Through a White House memorandum, President Trump directed the Treasury Department to exercise the authority conferred by Section 7508A. Under that statute, the Treasury may extend various otherwise strict deadlines under the tax code, including those for the payment of taxes. The White House memorandum contemplates that the Treasury will use Section 7508A to extend the deadline for the payment of some taxes described in Sections 3101(a) and 3201 (“payroll taxes”). In colloquial terms, the White House memorandum is intended to provide payroll tax relief to American workers. The remainder of this post provides further background on Section 7508A and explains why guidance under that statute likely will not provide significant tax relief to workers.

1. Scope of authority. When a “federally declared disaster” affects a taxpayer, Section 7508A(a) allows the Treasury to disregard a period of up to 1 year in determining whether the taxpayer has timely performed various acts described in the tax code. See Sections 7508A(a)(1) (referring to the acts described in Section 7508(a)). Suppose, for example, that a taxpayer must file her return and pay her taxes by April 15 in a given year. But, because of a federally declared disaster, she cannot do so. In these circumstances, the Treasury can apply Section 7508A and extend the taxpayer’s filing and payment deadline to July 15 or a later date (within one year). Thus, the taxpayer could escape late filing or late payment penalties.

In March, President Trump declared a federal disaster and directed the Treasury to provide relief to American taxpayers. The Treasury subsequently did so, along the lines of the fact pattern described above. See IRS Notice 2020-17.

2. Payroll tax memorandum. A new White House memorandum orders the Treasury to use Section 7508A to “defer the withholding, deposit, and payment” of payroll taxes. The contemplated deferral would apply only for the last four months of this year (i.e., from September 1, 2020 through December 31, 2020). Also, the deferral would generally apply only to the taxes imposed on workers making around $100,000 a year or less.

The White House memorandum does not implement any rules. Instead, operative guidance must come from the Treasury. That guidance may apply to both employers and employees. That is, employers usually withhold payroll taxes from employees’ paychecks and deposit those taxes with the government. Thus, to ensure that employees receive larger paychecks, the Treasury guidance may need to relieve employers of their withholding and deposit obligations.

3. Will it work? Changes to withholding and deposit obligations create complexities beyond those associated with filing extensions. The White House memorandum thus creates significant uncertainty. That uncertainty relates to both the contents of anticipated Treasury guidance and that guidance’s practical effects.

Regarding the practical effects, any anticipated Treasury guidance may create major problems for employers. Relief under Section 7508A can push the pause button on the tax code but that relief cannot turn it off. Under the tax code, an employer generally will be liable for any payroll taxes that it fails to withhold. See Section 6672 (describing the so-called trust fund penalty); Newsome v. United States, 431 F.2d 742, 745 (5th Cir. 1970); Rev. Rul. 75-191 (Section 6672 potentially applies when an employer fails to withhold and deposit employment taxes). So, Treasury guidance might follow the White House memorandum and provide that an employer may ignore its withholding and deposit obligations between September 1 and December 31. Cf. Rev. Rul. 75-191 (no Section 6656 failure-to-deposit penalty applies for amounts that are not withheld). But after that period, the employer’s failures to withhold and deposit can no longer be ignored. Thus, on January 1, 2020, the employer must remit the payroll taxes that had accrued over the 4-month deferral period or it must ensure that its employees will do so.

Given these potential consequences, employers probably will not want to implement the payroll tax relief contemplated by the White House memorandum. See The Hill, US Chamber asks Treasury to clear up ‘serious concerns’ about payroll tax deferral (August 12, 2020). Employers may themselves face liability for the taxes that they did not withhold and deposit. They thus have a financial incentive to continue their ordinary withholding and deposit practices. Alternatively, employers may encourage their employees to pay their deferred payroll taxes. But that would create further complexities. See Carlton Smith, Procedurally Taxing (Aug. 8, 2020).

It’s possible that employers will anticipate legislative or regulatory action that could make worthwhile the payroll tax deferral regime. For example, Congress might eventually pass a law that waives liabilities for all payroll taxes covered by the White House memorandum. Or, the Treasury might eventually announce that it will not impose penalties on any employers who fail to withhold and deposit payroll taxes. But legislative or regulatory action is hardly assured.

An employer might decide that it will withhold payroll taxes and release the funds to employees only if Congress waives liabilities. However, once an employer withholds payroll taxes it must, under current regulations, deposit those taxes. See Treas. Reg. § 301.7508A-1(c)(1)(ii) (no Section 7508A relief available for deposits required by Section 6302 and its regulations); Treas. Reg. § 301.7508A-1(f) (Example 1) (Corporation must make employment tax deposit notwithstanding Section 7508A relief extended for other actions, and may otherwise face Section 6656 penalties); Treas. Reg. § 31.6302-1 (describing deposit rules for payroll and other taxes). Thus, a wait-and-see approach may not work.

It seems unlikely that the White House memorandum will lead to significant tax relief for American workers. Employers are unlikely to make changes to their withholding and deposit practices, given the legal and practical uncertainties. Even if the Treasury promises not to apply employer penalties, employees might not be enthusiastic about the payroll tax relief program. Larger paychecks in the short term could mean a larger tax bill around filing time, and taxpayers usually prefer to receive refunds every April.

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Comments welcome. This post may be updated.