TAP F04-061

Payroll Taxes Deposit Penalties

Statement of Issue:

How can the IRS improve deposit compliance while making the deposit penalty rules and procedures less complicated for small businesses and the self-employed?

Proposal:

The Committee recommended a three-part approach:

Education:

1. Publicize more widely the Federal Tax Deposit Penalty Refund Offer. This information should include telephone numbers. Local IRS centers should also train personnel to work with business owners. If the IRS expends resources to educate and promote systems such as EFTPS to reduce processing errors, the IRS will benefit because of increased compliance and reduced processing costs due to errors. The benefit to the taxpayer is less time spent and associated costs incurred with dealing with the IRS. Suggestions for increasing exposure and improving EFTPS communication include:
   • Ensure that the EFTPS website is updated and upgraded periodically.
   • Maintain a focus group, such as utilizing TAP members, to make suggestions for improving the website, including content and website instructions for less sophisticated computer users.
   • Utilize the IRS Tax Forums as a method for outreach to the practitioner communities who work with small business clients.
2. Provide better materials to small businesses and the self-employed regarding their respective tax deposit responsibilities. Currently, educational materials are not readily available to small business owners. Suggestions include:
   • When a new small business is formed and the IRS issues an Employer Tax Identification Number (EIN), the IRS should also send tax information with the new EIN. If IRS resources do not allow for direct mailings, information on how to request information on the Internet site should be included.
   • When the Small Business Administration holds classes for new business owners, the IRS should actively participate in teaching filing and deposit requirements.
   • Local IRS personnel should periodically (perhaps twice a year) offer a workshop for small business owners on reporting and compliance issues.
   • The local IRS personnel should also initiate contact with newly established businesses within their respective areas to meet with the new business owners and answer any questions and address any concerns.

While a number of the recommendations are already being implemented, others are welcome for future consideration.

Education

1. The Federal Tax Deposit Penalty Refund Offer is a new program. The Taxpayer Education and Communication organization is making every effort to increase awareness of the program among business owners by working with the tax practitioner community and providing articles for news letters issued by business, trade and professional organizations.
2. The Service is continuing to use every opportunity to market EFTPS. Information on the program, as well as the opportunity to register on the system, are included each year in the IRS Tax Forums. While IRS does not own the EFTPS website, it does have the opportunity to provide input and recommendations. With the new Taxpayer Advocacy Panel, we hope to charge one of the SB/SE Issue Committees with reviewing the website and making recommendations.
3. IRS is working with all of our stakeholders to market the learning and assistance tools that are available to small businesses. Our Partnership Outreach organization is currently working with the Customer Accounts and Services organization to assure new employers receive the information they need when they are assigned a new EIN. Unfortunately, the IRS no longer has the resources necessary to directly offer small business workshops. It currently works with other Federal agencies, the tax practitioner community and business organizations to include tax issues in their workshops. To assist these organizations, the IRS develops products and training materials that can be used for such presentations or, in the case of some products, can be obtained directly by the business owner.

Procedures

1. The redesigned Form 941 afforded the IRS the opportunity to rewrite the instructions for payroll tax reporting. These instructions will be published in conjunction with the new form.
2. It is our expectation to obtain comments on new products from the TAP before the products are finalized, or if we are unable to do so, to capture the TAP’s thinking/comments for the next version of the product.

Legislative Proposals

1. Because the Federal government operates on a pay-as-you-go basis, to the extent that adequate funding is not available, the government must pay interest for the use of funds to support its operations. It is considered unlikely that the Congress would alleviate the interest charged for the delayed payment of funds due the government. However, it is within the IRS’ discretion to abate penalties for late deposits, and it does so on a regular basis when the taxpayer presents reasonable cause for a delayed deposit.
2. The multiplicity of deposit penalties is a reflection of the government’s desire to accommodate the interests of taxpayers and the need to assure payment compliance.
   • For example, the reason there are different penalty rates based on the number of days the deposit is late, is to recognize the difference between taxpayers who may un-intentionally have made a deposit late and quickly addressed the situation (2%), those who may have encountered a problem and those who demonstrate little effort to pay the taxes timely and fail to pay the taxes promptly upon demand (10%). As has been recognized, payroll taxes are a fiduciary responsibility of the employer and there is a strong belief that employers should be held accountable for meeting their tax responsibilities and penalized when they knowingly fail to do so.
     
     The government has established the most efficient method possible for the receipt of taxes. It is in the interest of the government, and the taxpayers it serves, to receive funds it is owed in a manner that affords the full use of the funds as quickly as possible. On a large scale, delayed receipt of the funds costs the government significant interest it would otherwise earn. To avoid such losses, and the use of resources to correct the erroneous deposit of taxes, a penalty was created. It is considered unlikely that either the Administration or Congress would support a change in legislation that would minimize the importance of proper deposit procedures.
   • A higher threshold for making FUTA deposits was implemented. We believe this will substantially reduce the burden on the small business owner.