No closing agreements to prepay FICA nonqualified deferred pay

The IRS should not enter into closing agreements in situations where employers did not take into account for Federal Insurance Contributions Act (FICA) tax purposes nonqualified deferred compensation (NQDC) for tax years that are statutorily barred from assessment. Some employers have requested closing agreements to permit them to pay FICA taxes in a subsequent year that is prior to the year of payment in order to reduce the amount of total FICA taxes that would be due under the general timing rule. The employer may also want to avoid application of the allocation rule that imposes FICA tax on a portion of each payment if an employer took some portion, but not all, of the NQDC into account for FICA tax under the special timing rule.

Since the applicable regulations provide a mechanism for the payment of FICA taxes in the case of NQDC that is not timely taken into account under the special timing rule in Reg. §31.3121(v)(2)-1(a)(2), a closing agreement is not appropriate if it has the effect of avoiding application of the regulatory mechanism. The existence of the special transition rule for years that were barred at the time the regulations were finalized reinforced the importance of adhering to the rules contained in Reg. §31.3121(v)(2)-1(d)(1)(ii) for determining the FICA tax due upon payment of amounts that were deferred in prior years and that should have been taken into account under Code Sec. 3121(v)(2) in prior barred years. (IRS Advice Memorandum AM 2017-001, January 13, 2017.)

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