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Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 4. Failure to Deposit Penalty

20.1.4  Failure to Deposit Penalty

20.1.4.1  (10-26-2007)
Overview and General

  1. This is a section of the penalty handbook which contains procedures for all IRS employees on the failure to deposit (FTD) penalty.

  2. The Internal Revenue Code (IRC) section 6656 provides for a FTD penalty if a taxpayer does not deposit tax in the correct amount, within the prescribed time period, and/or in the required manner.

  3. See Exhibit 20.1.4-1 for a list of the applicable forms related to the FTD penalty.

  4. The obligation to deposit employment/excise taxes is ongoing and requires that the taxpayer continue to follow the requirements as long as the taxpayer is incurring these taxes. For example, as long as an employer has employees and is issuing a payroll, that employer must deposit as required.

    1. IRC 6656provides for relief from the FTD penalty for non-compliance if the taxpayer can establish reasonable cause for the non-compliance (failure to deposit correctly). It is important to note that the penalty relief does not make a non-compliant taxpayer act compliant, but rather relieves the taxpayer of the penalty incurred for failing to deposit as required.

    2. IRC provisions for removal of the FTD penalty due to reasonable cause are expanded in Policy Statements. Other statutory and/or administrative provisions may also apply to allow penalty relief. See IRM 20.1.4.16for penalty relief provisions specific to the FTD penalty and IRM 20.1.1for general discussions of penalty relief criteria.

  5. Penalties are primarily an enforcement action and secondarily an educational tool. As such, the assertion or the removal of penalties is not to be taken lightly. There should be no assumption that penalty assessments have been made because of Service error or that penalties should be removed just because the taxpayer asked.

20.1.4.1.1  (10-26-2007)
Criteria for Reporting Tax and ROFT Information

  1. Taxpayers who withhold taxes (e.g., employment tax liabilities) are required to file returns that:

    1. report their tax liability,

    2. categorize their tax liability (FICA, FITP, etc.), and

    3. indicate the date during the return period on which each liability was incurred. However, taxpayers whose total liability is below the deposit threshold are not required to indicate the date each liability was incurred. In fact, the form instructions specifically instruct these taxpayers to leave the summary of federal tax liability blank.

  2. In addition to reporting the total tax liability incurred within the tax return period, the taxpayer must provide a valid periodic breakdown of its tax liability. This periodic breakdown is generally referred to as the Record of Federal Tax Liability (ROFT). This liability information is requested in various formats on the different employment tax returns. For example, a monthly schedule Form 941 depositor reports its monthly liability amounts on page 2 of Form 941, whereas the semi-weekly schedule Form 941 depositor is required to report its daily liability amounts on Schedule B ( Form 941).

    1. The ROFT shows the dates that each liability amount is incurred (for monthly schedule depositors, only the month is shown). For employment tax forms this will be the date or month that the employer issues paychecks to the employees. The ROFT is asking for the amounts and dates that each liability was incurred not for a record of the deposits that were made to pay the tax liability.

    2. Deposit (TC 650) and payment (TC 610/670) information (received by the Service throughout the return period) is compared to the liability information (provided by the taxpayer on or with the return) to determine compliance with the deposit requirements. All transaction codes (TCs) are defined in OFFICIAL USE ONLY Document 6209, IRS Processing Codes and Information.

20.1.4.1.2  (10-26-2007)
Notice Information

  1. As a return is processed, various computer codes are added to the return data. These codes are written on the return by Code and Edit function or they are systemically generated by the computer program from the input of the tax data shown on the return. See IRM 20.1.4.11.2.5 to determine whether the FTD Penalty issue will be:

    • manually reviewed, calculated, assessed, or

    • systemically assessed.

  2. Some of the notices related to the FTD program are internal notices which require a mandatory review of an account:

    • CP 194—Issued for manual review because Master File does not have enough information to determine if an FTD Penalty applies.

    • CP 294—Issued to determine if an additional 5 percent penalty (fourth tier) applies on a module where the tax liability remains unpaid and the FTD Penalty is restricted by TC 180 (Deposit Penalty).

