assessment authority.

 

H.R. Rep. No. 658, 94th Cong., 1st Sess. 289 (1975), 1976-3 C.B. (Vol. 2) 695, 981; see also S. Rep. No. 938, 94th Cong., 2d Sess. 375 (1976), 1976-3 C.B. (Vol. 3) 49, 413.

[8] The summary assessment procedures in the case of a mathematical or clerical error are defined in I.R.C. section 6213(b) as follows:

 

(1) ASSESSMENTS ARISING OUT OF MATHEMATICAL OR CLERICAL ERRORS. -- If the taxpayer is notified that, on account of a mathematical or clerical error appearing on the return, an amount of tax in excess of that shown on the return is due, and that an assessment of the tax has been or will be made on the basis of what would have been the correct amount of tax but for the mathematical or clerical error, such notice shall not be considered as a notice of deficiency . . . and the taxpayer shall have no right to file a petition with the Tax Court based on such notice, nor shall such assessment or collection be prohibited by the provisions of subsection (a) of this section. Each notice under this paragraph shall set forth the error alleged and an explanation thereof.

 

[9] The term "mathematical or clerical error" is presently defined in I.R.C. section 6213(g)(2) as follows:

(2) MATHEMATICAL OR CLERICAL ERROR. -- The term "mathematical or clerical error" means --

 

(A) an error in addition, subtraction, multiplication, or division shown on any return,

(B) an incorrect use of any table provided by the Internal Revenue Service with respect to any return if such incorrect use is apparent from the existence of other information on the return,

(C) an entry on a return of an item which is inconsistent with another entry of the same or another item on such return,

(D) an omission of information which is required to be supplied on the return to substantiate an entry on the return,

(E) an entry on a return of a deduction or credit in an amount which exceeds a statutory limit imposed by subtitle A or B, or chapter 41, 42, 43, or 44, if such limit is expressed --

(i) as a specified monetary amount, or

(ii) as a percentage, ratio, or fraction,

and if the items entering into the application of such limit appear on such return,

(F) an omission of a correct taxpayer identification number required under section 32 (relating to the earned income credit) to be included on a return,

(G) an entry on a return claiming the credit under section 32 with respect to net earnings from self-employment described in section 32(c)(2)(A) to the extent the tax imposed by section 1401 (relating to self-employment tax) on such net earnings has not been paid, and

(H) an omission of a correct TIN required under section 21 (relating to expenses for household and dependent care services necessary for gainful employment) or section 151 (relating to allowance of deductions for personal exemptions).

 

[10] The portions of the legislative history describing the provisions as they relate to your inquiry are as follows:

 

Inconsistent entries. -- Care must be taken in administering the next category -- inconsistent entries on the return. This category is intended to encompass those cases where it is apparent which of the inconsistent entries is correct and which is incorrect. For example, if the taxpayer's entries as to personal exemptions on lines 6a, b, c, d, and e of Form 1040 add up to the total stated on line 7 (for example, assume the total is "6," correctly added), but the taxpayer on line 46 of Form 1040 multiplies $750 by a different number (for example, "7"), then the service is justified in regarding this as an error and correcting the error by multiplying the $750 for each exemption by, in the case above, "6." Even in this case, however, your committee expects that the Service will so phrase its notification to the taxpayer as to include questions designed to show whether the taxpayer indeed is entitled to the greater number of exemptions indicated on line 46 rather than the lesser number of exemptions indicated on line 7.

However, the summary assessment procedure is not to be used where it is not clear which of the inconsistent entries is the correct one. For example, line 6b of the Form 1040 requires the taxpayer to list, "First names of your dependent children who lived with you" and then to enter the number of those dependent children in a column for personal exemptions. If a taxpayer lists three names on line 6b but then enters "4" in the column, it is not clear whether the taxpayer miscounted (in which case the taxpayer should have written "3" in the column) or whether the taxpayer erroneously omitted the name of one of the dependent children (in which case the taxpayer's column entry of "4" would be correct). In this case, the Service should, of course, take steps to determine which entry is correct, and the taxpayer has the obligation of showing that he or she is entitled to the number of exemptions claimed. However, THIS SUMMARY ASSESSMENT PROCEDURE IS NOT TO BE USED WHERE THE SERVICE IS MERELY RESOLVING AN UNCERTAINTY AGAINST THE TAXPAYER.

 

H.R. Rep. No. 658, 94th Cong., 1st Sess. 291-292, 1976-3 C.B. (Vol. 2) 695, 983 (emphasis added); see also S. Rep. No. 938, 94th Cong., 2d Sess. 377, 1976-3 C.B. (Vol. 3) 415; and see also Joint Committee on Taxation, 94th Cong., 2d Sess., General Explanation of the Tax Reform Act of 1976, 373, 1976-3 C.B. (Vol. 3) 383, 385.

