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Penalties And Interest For Late Deposits, Late Filing, And Late Payment

Posted by Tom Regan | Jul 05, 2010 | 0Comments

This is the fourth post in the Employment Tax Law series.  This series is dedicated to presenting individuals, sole proprietorships, and small to large businesses with a basic understanding of employment taxes, including the risks and responsibilities associated with those taxes.    

Deposit penalties occur when the taxpayer fails to make timely deposits, the timely deposits are made for less than what is owed, or the taxpayer fails to make the deposits in the proper manner (e.g. fails to use the EFTPS). For the amounts not properly or timely deposited, the applicable penalty rates are as follows:

a. 2% penalty for deposits made 1 to 5 days late.b. 5% penalty for deposits made 6 to 15 days late.c. 10% penalty for deposits made more than 15 days late. This also applies to amounts paid within 10 days of the date of the first notice the IRS sent asking for the tax due.d. 10% penalty for deposits made without a proper E.I.N.e. 10% penalty for amounts subject to electronic deposit but not made through the EFTPS.f. 15% penalty for amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due OR the day on which the taxpayer received notice and demand for immediate payment, whichever is earlier.

g. The IRS may assess an “averaged” failure to deposit penalty in cases where the taxpayer failed to report their tax liabilities. For a monthly depositor, this is the information on Line 17 of Form 941. For a semi-weekly depositor, this requires a Schedule B (Form 941).

Failure-to-file and failure-to-pay penalties mirror the penalties assessed for other late filed or unpaid federal taxes. For each whole or part month that a return is not filed, a failure-to-file penalty of 5% of the unpaid tax due with that return is assessed. The maximum penalty is generally 25% of the tax due. For each whole or part month that the tax is paid late there is a 0.5% failure-to-pay penalty. This amount is reduced to 0.25% if an Installment Agreement is in place. Like the failure-to-file, the maximum amount of this penalty is 25% of the unpaid taxes due on the return. If both penalties apply in any month, then the failure-to-file penalty is reduced by the failure-to-pay penalty. This applies only when the penalties are running concurrently.In the case of all of these penalties, the taxpayer can request to have the penalties abated, or, if provided soon enough, not assessed in the first place. To do so, the taxpayer must demonstrate to the IRS that there was reasonable cause for failing to file or pay. This explanation of the reasonable cause can be detailed in a Form 843, Claim for Refund and Request for Penalty Abatement.

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