2. Five most common reasons for
failure to deposit penalty
1 2 3
Taxpayer fails to make Taxpayer makes Taxpayer pays with
deposits by the due deposits to an the return when
dates. unauthorized required to make
institution. deposits.
4 5
Taxpayer fails to properly Taxpayer pays directly to the
disclose a record of federal tax IRS with a check when required
liability (ROFTL), such as Form to deposit taxes electronically
941, Schedule B. using Electronic Federal Tax
Payment System (EFTPS)
3. How much is the penalty?
Penalty percentage depends on when the
failure is corrected:
► 2% for deposits 1-5 days late
► 5% for deposits 6-15 days late
► 10% for deposits more than 15 days late
► 15% if the failure isn’t corrected on or before the earlier
of:
→ 10 days after the date of the first IRS delinquency
notice or
→ The day on which notice and demand for immediate
payment is given under a jeopardy assessment
4. What are ways to get the penalty
reduced or removed?
Defense 3:
Defense 1: Defense 2: Defense 4:
First-time
Application of Statutory Reasonable
penalty
deposits waiver cause
abatement
Client can designate The IRS can waive the The IRS can remove the The IRS can remove the
deposits or change penalty if your client penalty based on your penalty based on your
prior designations to meets certain tests. client’s clean client’s facts and
periods that are compliance history (no circumstances.
more beneficial. penalties added to or
removed from your
client’s account for the
past three years).
5. How do I request penalty
abatement?
Call vs. Write
Advantages Most effective way to designate payments to Most effective way to request
different tax periods or to correct how the IRS penalty abatement due to
is applying payments reasonable cause
Quicker and easier to obtain penalty Allows for a paper trail of all
abatement due to first-time penalty correspondence
abatement provisions or statutory waiver relief
Other Must have Form 2848, Power of Attorney, Don’t need Form 2848, Power of
Considerations authorization to request penalty abatement on Attorney, authorization to
behalf of your client over the phone request penalty abatement
when writing to the IRS
Tip: Mail the IRS penalty
abatement letter in a
preferred IRS format.
Learn about the failure to deposit penalty imposed underIRC § 6656(a) and ways to obtain relief.
When an employer collects taxes from employees, the employer must deposit the employees’ taxes, in addition to the employer’s FICA tax contribution, on a certain timetable. The timetable dependson the amount of tax required to be paid and the tax form required to be filed (such as Form 941 or 943). The more employment taxes an employer owes, the sooner the IRS requires payment. Employers should make deposits and/or payments in accordance with one of four schedules:$100,000 next-day deposit Semiweekly deposit Monthly depositPayment with return Under IRC § 6656(a), Failure to make deposits of taxes, taxpayers are penalized for not depositing employment taxes on time, in the correct amount or in the manner required.
The applicable penalty percentage depends on when the failure is corrected. The penalty ranges from 2%-15% of the underpayment in tax. An underpayment in tax is equal to the amount of tax required to be deposited minus any amount that was deposited on time.
Once you have determined why the penalty was assessed and how the penalty was computed, evaluate penalty relief criteria. Application of deposits: Often, the IRS applies deposits that result in more penalties owed to the IRS. One way to obtain relief for your client is to designate deposits/payments to different periods. However, you must designate the tax period for each deposit within 90 days of receiving a failure to deposit penalty bill ((IRC § 6656(e)(1)(2)). Statutory waiver: The IRS has the authority, under IRC § 6656(c) and Reg. § 301.6656-1, to waive the failure to deposit penalty on employment taxes if your client meets all of the following tests:The failure to deposit taxes was inadvertent. The IRS will determine whether the failure is inadvertent based on all of the facts and circumstances. If the IRS thinks the failure was intentional, the IRS will not apply the statutory waiver.Your client meets the “net worth” requirement of IRC § 7430(c)(4)(A)(ii). Generally, an individual’s net worth can’t exceed $2 million, and a corporation’s net worth can’t exceed $7 million. The failure to deposit penalty occurs during the first quarter in which your client was required to make a federal tax deposit or the first deposit when your client’s deposit requirement changed. For example, the first time your client was required to make a deposit, your client inadvertently sent a check to the IRS rather than depositing the funds via electronic funds transfer (EFT). The employment tax return was filed on time. First-time penaltyabatement: Under the first-time penalty abatement provisions, the IRS reviews your client’s compliance history to grant penalty relief based on good behavior. IRS employees follow the procedures discussed in the Internal Revenue Manual (IRM) 20.1.1.3.6.1, First-Time Abate (FTA). To qualify for first-time penalty abatement, your client must have had no penalties added to or removed (abated) from your client’s account for the previous three years (exception for the estimated tax penalty). First-time penalty abatement is intended to help taxpayers with an isolated compliance issue. Therefore, first-time penalty abatement applies only to a single tax period. If the IRS is considering a request for penalty relief for two or more tax periods, and the earliest tax period meets the first-time penalty abatement criteria, penalty relief applies only to the earliest tax period. Your client would need to prove reasonable cause for subsequent tax periods. Reasonable cause is a test of facts and circumstances that establish that your client acted with ordinary business care and prudence (taking the degree of care a reasonably prudent person would exercise), but nevertheless was unable to comply with the law. The burden of proof is on your client, and only the IRS can decide what constitutes “reasonable cause.”
You may call or write to the IRS to request penalty abatement.Calling is typically preferred when you need to shift payments to different tax periods or you want to request penalty abatement due to first-time penalty abatement provisions or statutory waiver relief. Writing is preferred when you do not have the appropriate authorization (power of attorney) to request penalty abatement over the phone, or when you want to request penalty abatement due to reasonable cause.Note: The IRS Office of Service-wide Penalties does not advocate the use of Form 843 for penalty relief unless your client is also requesting an abatement of tax and/or interest. This is because the form was not specifically designed for straightforward, reasonable cause penalty abatements.
