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Home : Essentials of Payroll : Federal Tax Deposit Penalties
Federal Tax Deposit PenaltiesFederal Tax Deposit PenaltiesThe IRS imposes significant penalties if a business does not make its tax deposits on time, makes insufficient deposits, or does not use the EFTPS electronic filing system when it is required to do so. Its penalty structure is:
Penalties can be avoided for very small payment shortfalls. There is no penalty if a deposit of up to $5,000 is short by no more than $100, or a larger deposit is short by no more than 2 percent of the total. If a shortfall of this size occurs, a semiweekly depositor must deposit the shortfall by the earlier of the next Form 941 due date or the first Wednesday or Friday following the fifteenth day of the next month. A monthly depositor must make the deposit with its next Form 941. If an employer does not file its quarterly Form 941 in a timely manner, it will be penalized 5 percent for the amount of all net unpaid taxes shown on the return for each month during which the form is not filed. This penalty is capped at 25 percent, which essentially means that a business will be penalized for the first five months during which it does not file a Form 941.
A company that acquires another business should closely examine the acquiree's payroll remittances to ensure that all remittances have been made. By doing so, it can determine if a liability for unpaid withholdings lurks, one that might not crop up for several years, when federal or state auditors file claims that may include stiff penalties and interest charges. (Note: This is an issue only if the acquiring entity purchases the other business as a going concern, since it takes on all liabilities of the acquired entity. A purchase of business assets will not present this problem.) A potential flag for remittance problems is that an acquiree does all of its own remittance filings, rather than using the services of a payroll provider. In this case, there is a greater risk that remittances were sporadically made or never made. Anyone conducting a due diligence review of such a company should establish that every remittance was made in sequence, that cashed checks verify the transfer of funds to the government, and that the amounts paid match the amounts calculated as due and payable in the payroll register.
Example. The Red Herring Fish Company's controller forgets to file a quarterly Form 941, which would have shown a net tax due of $2,200. Upon discovering the error 10 months later and filing the return, the IRS penalizes the firm for five percent of the $2,200 due, multiplied by five months, which is a 25 percent penalty, or $550. It is possible to convince the IRS to mitigate or eliminate these penalties if reasonable cause is proven. However, given the size of the potential penalties, it is best to make the proper remittance of tax deposits a high priority by the payroll staff. 553
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