IRS rolling back penalties on some employers who didn’t deposit enough taxes

The Internal Revenue Service plans to correct penalties mistakenly levied on employers who reduced their tax deposits because they expected to claim some of the new tax credits to which they’re entitled under the Families First Coronavirus Response Act and the CARES Act this year.

The IRS said Friday that some employers may have received a notice warning them they would be subject to penalties for not depositing the proper amount of taxes with their quarterly Form 941 filings. However, the IRS admitted that some employers may have intentionally reduced their tax deposits in anticipation of claiming the sick and family leave credits, or employee retention credit under the recent coronavirus relief packages, which Congress passed to provide more money to businesses and individuals dealing with the economic fallout of the COVID-19 crisis.

“The IRS is aware that a small population of employers that reduced their tax deposits in anticipation of claiming the sick and family leave credits, or employee retention credit, may have received a notice stating there was a failure to deposit penalty applicable to the Form 941 on which the credits were claimed,” said the IRS. “Under Notice 2020-22, employers claiming the new tax credits may reduce their deposits throughout the tax period up to the amount of the credit. However, in reporting the schedule of liabilities on Form 941, the reported liabilities did not match the reduction in deposits for every pay date. In these situations, they incurred a failure to deposit penalty on the difference in the reported liabilities and the reduced deposits (in situations where deposits were reduced by the amount of the anticipated credit(s) in excess of liability for the employer portion of social security for a given pay date).”

The IRS said it has taken steps to implement rules to prevent the failure to deposit penalty from kicking in for employers who reduced their deposits in expectation of claiming the new tax credits, but nevertheless it’s become aware that some employers may still have inadvertently received notice of the penalty. The IRS said it’s taking actions to identify those employer accounts and correct them as soon as possible. Employers that have recently received such notices don’t need to take additional actions at this time, according to the IRS, but to avoid future receipts of these notices, check IRS.gov/form941 for future guidance on reporting liabilities when reducing deposits.

Last Friday, the IRS also reversed course on balance due notices, saying it would stop mailing them out to taxpayers until it catches up with the backlog of mail that has been building up outside its facilities since the start of the pandemic (see story). Taxpayers who have sent in their tax payments by check to the IRS have complained that they have been receiving the notices despite paying their taxes. IRS employees across the country were forced by the pandemic to work remotely in the middle of tax season, but many of them have been returning to the offices to deal with the backlog of millions of pieces of mail.

Andrew Harrer/Bloomberg