2010 Excess Withholding Error discovered now in 2011

[SFSD]

We are a TPA and have been advised by our custodian who handles withholding and Form 1099-R reporting that an error in 2010 withholding can no longer be corrected since it's now 2011. I always thought this could be done by filing a Form 843, Claim for Refund and Request for Abatement and Form 941c, Supporting Statement to Correct Information. Then the excess 2010 withholding would be "refunded" in the form of a credit to the payor's account. But, maybe this is ancient history? The custodian says that at this time their Form 945 filing must match their total Form 1099-R filings and that "adjustments" are not allowed. Now I know the IRS can make rules that don't make sense but is that the case here? Mistakes happen and it doesn't seem right we cannot make the appropropriate corrections for the participant. Any ideas? Thanks in advance for your help.

[Lou S.]

Can't they file their taxes and get a refund?

[SFSD]

Yes, they could but the participant doesn't want to go this route since too much was withheld to the tune of $2,000. It was our mistake so we are trying to fix it so the participant gets his money now.

[masteff]

The custodian is correct. The only option available now is for the participant to get a refund on their income tax return.

See "Income tax withholding adjustments" and "Refunding amounts incorrectly withheld from employees" on page 28 of IRS Publication 15.

Edit: keep in mind that the participant has an affirmative duty to review their check stubs, which includes reviewing whether their withholding is either too high or too low.

[Lou S.]

I'm with masteff on this one and the correction is to request a refund with the tax return.

If you want to be super nice guys because you feel the error is yours, you can give him an interest free loan of $2,000 until he files his tax return. Not sure if that would be a prohibited transaction or the tax implications of giving him an interest free loan. But even if there are no tax ramafications and no PT, that would probably fall under the heading of "no good deed goes unpunished" before the saga ended. If you do go that route, you might want to run it by counsel which might be more more expensive than the fix.