  3. Notices issued directly to taxpayers which require a response:

    • CP 207—Issued to request a valid ROFT, to notify taxpayer due to a missing, incomplete or illegible ROFT and of the impending proposed averaged FTD Penalty that may result if the requested ROFT is not received.

    • CP 207L—Proposed FTD Penalty ( $100,000), Request for Correct ROFT Information

    • CP 161—First notice issued to inform taxpayer of tax, penalty and/or interest due.

    • Other adjustment notices (e.g., math error, balance due or overpayment) issued to inform the taxpayer of a penalty assessment.

20.1.4.1.3  (10-26-2007)
Authorized Depositary

  1. Generally, taxpayers who file Forms 941, 943, 944, 940, 945, 720, 1042, and CT–1 must deposit taxes with an authorized depositary when the tax liability reaches certain dollar amounts. See IRM 20.1.4.2.2.1 for additional information. However, Form 720 filers are liable for deposits of only certain excise taxes. See IRM 20.1.4.8 for additional information.

  2. Under the Federal Tax Deposit (FTD) system, a taxpayer is required to deposit taxes with an authorized financial institution designated as a depository for federal taxes. Taxpayers can contact their area Federal Reserve Bank (FRB) to get a listing of local authorized financial institutions. If the taxpayer cannot locate a FRB, refer the taxpayer to a number listed below.

    • IRS Business & Specialty Tax Line 1–800–829–4933.

    • Telecommunications Device for the Deaf (TDD) 1–800–829–4059.

  3. Effective January 1, 2001, FRBs no longer accept FTD coupons. All other authorized financial institutions continue to accept FTD coupons. Some deposits made by mail are considered timely if the taxpayer establishes it was mailed in the U.S. at least two days before its due date. See IRM 20.1.4.1.3.6 for more information on depositing by mail. Payments of this type must be by check, postal money order, or cashiers check, payable to "Financial Agent" . Any third party check sent to the Financial Agent must be endorsed by the taxpayer.

  4. Payments made directly to the IRS or to an unauthorized institution can result in a failure-to-deposit penalty.

  5. For information on Campus pipeline processing of Federal Tax Deposit payments, see IRM 3.5.17, Federal Tax Deposit System.

  6. Monies are sent by authorized depositaries to the Treasury. Deposit information is sent to one of the following Processing Sites by depositaries:

    • Austin Campus

    • Cincinnati Campus

    • Ogden Campus

20.1.4.1.3.1  (10-26-2007)
Electronic Funds Transfer (EFT)

  1. Legislation passed in 1993 requires certain taxpayers to make their deposits via an electronic funds transfer (EFT) system. This system allows for the electronic transfer of funds from taxpayer accounts and the conveyance of deposit information directly to the Treasury .

  2. A taxpayer must begin depositing electronically on January 1 of the year it becomes required to deposit via EFT. This year is based on the taxpayer’s total deposits of certain taxes exceeding a prescribed dollar threshold during the "determination" period.

    1. Initially, the requirement to deposit electronically is based on an analysis of the total deposits of employment taxes imposed by IRC Chapter 21, Federal Insurance Contribution Act, Chapter 22, Railroad Retirement Tax Act, and Chapter 24, Collection of Income Tax at Source on Wages. See IRM 21.7.1.4.8.1, EFTPS Deposit Requirements, for threshold amounts, determinations periods and applicable effective dates.

    2. Once a taxpayer meets the threshold and is required to deposit electronically:
      (i)  All taxes required to be deposited by that taxpayer must be deposited electronically (not just the taxes considered in the determination analysis), and
      (ii) This taxpayer can no longer use coupons or any other means to deposit without being subject to the failure-to-deposit penalty, referred to as the avoidance penalty.

  3. Deposits made electronically use the Automated Clearing House (ACH) financial network which transfers funds and passes tax payment information to IRS. ACH is the banking industry’s system for moving payments electronically between financial institutions (for EFTPS purposes, between financial institutions and the Treasury).

  4. Before any attempt is made to transfer monies electronically, taxpayers must enroll in the system. The enrollment process allows the taxpayer to choose the type of payment method very similar to the one your bank may use now to arrange for a direct debit (e.g., an automated bill payer account), or credit (e.g., Direct Deposit) to your account.

