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Can The IRS Even Implement Payroll Deferral?

Posted on Aug. 11, 2020

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.

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(subtitle E)), employment tax (including income tax withheld at source and income tax imposed by subtitle C or any law superseded thereby), any installment of those taxes (including payment under section 6159 relating to installment agreements), or of any other liability to the United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.

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