Reduction of Payroll Tax Penalties

Imagine this. You are a business making weekly payroll tax deposits of $10,000 per week. You have deposited $520,000 for the year. You were late on the first deposit. This makes all deposits late because the second payment you thought you were making is actually the first payment the IRS the records. A 10% penalty is assessed on each and every payment your make. This is called a cascading effect or a cascading penalty. The penalty is 10% on $520,000 or $52,000.

You have the right to call the IRS and move payments. If you move the first payment the IRS received to week 2 from week 1, then all 51 payments are now on time. The first payment is 51 weeks late, but who cares. The penalty is 10% on $10,000 or $1,000. This is a huge difference.

Reasonable Cause
Reasonable cause means the employer was unable to pay the tax because of circumstances beyond their control. This might be caused by a death in the family, a serious illness of the employer or a family member, an unavoidable trip near the time the taxes were due, or an interruption of business due to fire, accidental loss of records or natural disaster. A letter requesting abatement should include a description of the problem, how the problem prevented the employer from sending the taxes, any unsuccessful attempts the employer made to comply and how timely they acted to comply.

Statutory Exceptions and Administrative Waivers
If there is a sudden or dramatic change in the law or retroactive changes governing calculating or depositing payroll taxes or confusion over laws, or compliance with, a new provision. The request letter should clearly state how the change caused the problems. The employer should explain what they did to gain an understanding or how they attempted to comply in good faith. The IRS may grant an administrative waiver to an employer who requests one if the service recognizes that retroactive changes or new legislation or delays in sending forms to employers or failure by the IRS to provide timely guidance created the confusion. In this case, simply stating that the problem was caused by the change, new regulation or delay may be enough to have the penalty waived.

Correction of Service Errors
If the IRS gives you incorrect or incomplete written or oral guidance, or if the employer relied on bad advice from a tax professional, write a letter stating the advice and how that advice caused the inability to comply.