The Internal Revenue Service (IRS) has issued Program Manager Technical Advice (PTMA 2025-001) addressing the validity of Employee Retention Credit (ERC) claims submitted by third-party payers (TPPs) on aggregate employment tax returns or claims for refund when the required allocation schedule, Schedule R (Form 941), is not attached. This guidance, dated February 13, 2025, responds to a request for assistance concerning the treatment of these claims, particularly in light of the moratorium on processing Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, due to concerns about ineligible ERC claims. This article will detail the facts underlying this advice, the IRS’s analysis of the relevant law, the application of this law to the presented facts, and the resulting conclusions regarding the validity of these ERC claims.

Facts

The PTMA addresses situations where a TPP, using its own Employer Identification Number (EIN), submits an aggregate Form 941, Employer’s QUARTERLY Federal Tax Return, or an aggregate Form 941-X to claim the ERC on behalf of its common law employer clients. The specific issue under consideration is the impact of the TPP’s failure to attach Schedule R (Form 941): Allocation Schedule for Aggregate Form 941 Filers, to these aggregate filings. The IRS noted that during the moratorium on processing Form 941-X, it identified approximately 2,700 amended returns submitted by TPPs without the requisite Schedule R. This schedule is required by Notice 2021-20, 2021-11 I.R.B. 922, and the Instructions for Forms 941-X to allocate the claimed refund to each common law employer client.

The PTMA specifically considers four issues related to this scenario:

Whether an aggregate Form 941 or 941-X submitted by a TPP without Schedule R is a valid return for the TPP’s clients.
Whether an aggregate Form 941-X submitted by a TPP without Schedule R is a valid formal claim for refund for the TPP’s clients.
Whether such a Form 941-X constitutes a valid informal claim for refund.
Whether such a Form 941-X constitutes a valid protective claim for refund.

IRS Analysis of the Law

The IRS’s analysis draws upon established tax law principles and specific guidance related to TPPs and the ERC.

Validity of a Tax Return: The IRS refers to the test established in Beard v. Commissioner, 82 T.C. 766, 777 (1984), aff’d per curiam, 793 F.2d 139 (6th Cir. 1986), to determine if a return is valid. The Beard test requires that:
- Sufficient data be supplied to calculate tax liability.
- The document purport to be a return.
- There be an honest and reasonable attempt to satisfy the requirements of the tax law.
- The return be executed under penalty of perjury. A return meeting this "substantial compliance" standard commences the period of limitations on assessment under Internal Revenue Code (IRC) § 6501.
Formal Claim for Refund: The regulations under IRC § 6402 specify the requirements for filing a claim for refund. Treasury Regulation § 301.6402-2(a)(2) mandates that when a specific form is prescribed, the claim must be filed in a manner consistent with that form, its instructions, publications, or other IRS guidance. Furthermore, Treasury Regulation § 301.6402-2(b) requires the claim to provide "facts sufficient to apprise" the IRS of the basis for the claim.
Informal Claim for Refund: The IRS cites United States v. Kales, 314 U.S. 186, 194 (1941), which outlines the requirements for an informal claim. An informal claim is a timely filed refund request that satisfies the essential informational requirements but may lack formal requirements. It must have a written component, sufficiently notify the IRS that a refund is sought, and focus the IRS’s attention on the merits of the claim.
Protective Claim for Refund: The analysis of protective claims references AmBase v. United States, 731 F.3d 109, 118 (2d Cir. 2013), and United States v. Kales, 314 U.S. 186, 196 (1941). Protective claims are filed to preserve a taxpayer’s right to a refund contingent on future events that may not be ascertainable before the statute of limitations expires, often involving pending litigation or expected changes in the law where the exact amount of the claim is uncertain.
Third-Party Payers and the ERC: The memorandum acknowledges that IRC § 2301(l)(3) and (2) of the CARES Act, as amended, directed the IRS to issue guidance regarding the application of the ERC to TPPs. The IRS complied with this through Notice 2021-20, which, in Q&A #62, specifically addressed ERC claims for employers using TPPs. This guidance states that for both Certified Professional Employer Organizations (CPEOs) and section 3504 agents (who are already required to file Schedule R with Form 941), the ERC claim for each client must be reported on Schedule R (Form 941). For other TPP aggregate filers who do not typically file Schedule R, the notice and the Instructions for Form 941 mandate that they must also attach a Schedule R (Form 941) to their aggregate Form 941 when claiming the ERC for their clients, allocating the credit to each client. The Instructions for Form 941-X reiterate this requirement for TPP aggregate filers claiming the ERC on amended returns.