 

Omissions of supporting schedules. -- The next category is "an omission of information which is required to be supplied on the return to substantiate an entry on the return". The intent of this provision is to deal with SITUATIONS WHERE ITEMS SHOULD BE SUPPORTED BY SCHEDULES WHICH ARE PART OF THE RETURN. For example, if deductions are itemized (rather than the taxpayer taking the standard deduction), Schedule A should be included with the return. Similarly, Schedule G should be included if the taxpayer claims the benefits of income averaging. Also, Form 4726 should be included if the taxpayer claims the benefits of the maximum tax. WHERE THE NECESSARY SUPPORTING SCHEDULE IS OMITTED FROM THE RETURN, THEN THE SERVICE MAY PROCEED UNDER THIS PROVISION BY DISALLOWING THE BENEFICIAL TREATMENT UNLESS THE TAXPAYER SUPPLIES THE NECESSARY SCHEDULE. Here, too, the notification by the Service should be so designed as to encourage the taxpayer to supply the omitted schedule. If the taxpayer supplies the omitted schedule, then this justification for use of the summary assessment procedure is no longer applicable, and the supplying of the schedule is to be treated as a request for an abatement of the summary assessment. If the omitted schedule itself presents other mathematical or clerical errors (such as errors in addition or inconsistent entries), then this may be a justification for initiating a new summary assessment procedure based on those asserted errors.

 

S. Rep. No. 638, 94th Cong., 2d Sess. 377 (1976), 1976-3 C.B. (Vol. 3) 49, 415 (emphasis added).

[11] A further elaboration of the phrase "omissions of supporting schedules" appears in the following footnote to the legislative history:

 

It may be argued that the category of omissions of supporting schedules departs from this general approach [that the correct amount is determinable with a high degree of probability from the information that appears on the return]. As indicated above, the summary assessment in such a case is to be abated when the omitted schedule is supplied by the taxpayer: DISPUTES AS TO THE ADEQUACY OF THE SCHEDULE THAT THE TAXPAYER SUBMITS ARE TO BE DEALT WITH UNDER NORMAL ADMINISRATIVE PROCEDURES AND NOT BY USE OF THE EXTRAORDINARY SUMMARY ASSESSMENT PROCEDURES (unless one of the other "mathematical or clerical errors" categories applies).

 

H.R Rep. No. 658, 94th Cong. 1st Sess. 292 n. 1, 1976-3 C.B. (Vol. 2) 984 (underlining and explanatory note added).

[12] Section 6211(a) of the Code defines the term "deficiency" as follows:

 

(a) IN GENERAL. -- For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excises taxes imposed by chapters 41, 42, 43, and 44, the term "deficiency" means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the excess of --

(1) the sum of

(A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus

(B) the amounts previously assessed (or collected without assessment) as a deficiency, over --

(2) the amount of rebates, as defined in subsection (b)(2), made.

 

[13] Section 1401 is contained in subtitle A of the Code. Thus, the taxes imposed by that section are among those to which I.R.C. sections 6211(a) and 6213(a) refer. An adjustment increasing a taxpayer's liability for self-employment taxes is a deficiency within the meaning of section 6211(a) and assessment of such an adjustment will generally be subject to the assessment restrictions contained in section 6213(a). Treas. Reg. section 1.1401-1, provides for such a result as follows:

 

Tax on self-employment income. -- (a) There is imposed, in addition to other taxes, a tax upon the self-employment income of every individual . . . . This tax shall be levied, assessed, and collected as part of the income tax imposed by subtitle A of the Code and, except as otherwise expressly provided, will be included with the tax imposed by section 1 or 3 in computing any deficiency or overpayment and in computing the interest and additions to any deficiency, overpayment, or tax. Since the tax on self-employment income is part of the income tax, it is subject to the jurisdiction of the Tax Court of the United States to the same extent and in the same manner as the other taxes under subtitle A of the Code.

 

[14] The Tax Court, relying of Treas. Reg. section 1.1401-1(a), has held that the tax on self-employment income is subject to the deficiency procedures. See Knox v. Commissioner, T.C. Memo. 1967-164.

[15] You have asked us whether a taxpayer's failure to report self-employment tax on self-employment income reported on an income tax return is a mathematical or clerical error as described in I.R.C. section 6213(b)(1), allowing the Service to assess the self- employment tax without following the normal deficiency procedures. You assert that in certain cases the legislative history appears to support the summary assessment of the self-employment tax. Specifically, you note that where the taxpayer reports earnings from a Form 1099 or self-employment income, but fails to report the self- employment tax, that this may constitute an "entry on a return of an item which is inconsistent with another entry of the same or another item on such return" or an "omission of information which is required to be supplied on the return to substantiate an entry on the return" within the meaning of I.R.C. sections 6213(g)(2)(C) and (D), respectively.

