How to Reduce Your Payroll Tax Deposit Penalties

I’ll bet every tax “expert” from every tax resolution company around the country tells you about removing the penalties from your tax debt by submitting a Reasonable Cause Abatement request in writing. They’re right, an Abatement request could reduce your tax debt significantly. M&M works diligently to request the abatement of our client’s penalties. But we aren’t satisfied with just requesting the removal of penalties. At M&M, we look for other ways to reduce our client’s tax debts.

IRS Penalty Abatement AND Reduction

If you owe payroll taxes, you may be able to reduce the Federal Tax Deposit (FTD) penalty the IRS has charged your business for making your EFTPS deposits late. Under the authority of the Internal Revenue Code, a you may designate deposits within a 941 reporting period to specific deposit due dates. By designating your tax deposits correctly, you may significantly reduce the penalty charged to your account by the IRS.

The idea behind designating tax deposits to reduce penalties is difficult to explain, but I’ll give it my best shot. First, you need to know the penalties that the IRS charges you for making your employment tax deposits late.

FTD Penalty

2% - Deposits made 1 to 5 days late
5% - Deposits made 6 to 15 days late
10% - Deposits made 16 days or more late
10% - Deposits made to an unauthorized financial institution or payment made directly to IRS or payments made with tax return
10% - Amounts subject to electronic deposit requirements but not made using EFTPS
15% - Amounts still unpaid more than 10 days after the date of the first IRS notice asking for the tax due OR the day on which you receive notice and demand for immediate payment, whichever is earlier.

The second item to know is whether you are a Monthly tax depositor or a Semiweekly depositor. The IRS determines an employer’s deposit schedule based on its lookback period. Under the monthly deposit schedule, employers deposit tax for payroll made during a calendar month on the 15th day of the following month. The Semiweekly schedule is as follows.

Deposit Period (Payroll Payment Days) Deposit No Later Than

Wed, Thu and/or Fri The Following Wed
Sat, Sun, Mon and/or Tue The Following Fri

See IRS Notice 931 for more information.

Use Federal Tax Deposit Designation to Get Penalty Relief

Here is a simple way to look at the benefit of FTD designation. Let’s say that M&M is assisting ABCompany, a Monthly depositor. The business owner just received IRS Letter CP134B stating that Deposit Penalties have been assessed on the 941 1st quarter. As a Monthly depositor, the business 1st Q FTDs are due 2/15, 3/15 and 4/15. If ABCompany made FTDs as follows, M&M would designate them in an effort to reduce the FTD penalty.

January FTD due February 15th

ABCompany made FTD of $1,000 on March 5th, 18 days late, 10% penalty of $100
M&M requests to designate this deposit to the March 15th deposit date, resulting in zero penalty

February FTD due March 15th

ABCompany made FTD of $1,000 on March 31st, 16 days late, 10% penalty of $100
M&M requests to designate this deposit to the April 15th deposit date, resulting in zero penalty

March FTD due April 15th

ABCompany made FTD of $1,000 on May 1st, 16 days late, 10% penalty of $100
M&M requests to designate this deposit to the February 15th deposit date, resulting in 10% penalty of $100

In the scenario above, the IRS has charged ABCompany $300 in FTD penalties. Designating the FTDs would result in a $200 reduction of the penalty, lowering it to $100.

Be aware that law allows taxpayers 90 days from the date of the first penalty notice to contact the IRS and designate the deposits within a tax quarter. That means you have a very limited amount of time to request the designation of your tax deposits.

Please also remember that according to the IRS schedule of FTD penalties listed above, penalty “amounts still unpaid more than 10 days after the date of the first IRS notice asking for the tax due OR the day on which you receive notice and demand for immediate payment, whichever is earlier” increase to 15%. This means that the example above may end up saving ABCompany even more than $200, depending on how quickly it pays back the 941 1st Q tax liability. Left unpaid each 10% FTD penalty could jump up to 15%.

M&M's Tax Resolution System

M&M’s Tax Resolution System assures our client’s recent transcripts and IRS 134B Notices are checked for possible FTD designation savings. We can’t speak for our competitor’s practices regarding FTD designation or whether they even know about it. Give M&M a call today at 866-487-5624. We’ll tell you how we can fix your tax problem. You choose if we’re the right fit for you and your business.