The IRS informed employers about erroneously sending a failure-to-deposit (FTD) penalty notices. The notice was sent to employers who reduced their employment tax deposits on the Employer’s Quarterly Federal Tax Return (Form 941). Most of these employers anticipated claiming sick and family leave credits under the Families First Coronavirus Response Act (FFCRA) or the employee retention credit (ERC) under the Coronavirus Aid, Relief and Economic Securities (CARES) Act.

Both the CARES and FFCRA Act were passed by Congress in March. Both Acts are to offer relief for employees and employers affected by the coronavirus pandemic. The Act provides for paid sick and expanded family and medical in addition to an ERC. After that, the IRS issued Notice 2020-22 so as to handle adequately, relief from late deposit penalties for employment tax deposits decreased in anticipation of one of the employer social security tax credits.

Rules Of Deposit

Employers are mandated to deposit federal employment taxes in accordance with time periods mentioned under Treas Reg 31.6302-1 and 31.6302-2. All of these regulations place employers on a monthly or semi-weekly deposit schedules depending on the amount of employer’s employment tax deposits. However, when an employer has $100,000 or more employment taxes, they are mandated to use next-day deposits. Any delay in tax payments will warrant FTD penalties in accordance with section 6656.

The FTD penalty rate is dependent on the lateness of the deposit.

• • Deposits that are 5 days late incur a 2% penalty
• • Deposits that are 15 days late incur a 5% penalty
• • Deposits that are more than 15 days late incur a 10% penalty

According to Section 6656, penalties can be avoided should the employer gives a reasonable cause.

Error In IRS Notices

The announcement by the IRS mentions that it noticed a small number of employers took advantage of the CARES and FFCRA Act by decreasing employment tax deposits on Form 941, thus leading to the employers receiving notices of imposing FTD penalties. The IRS further explained that the reason for the error relates to specific differences between the liabilities in the Schedule B to Form 941 and the actual deposits made. Mind you, liabilities mentioned in Schedule B are not reduced so as to show the credits. This means employers claiming the credits will report liabilities over deposits.

Even though the IRS made plans to implement rules that will prevent any false penalty notices, the IRS programming error happens in situations were deposits are reduced by amounts in excess of the liability for the employer portion of social security in regards to a specific payment date. The IRS has not specified which notice number will be issued, but there is a strong chance that it will be a Notice CP161.

The IRS has announced that it is taking swift action in rectifying the erroneous notices with immediate effect.

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