Strategy for minimizing late deposit penalties, avoiding IRS trap

Strategy for minimizing late deposit penalties

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.

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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
$100.00 2/1/2016 2/25/2016 24 10% $10.00
$100.00 2/25/2016 3/15/2016 19 10% $10.00
$100.00 3/15/2016 3/20/2016 5 2% $2.00
  Total penalty $22.00

 

Deposits designated to specific liabilites
Amount Deposit due date Deposit date Days late Penalty rate Penalty
$100.00 2/1/2016 3/20/2016 48 10% $10.00
$100.00 2/25/2016 2/25/2016 0 0% $ -
$100.00 3/15/2016 3/15/2016 0 0% $ -
  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.

KPMG observation

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 | dcossaart@kpmg.com

Rhonda Gibson | +1 (336) 433-7122 | rkgibson@kpmg.com

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