    1. Taxpayer’s can make payments directly through EFTPS by instructing the Treasury’s financial agent to originate an ACH Debit transaction against their bank account or

    2. The taxpayer instructs Treasury’s financial agent to originate an ACH debit entry to a specifically identified bank account or instructs their own financial institution to debit their account to the government’s financial institution.

    3. Same-day Settlement Deposits are also available. See IRM 20.1.4.1.3.3.

  5. There are no new penalties or changes to the basic deposit rules inherent in using EFT. Taxpayers are penalized for not depositing on time, in the correct amount, or in the manner required.

    1. EFT has been added as an additional required deposit method.

    2. Previously, specific payments were charged the avoidance portion of the FTD penalty for failure to use the FTD system (not using a coupon).

    3. A taxpayer required to deposit electronically will be assessed this same avoidance portion of the FTD penalty for failing to deposit electronically (not depositing in the required manner).

20.1.4.1.3.2  (10-26-2007)
Electronic Federal Tax Payment System (EFTPS)

  1. The Electronic Federal Tax Payment System (EFTPS) is the electronic tax payment system that the federal government uses to accept all electronically transmitted tax payments. EFTPS will accept all types of tax payments from both businesses and individuals.

  2. Effective November 14, 2004, Bank of America is the sole financial institution authorized to operate EFTPS as a Treasury financial agent.

    1. Bank of America (formerly National Bank), and their primary subcontractor Gov One Solutions (subsidiary of First Data Corporation), are identified as Bank of America throughout this document.

    2. Prior to November 14, 2004, First National Bank of Chicago was authorized to operate EFTPS as a Treasury financial agent.

  3. Before any funds can be transferred electronically, the taxpayer must be enrolled in EFTPS. Taxpayers are directed to call the financial agents for assistance on EFTPS.

  4. Bank of America assistance numbers are:

    • 1–800–555–4477 (voice)

    • 1–800–555–8778 EFTPS-OnLine

    • 1–800–244–4829 (Spanish)

    • 1–800–733–4829 (TDD)

    • 1–800–605–9876 for financial institutions

    • 1–877–333–8292 FEDTAXII

  5. Taxpayers with entity related questions that the financial agent cannot resolve may be referred to the IRS Business & Specialty Tax Line at 1–800–829–4933.

  6. Several indicators have been created to aid in identifying and working with electronic deposits. See IRM 3.17.277.1.3, EFTPS Customer Service Responsibilities

  7. Deposits made after December 31, 1996 will carry an extra field in the record layout for recording how the payment was received. Whether the deposit or payment was received electronically will now be displayed for determining whether the taxpayer deposited in the required manner.

  8. Reference IRM 21.7.1.4.8.1, Electronic Federal Tax Payment Systemon requesting payment research information.

20.1.4.1.3.3  (10-26-2007)
Same Day Settlement/
FEDWIRE/ETA

  1. This funds-transfer system is owned and operated by the Federal Reserve Banks (FRB) and is used primarily for the transmission and settlement of payment orders, the same day. Financial institutions use the FRB (Minneapolis) to transfer directly into the Treasury’s General Account.

  2. FEDWIRE has been operational for many years. IRS required the use of FEDWIRE for certain types of deposits (e.g., certain CT–1 deposits) to move large sums immediately into the Treasury’s General Account (same day settlements).

  3. Because ACH is a two-step process (initiate the instructions one day, the money actually moves the next), some taxpayers (e.g. $100,000 depositors) had difficulty making timely deposits. If taxpayers missed the ACH cut-off time to initiate a timely deposit, they could use the FRB (Minneapolis) FEDWIRE as a deposit option.

  4. As the systems have evolved, the same day settlement feature is now referred to as the Electronic Tax Application (ETA).

  5. Enrollment in EFTPS automatically enrolls the taxpayer to use ETA as a routine payment option and as a backup payment method.

    1. Taxpayers enrolled in EFTPS can initiate a same-day payment using the ETA payment instructions located in the EFTPS Payment Instruction Booklet.

  6. A Business taxpayer who requires a same-day settlement and who is not currently enrolled in the EFTPS system will need to assist in directing its financial institution to the proper format for making the payment.

