900 N. Kings Highway, Cherry Hill, New Jersey 08034
856.667.4100 ·
215.563.0276 ·
Fax: 856.667.3652
|
|
Business Tip |
The IRS issues thousands of erroneous payroll tax penalties.
There are about eleven million small businesses
in the U.S., and the IRS will be sending over three million of them penalty notices this year. The penalties will
be for the late payment of payroll taxes. Because of the method the IRS uses to assign payments to deposits due,
many of the penalty notices are in error. A change in the law now allows the taxpayer to allocate deposits to his
or her best advantage.
The amount of the penalty is determined by the number of days the deposit is late. If a deposit is 1 to 5 days
late, a 2% penalty is applied. If the deposit is 6 to 15 days late, the penalty is 5%, and for more than 15 days
late, the penalty is 10%.
Here is an example of what happens. Let's say that you have deposits due April 15, May 15, and June 15 and that
you failed to make the April deposit but made the other two on time. The maximum penalty should be 10% of the April
deposit. But the IRS will use the first-in, first-out (FIFO) method and apply the May deposit to the April balance
due, and then the June payment to the May balance. Since every deposit date appears to have been missed, you will
receive a 10% penalty for each of the three months. You should be penalized for April only since the other two
deposits were made on time.
The IRS reform legislation amended the Internal Revenue Code to allow the taxpayer 90 days from the date of the
penalty notice to respond. The taxpayer can allocate the payments as he or she sees appropriate. So, in our example
above, only April would get the 10% penalty.
In addition to being able to allocate which deposit dates your payments apply to, there are special safe harbor
rules which you may be able to use to your advantage. There are many possible combinations of payment allocations
under which you may be able to reduce the penalty as originally issued by the IRS.
Please contact us, we will be happy
to assist you with all your tax matters, including responding to IRS notices. We are here to see that you pay no
more tax than the law requires.