[16] With regard to the assertion that an omission on Form 1040, line 45 of self-employment tax is "inconsistent" with claiming self-employment income on that same form, on its face the argument has some merit. We do not believe, however, the scope of I.R.C. section 6213(g)(2)(C) was intended to include such errors. The committee reports (set forth in more detail above) are helpful in determining the limits of I.R.C. section 6213(g)(2)(C):

 

Care must be taken in administering the next category -- inconsistent entries on the return. This category is intended to encompass those cases where it is apparent which of the inconsistent entries is correct and which is incorrect . . . . However, the summary assessment procedure is not to be used where it is not clear which of the inconsistent entries is the correct one . . . . [nor] where the Service is merely resolving an uncertainty against the taxpayer.

 

H.R. Rep. No. 658, 94th Cong., 1st Sess. 291-92, 1976-3 C.B. (Vol. 3) 983 (1975). In light of the legislative history, we believe I.R.C. section 6213(g)(2)(C) would not include an omission of self- employment tax within the definition of "mathematical or clerical error". An omission on Form 1040, line 45 of self-employment tax is clearly not an entry where the Service may readily determine whether a taxpayer has income that is or is not subject to self-employment tax. See GCM 38277 (Feb. 12, 1980), where the Service concluded that "[n]egative responses or omissions on lines 3(a) or 3(b) [of Form 2119] are clearly not entries where the Service may readily determine which [entry] is correct and which [entry] is incorrect." As noted in your incoming memorandum, "[U]pon review of a tax return, the Service may not always be able to determine if self-employment tax should be imposed. Where the line used to report income on the first page of the Form 1040 normally requires a Schedule C or F and a Schedule SE, it may not be possible to determine whether self-employment tax is due or whether the entry was merely on the wrong line."

[17] Further, although the inclusion on the return of self- employment income is an "entry on the return," the same cannot be said about an "omission" of self-employment tax. An omission clearly is not an "entry" on a return, rather it is the absence of an "entry" on the return. Therefore, the entry - the inclusion of self- employment income -- is not inconsistent with another "entry" on the return, because an omission is not an "entry" on a return. Accordingly, in light of the I.R.C. section 6213(g)(2)(C) definition of a mathematical or clerical error and the legislative history, we do not think that "inconsistent entries" as described in I.R.C. section 6213(g)(2)(C), include the situation where the taxpayer enters income from self employment on the return, but does not enter the self-employment tax.

[18] Nor do we believe that the failure to enter self- employment tax on the return constitutes an "omission of information which is required to be supplied on the return" within the meaning of I.R.C. section 6213(g)(2)(D). Although we have not located any cases that would be useful in analyzing the parameter of I.R.C. section 6213(g)(2)(D), there are several GCMs. In GCM 39,019 (Dec. 23, 1982), the above-quoted Senate Report (S. Rep. No. 638, 94th Cong., 2d Sess. 377 (1976), 1976-3 C.B. (Vol. 3) 49, 415) was relied upon to conclude that I.R.C. section 6213(g)(2)(D) was intended to apply only to an omission of an entire schedule required to substantiate an entry on the return. GCM 39,738 at 4 (May 20, 1988); see also GCM 38,408 at 7 (June 11, 1980). GCM 39,019 analyzed a situation where a deduction was claimed on line 25 of Form 1040 for contributions to individual retirement accounts (IRAs), but no code was entered as requested on that line identifying the type and number of IRAs. The GCM concluded that the omission was not a mathematical or clerical error within the meaning of I.R.C. section 6213(g)(2)(D), because the omission of such a code is not the omission of an entire schedule.

[19] In GCM 38,277 (Feb. 12, 1980), it was concluded that if a taxpayer claims the exclusion of the gain on the sale of a personal residence, but fails to respond or respond negatively to the eligibility questions on Form 2119, Sale of Your Home, the missing responses are not mathematical or clerical errors, because they are not errors of the same character as omissions of supporting schedules.

