Failure to Deposit Tax Penalty

Uncle Sam Bank to Deposit Taxes

When the Failure to Deposit Penalty Applies

The IRS asserts the failure to deposit penalty if the taxpayer does not deposit the correct amount of tax by the prescribed time and in the required manner. The obligation to deposit taxes is ongoing and continues so long as the taxpayer is incurring the tax liability that requires deposits.

Relief from Failure to Deposit Penalties

The IRS will abate the failure to deposit penalty if it can be shown that the failure was due to reasonable cause and not willful neglect. Taxpayers who withhold taxes (e.g. employment taxes) are required to file returns that report their liability, categorize the liability (e.g. FICA, Social Security), and indicate the dates during which the tax liability accrued. If a taxpayer who withholds taxes does not exceed a certain threshold then the taxpayer may leave the dates the liability incurred from the return.

Types of Filers required to Deposit Tax

Generally, only taxpayers who file Forms 941-943, 944, 940, 945, 720, 1042, and CT-1 must deposit taxes with an authorized depositary when a certain threshold is met. It should be noted that Form 720 filers are only liable for deposits of certain excise taxes.

Authorized Depositary

The Federal Tax Deposit system requires taxpayers to deposit taxes with an authorized financial institution. Taxpayers may contact their area Federal Reserve Bank to get a listing of local authorized financial institutions, or call the IRS Business & Specialty Tax Line at1-800-829-4933.

If a depositor can establish that they mailed the deposit from the United States at least two days before its due date, the IRS will normally abate the penalty.

Electronic Funds Transfers (“EFT”)

Taxpayers who meet certain thresholds must electronically deposit funds with the U.S. Treasury. Once a determination is made that the taxpayer is required to deposit funds electronically, the taxpayer must pay all taxes electronically and can no longer use coupons or other means to deposit tax.

Depositing at an Authorized Depositary

Taxpayers who are not required to electronically transfer their funds may deliver their deposits to an authorized depositary using a payment coupon. Deposits made using cash, a postal money order, treasury bill, certified or cashier’s check, or a check or draft drawn on and to the order of the depositary are considered immediate credit on the date that the deposit is remitted to the depositary.

Failure to Deposit Tax Penalty Rate

The penalty rates for failing to deposit are:

2% for deposits 1-5 days later

5% for deposits 6-15 days late

10% for deposits more than 15 days late

15% for all amounts still unpaid 10 days after the first notice sent by the IRS asking for the tax that is due.

Deposit Due Dates

Treasury regulations provide that deposits are due on or before the due date. If the due date falls on a weekend, District of Columbia holiday, or bank holiday in a particular state, then the due date is the next available banking day. Any depositor required to make payments using the EFT system will be assessed a 10% penalty if they do not use the EFT system.

De Minimis Exception

Taxpayers must usually deposit employment taxes by using either the monthly or semi-weekly deposit schedule. However, if the amount of tax due is below a certain threshold (presently $2,500) then the taxpayer can make the payment with their return.

Lookback Periods for Employment Taxes

An employer either needs to deposit monthly or semi-weekly based upon an annual determination of employment taxes reported during their lookback period. For Form 941, the lookback period is the twelve month period preceding June 30th. For example, the lookback period for calendar year 2008 is the period from July 1, 2006 to June 30, 2007.

Monthly Depositors

If the employer reported employment taxes of $50,000 or less, then the employer is a monthly depositor. When an employer is a monthly depositor it generally needs to deposit the taxes by the 15th day of the month following the month when the liability accrued.

Semi-weekly Depositors

If the employer was required to withhold taxes in excess of $50,000 during the lookback period, then the employer must make semi-weekly deposits. If the deposit date for a pay day is Wednesday, Thursday, or Friday, then the employer must make a deposit by the following Wednesday. A deposit date of Saturday, Sunday, Monday, or Tuesday, must be made by the following Friday.

$100,000 One Day Rule

For Depositors who must make a deposit of 100k or more on Forms 941, 943, 944, 945, and CT-1, the deposit must be made in time to settle the next business day. A monthly depositor who is subject to a tax liability $100,000 or more becomes a semi-weekly depositor for the remainder of the current and following calendar year.

Non-Payroll Taxes for Form 945

A taxpayer files Form 945 to report income tax that has been withheld from non-payroll items such as Forms 1099 and W-2G. The Form 945 deposit requirements are determined by using the lookback period. The lookback period is the second year preceding the current calendar year. For example, in 2009 the lookback period is 2007.

Administrative Errors and Adjustments for Form 945

An adjustment to Form 945 will be made on Form 945-X. However, Form 941c will be accepted for errors discovered before January 1, 2009.

Form 943

This form is used to report social security, Medicare, and income taxes that are withheld for agricultural employees. Form 943 uses a lookback period of the second year preceding the current calendar year.

Form 940

This form is used to report Federal Unemployment Taxes (FUTA). If the tax liability at the end of the first, second, or third quarter is $500 or less, the liability is carried over to the next quarter. If the quarterly liability exceeds $500, the tax must be deposited by the last day of the next month.

Form 720

This Form, Quarterly Federal Excise Tax Return, contains three parts. Part I reports taxes that are subject to deposit requirements. Part II reports taxes that are not subject to deposit requirements, and part III computes the balance due or overpayment. The Form 720 filing requirement applies separately to each tax listed on the return.

In general, Form 720 must be filed by the last day of the second month following the end of the calendar quarter. An extension of time to file does not extend the date for making deposits, or tax payments.

