Code section 6656 provides that in the case of any failure to deposit taxes by the date prescribed, a penalty will be imposed on the amount of the underpayment. The “failure to deposit penalty” ranges from 2% to 15% of the underpayment, depending on the number of days the deposit is late.
The IRS will generally follow Rev. Proc. 90-58, which applies deposits in “date-made order against deposit liabilities in due-date order.” In theory, this approach minimizes the number of days each deposit might be considered late. However, in reality, if a taxpayer misses a single deposit early in a quarterly payroll period, but makes all succeeding deposits on a timely basis, the IRS’s method can cause timely deposits to be reallocated against an earlier unpaid liability. When this happens, the later timely deposits appear to be untimely, generating failure-to-deposit penalties on multiple liabilities—rather than on the single liability for which the deposit was missed.
Fortunately, section 6656(e) allows taxpayers who receive a failure-to-deposit penalty notice to designate deposits against specific liabilities, which can reduce failure to deposit penalties significantly.
The following example helps to illustrate this point.
|Deposit date-made order against deposit liabilities in due-date order|
|Liability amount||Deposit due date||Deposit date||Days late||Penalty rate||Penalty|
|Total penalty $22.00|
|Deposits designated to specific liabilites|
|Amount||Deposit due date||Deposit date||Days late||Penalty rate||Penalty|
|Total penalty $10.00|
It is important to note that a taxpayer that wishes to request a deposit redesignation under section 6656(e) must make such a request within 90 days of the penalty notice date. Failure to redesignate deposits may result in a taxpayer facing a substantially larger penalty amount, with a request for waiver based on reasonable cause as the only avenue for relief.
Taxpayers receiving an IRS notice assessing a failure-to-deposit penalty need to consider how to redesignate the deposits. KPMG’s Complex Interest Services group has experience in guiding taxpayers how to redesignate deposits in a taxpayer-favorable manner, and can assist with computational and refund claim preparation.
For more information, contact a tax professional with KPMG’s Complex Interest Services group:
Darren Cossaart | +1 (336) 433-7073 | firstname.lastname@example.org
Rhonda Gibson | +1 (336) 433-7122 | email@example.com
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