[20] One could argue that an omission of Schedule SE from Form 1040 is an omission of an entire schedule necessary to supply information that is required to support an entry on the return. On its face, this argument has some merit, however, we do not believe the scope of I.R.C. section 6213(g)(2)(D) was intended to include such errors. In GCM 37,219 (Aug. 10, 1977), the Service concluded that the I.R.C. section 6213(b)(1) summary assessment procedure for mathematical or clerical errors may not be used to assess self- employment tax when a taxpayer reports net business income on Schedule C and/or F of the Form 1040, but does not report self- employment tax on the Form 1040 and does not include Schedule SE with the return. GCM 37,219 concludes, at 3:

 

The basic problem is that Schedule SE does not "substantiate an entry on the return" as required by Code section 6213(f)(2)(D) [present section 6213(g)(2)(D)] when the return does not report any self-employment tax. Although both Schedules C and F do require the taxpayer to enter certain amounts computed therein onto Schedule SE, the function of Schedule SE is not to substantiate those amounts so computed. Instead, Schedule SE computes an entirely new tax.

 

(Explanatory language added).

[21] Although GCM 37,219 was promulgated in 1977, the above reasoning is still applicable. Thus, we think that an omission of self-employment tax, even in situations where self-employment income has been reported on the return, is not "an omission of information which is required to be supplied on the return to substantiate an entry on the return" as described in I.R.C. section 6213(g)(2)(D).

ISSUE 2

[22] As discussed above, I.R.C. section 6213(b)(1) provides an exception to the restrictions on assessment applicable to assessments arising out of mathematical or clerical errors. In this context, I.R.C. section 6213(g)(2)(D) provides that a "mathematical or clerical error" includes an "omission of information that is required to be supplied on the return to substantiate an entry on the return." The portion of the legislative history describing this provision is set forth above.

[23] Ministers, members of religious orders, or Christian Science practitioners seeking an exemption from self-employment tax must file Form 4361, Application for Exemption from Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners. Treas. Reg. sections 1.1402(e)-2A(a) and 1.1402(e)-5A(a) and (b). The application is to be filed by the due date including extensions for filing the individual's income tax return for the second tax year in which the individual has $400 or more of net earnings from self-employment, some of which were earnings from services performed in the exercise of his duties as a minister, a member of a religious order or as a Christian Science practitioner. Treas. Reg. section 1.1402(e)-3A(a).

[24] Form 4361 is not required to be attached to either Form 1040 or Schedule SE. Neither Form 1040 nor Schedule SE (nor their accompanying instructions) requires that Form 4361 be attached. Nor does Form 4361 require that the taxpayer attach a copy of it to Form 1040 or Schedule SE. However, the instructions accompanying Form 4361 provide, "Keep a copy of Form 4361 for your permanent records" and "[i]f the IRS returns your application marked 'approved' and your only self-employment income was from ministerial services, write 'Exempt -- Form 4361' on the self-employment line in the Other Taxes section of Form 1040." Form 4361 is filed only once with the Service and is thereafter maintained in and with the taxpayer's permanent records. Thus, Form 4361 is not a schedule which is PART OF the return. See S. Rep. No. 638, 94th Cong., 2d Sess. 377 (1976), 1976-3 C.B. (Vol. 3) 49, 415 ("The intent of this provision is to deal with situations where items should be supported by SCHEDULES WHICH ARE PART OF THE RETURN") (emphasis added). Consequently, we believe that this omission is not a mathematical or clerical error for purposes of I.R.C. section 6213.

[25] Further it is not at all apparent on the face of the income tax return that a mathematical or clerical error has occurred in such situations. Consider that there is an automatic exemption from self-employment tax on certain earnings for members of a religious order who take a vow of poverty. See Treas. Reg. section 1.1402(c)-5(d). A member of a religious order who takes a vow of poverty does not have to file Form 4361 to shelter certain earnings from taxation. If the Service were to summarily assess self- employment tax against such an individual, it would be acting contrary to the express intention of Congress. The legislative history clearly cautions that the summary assessment procedure is not to be used where the Service is merely resolving an uncertainty against the taxpayer. See GCM 38,583 (Dec. 8, 1980), where the Service held that a liability for the self-employment taxes resulting from disapproval of an minister's exemption application does not arise out of a mathematical or clerical error and, therefore, the Service Center's action in summarily assessing the self-employment tax was in violation of the requirements of I.R.C. section 6213(a).

 

SUMMARY

 

 

[26] We conclude that the exception to the normal assessment procedures for mathematical or clerical errors in I.R.C. section 6213(b) may not be used to correct federal income tax returns for omitted self-employment tax and/or to summarily assess self- employment tax in the above referenced cases because the types of errors involved are not within the scope of the definitions set forth in I.R.C. section 6213(g)(2).

[27] If you require any further information with respect to this matter, please contact George Johnson at (202) 622-7927.

DEBORAH BUTLER

 

 

By: NANCY B. ROMANO

 

Senior Technician Reviewer

 

Procedural Branch
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