June 28, 1999
Employers May Qualify for Penalty Reduction
WASHINGTON - Some businesses penalized for failing to make timely
employment tax deposits during the first quarter of 1999 may be able to lower their
penalties because of tax law changes that apply to federal tax deposits due after
January 18, 1999.
Although the Internal Revenue Service intended to advise taxpayers of these
relief provisions when it sent the penalty notices, it inadvertently omitted the
explanations. The IRS will write to these taxpayers, apologizing for the omission and
telling them about the new relief features. It will also include the relief information with
future penalty notices. Eligible taxpayers, who would have received the penalty notices
in late May or early June, may get the penalty relief by calling the IRS at the number
listed on the notice.
One relief provision allows taxpayers to designate the period to which a specific
deposit applies, rather than having deposits applied against tax liabilities in the order
they were due. This can prevent the “cascading” of penalties, which occurs when a
deposit is less than the amount due and a portion of the next deposit is applied against
the earlier shortfall. This results in a second penalty, for the new deposit shortfall.
For example, a taxpayer who should deposit $3,000 each month but deposits
only $2,000 for the first month of the quarter would incur a penalty ranging from two to
15 percent, depending on the lateness of the deposit. If the taxpayer next deposits
$3,000 the following month, $1,000 is applied against the previous month’s shortfall,
leaving the second month’s deposit short by $1,000, again incurring a penalty.
The tax law now gives the taxpayer 90 days from the date of the penalty notice
to contact the IRS and designate the periods against which the deposits apply. In the
above example, by designating that the second month’s deposit applies to that month’s
liability, the taxpayer incurs only the one penalty for the first month’s shortfall.
In light of its omission of this relief information from the recent penalty notices,
the IRS will give affected taxpayers 90 days from the date of the apology letter it sends
them to call and make a deposit designation, rather than 90 days from the notice’s
The other penalty relief provision is for employers who are required to change
the frequency of their deposits. These taxpayers may get a penalty waiver for the first
deposit due under the new schedule, provided they filed the applicable employment tax
return on time and had a net worth under $2 million ($7 million, in the case of a
For example, an employer depositing monthly moves to the semiweekly
schedule in 1999 if the employment tax liabilities during the 1997 to 1998 lookback
period exceeded $50,000. If the first 1999 payday was Friday, Jan. 15, the tax deposit
would have been due on the following Wednesday, Jan. 20, rather than in February. If
the taxpayer filed the applicable return on time and met the net worth limit, the IRS
would waive any late deposit penalty for Jan. 20. All the taxpayer has to do is contact
the IRS and request the waiver.
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