Application of the Law to the Facts

The IRS applies these legal principles to the scenario of aggregate Form 941 and Form 941-X filings by TPPs that lack an attached Schedule R (Form 941).

Validity of a Tax Return: The IRS concludes that an aggregate Form 941 or Form 941-X submitted by a TPP without Schedule R fails the data sufficiency requirement of the Beard test. Without Schedule R, the IRS has no way of knowing that the return is an aggregate return or to which client(s) the reported taxes and payments should be allocated. This omission prevents the IRS from calculating the tax liability for each of the TPP’s clients. Consequently, the aggregate return without Schedule R is not considered a valid return for the TPP’s clients for purposes of commencing the period of limitations on assessment under IRC § 6501. This position aligns with the IRS’s prior determinations regarding aggregate employment tax returns filed without allocation schedules.
Formal Claim for Refund: The IRS determines that an aggregate Form 941-X submitted by a TPP without Schedule R is not a valid formal claim for refund. Form 941-X is the prescribed form for claiming refunds of overpaid employment taxes, including those resulting from the ERC. Treasury Regulation § 301.6402-2(a)(2) requires adherence to the form and its instructions. The Instructions for Form 941-X explicitly require TPP aggregate filers claiming the ERC for their clients to attach Schedule R (Form 941). The absence of Schedule R also violates Treasury Regulation § 301.6402-2(b) because the claim lacks sufficient facts to apprise the IRS of the basis for the refund for each specific client. The Schedule R is the only document that identifies the TPP’s clients and the amount of the ERC claimed on their behalf. Without this information, the IRS cannot adequately assess the validity of each client’s claim.
Informal Claim for Refund: The IRS concludes that an aggregate Form 941-X submitted without Schedule R does not constitute a valid informal claim for refund. While the Form 941-X itself is a written document and indicates that a refund is sought, it fails the "merits of the claim" requirement outlined in Kales. Without Schedule R, the Form 941-X lacks sufficient information regarding the basis for the refund for each client, preventing the IRS from focusing its attention on the merits of each individual employer’s ERC eligibility. The IRS cannot determine which taxpayers are claiming a refund without the client-specific allocation provided by Schedule R.
Protective Claim for Refund: The IRS finds that an aggregate Form 941-X submitted without Schedule R is not a valid protective claim for refund. Protective claims are intended for situations where a refund is contingent on uncertain future events. The mere submission of a Form 941-X without the required Schedule R and without any additional explanation does not meet this criterion. Furthermore, even if additional justification were provided, the lack of Schedule R would prevent the IRS from knowing which of the TPP’s clients the protective claim was intended to cover, failing to comply with Treasury Regulation § 301.6402-2 and the form instructions.

Conclusions

Based on its analysis, the IRS arrives at the following conclusions regarding aggregate Form 941 and Form 941-X filings by TPPs claiming the ERC on behalf of their common law employer clients when Schedule R (Form 941) is not attached:

An aggregate Form 941 or Form 941-X submitted by a TPP under the TPP’s own EIN to claim the ERC on behalf of its common law employer clients is not a valid return for the clients if the TPP fails to attach a Schedule R (Form 941). This applies to both original and amended returns.
An aggregate Form 941-X submitted by a TPP under the TPP’s own EIN to claim the ERC on behalf of its common law employer clients is not a valid formal claim for refund for the TPP’s clients if the TPP fails to attach a Schedule R (Form 941).
An aggregate Form 941-X submitted by a TPP under the TPP’s own EIN to claim the ERC on behalf of its common law employer clients is not an informal claim for refund for the TPP’s clients if the TPP fails to attach a Schedule R (Form 941).
An aggregate Form 941-X submitted by a TPP under the TPP’s own EIN to claim the ERC on behalf of its common law employer clients is not a valid protective claim for refund for the TPP’s clients if the TPP fails to attach a Schedule R (Form 941).

Implications for CPAs

This recent IRS guidance retroactively underscores the critical requirement for Third-Party Payers (TPPs) to have included Schedule R (Form 941) when filing aggregate Form 941 or Form 941-X to claim the Employee Retention Credit (ERC) on behalf of their clients. The challenge now lies in the past tense, as the statute of limitations for filing the majority of ERC claims has generally expired.

According to the IRS, the absence of this schedule renders the return invalid for the clients, and any related refund claims are not considered valid formal, informal, or protective claims. The IRS's clear stance underscores the agency's view that Schedule R is not simply a procedural requirement but a necessary component for the IRS to accurately identify the taxpayers and assess the validity of each individual ERC claim within an aggregate filing.

Prepared with assistance from NotebookLM.

The text of the PMTA may be accessed via this link: PMTA 2025-001.