Required Deposits for Form 720

The amount the taxpayer is generally required to deposit must be 95% of the amount of the net tax liability for that period, unless the de minimis or a safe harbor rule applies.

De Minimis Exception to Deposit Requirements for Form 720

Deposits are not required if the net tax liability on part I of Form 720 does not exceed $2,500. To calculate the $2,500 threshold the taxpayer can generally exclude taxes reported on a one-time filing basis as they are typically not subject to deposit requirements.

Safe Harbor Rule for Form 720

Persons who filed Form 720 for the lookback quarter (the 2nd quarter preceding the current quarter) may use the 1/6 rule. This rule provides that the deposit for the current quarter must be 1/6th of the net tax liability of the lookback quarter for the same class of tax. Any underpayment must be paid on the return due date without regards to an extension.

If there is a tax rate increase for the current quarter, then the 1/6^th rule does not apply. Furthermore, a taxpayer cannot use the safe harbor if tax was not imposed throughout the look-back quarter.

Current Liability Safe Harbor (95 percent rule) for Form 720

To satisfy the 95% rule, the taxpayer must deposit at least 95% of the net liability for the class of tax for the semi-monthly period. Any underpayment must be made by the return due date without regards to an extension.

Special Rules for Deposits in September for Form 720

An additional deposit is required in September for each class of tax.

Alternative Method for Form 720

When utilizing the alternative method taxes charged (that is, included in amounts billed or tickets sold) during the initial semimonthly period in September, independent deposits are required for the taxes charged during the period September 1st to 11th (1st to 10th for non-EFTPS depositors) and the period 12 to 15.

What Taxes the Alternative Method Rule Applies to

The alternative method rule only applies to the local telephone and teletypewriter exchange service tax (IRS No.22), the transportation of persons by air tax (IRS No. 26), use of international air travel facilities tax (IRS No. 27), and transportation of property by air tax (IRS No.28).

Special Safe Harbor Rules for Form 720

The 1/6 rule doesn't apply to the third calendar quarter, unless the deposit from September 16th to 26th (16th to 25th for non-EFTPS depositors) is greater than or equal to 11/90 (10/90 for none-EFTPS depositors) of the net tax liability reported throughout the lookback quarter. Furthermore, the total deposit of taxes during the second semimonthly period in September cannot be less than 1/6 of the net tax liability reported for the same class of tax from the lookback quarter.

The 95 percent rule doesn't apply for the third calendar quarter unless the tax deposit from September 16th to 26th (16th to 25th for non-EFTPS depositors) is greater than or equal to 69.67 (63.33 percent for non-EFTPS depositors) of the net tax liability for the same tax class for the second semi-monthly period in September. Furthermore, the total tax deposits for the second semi-monthly period in September cannot be less than 95 percent of the net tax liability for that tax class for the semi-monthly period.

Alternative Method Form 720

The 1/6 rule doesn't apply to the fourth calendar quarter unless the deposit for alternative method taxes charged during the period September 1st to 11th (1st to 10th for non-EFTPS depositors) is greater than or equal to 11/90 (10/90 for non-EFTPS depositors) of the net tax liability reported for alternative method taxes during the lookback quarter. Secondly, the total deposit for alternative method taxes charged during the first semimonthly period in September cannot be less than 1/6 of the net tax liability reported for alternative method taxes during the lookback quarter.

The 95 percent rule doesn't apply for the fourth calendar quarter unless the deposit for alternative method taxes charged during the period September 1st to 11th (1st to 10th for non-EFTPS depositors) is greater than or equal to 69.67 percent (63.33 percent for non-EFTPS depositors) of the alternative method taxes charged during the first semimonthly period in September. This must also not be less than 95 percent of the alternative method taxes charged during that semimonthly period.

Requirement to Deposit at an Authorized Depository

If the taxpayer timely pays the correct amount, but the deposit is not made at an authorized depository as required, the ten percent penalty applies. Furthermore, if the taxpayer fails to use an authorized depository and was relying on either the 1/6 or 95 percent rule, the safe harbor rules do not apply for the entire quarter.

Form 1042

Form 1042, Annual Withhold Tax Return for U.S. Source Income of Foreign Persons, is for the purpose of reporting and paying tax due from income derived from sources within the United States. This form is filed by a withholding agent who receives, controls, has custody or disposes of, or pays income from sources within the United States.

Extension of Time to File Form 1042

In order to receive an extension of time to file Form 1042, a taxpayer must file Form 2758. Filing Form 2758 provides the taxpayer with an extension of time to file, but not an extension of time to pay.

If the taxes at the end of a month are $200 or more, but less than $2000, the deposits must be made by the 15th day of the following month. If the amount of undeposited taxes after a quarterly monthly period are $2,000 or more, then the deposits are required to be made within three (3) banking days after the quarterly-monthly period.

Deficiency Procedures for Form 1042

The statutory notice of deficiency procedures will apply to a Federal tax deposit penalty as well as any underpayment of tax. There does not need to be an underpayment of tax for the statutory notice of deficiency procedures to apply.

Deposit Requirements for Form 1042

For the purposes of making deposits for Form 1042, a taxpayer must divide each month into four periods. These periods must end on the 7th, 15th, 22nd, and last day of the month. These periods are called quarter-monthly periods. These quarter-monthly periods and the totals for each month are labeled 1 through 60 on the tax return. The taxpayer must list the tax liability in each quarter-monthly period if the yearly tax is at least $200. Exceptions may apply due to foreign tax treaties.

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Page last revised : February 05, 2012