    1. All same-day payments are sent to the Minneapolis Federal Reserve Electronic Tax Application (FR-ETA) by the business taxpayer’s financial institution. Financial institutions have two Fedwire options for making a same-day federal tax payment. It is important that its bank use the proper format. The taxpayer’s financial institution will need to follow guidelines in the most current procedures outlined In Making Same-day Federal Tax Payments. Guidelines for Financial Institutions can be obtained at http://www.frbservices.org/Treasury/pdf/Sameday.pdf.

    2. FEDWIRE Funds Transfer begins daily operations at 12:30 a.m. Eastern Time (ET). The current hours for FR-ETA processing are 8:30 a.m. to 5:00 p.m. ET. Same-day federal payment transactions sent after 12:30 a.m. and before 8:30 a.m. ET are queued for processing when FR-ETA opens for the day. Tax payments sent AFTER the 5:00 p.m. ET cutoff, are rejected and NOT processed the next day. It is recommended that financial institutions transmit the transaction well in advance of the cutoff. Taxpayers should make arrangements to have their financial institution notify them immediately if a payment is rejected and returned, so that the transaction can be corrected and resubmitted before the 5:00 p.m. ET cut-off.

  7. FR-ETA payments are identified by payment method 3 or 4 in the second position of the EFT number. However, early in 2004, the payment will only be identified by method 3 in the second position of the EFT number.

  8. Taxpayers may call the FR-ETA Toll-free Customer Service number at 1-800-382-0045 for assistance in making their payment or in resolving problems with their FR-ETA payment.

20.1.4.1.3.4  (10-26-2007)
Federal Tax Deposit Coupons

  1. When employers request an Employer Identification Number (EIN) or indicate that they will be paying employees, they are pre-enrolled in the Electronic Federal Tax Payment System (EFTPS) as part of our express enrollment initiative for new businesses and will subsequently receive a conformation package with an EFTPS PIN and instructions on how to activate the EFTPS enrollment, and one FTD coupon. For further information on express enrollment go to http://www.irs.gov/pub/irs-pdf/p4275.pdf. If the taxpayer decides to make payments by check they must order additional coupons by calling 1-800-829-4933, and should allow 5-6 weeks for coupons to arrive by mail.

    1. Though employers should be encouraged to use the coupon books, if a taxpayer does not have a Form 8109 when a deposit is due, a blank over-the-counter coupon ( Form 8109 B) may be obtained from an Area Office or Campus.

    2. When a Form 8109 B is requested, the taxpayer’s name and Taxpayer EIN must be manually entered on the form by the dispensing IRS office. This form requests the same information as the Form 8109 (i.e., MFT, Tax Period, amount of deposit).

  2. AUTOGEN

    1. The FTD Coupon Book contains, on the sixth and seventh coupon, Form ID Number "91 and 92" . These special ID numbers systemically activate a reorder request of a FTD Coupon Book.

    2. When the "91" and/or "92" has been input, Transaction Code 016 posts to the taxpayer’s account, and the computer does an analysis to determine whether or not to generate a FTD reorder request. The decision is based on the FTD posting activity on the most recent tax accounts.

    3. An FTD ADDRESS FORM ( Form 8109-C) is included in the FTD Coupon Book. Taxpayers complete the form and submit it to the Campus to request that FTD Coupon Books be sent to a different mailing address. The FTD Coupon Book no longer contains a FTD "REMINDER" Form. In its place is an additional FTD Coupon which increased the number of FTD Coupons from 23 to 24 per book. The FTD Database has been expanded to include the "Date the FTD Coupon Book was generated" .

20.1.4.1.3.5  (10-26-2007)
Depositing at an Authorized Depository (Immediate Credit Item)

  1. Taxpayers not required to deposit via EFTPS may deliver their deposit to an authorized depository using and FTD payment coupon. An authorized depositary is a financial institution (for example, a commercial bank) that is authorized to accept federal tax deposits.

  2. Immediate credit Item - Authorized depositaries must accept cash, a postal money order, Treasury Bill, or a certified or Cashier’s check drawn to the order of the depositary, or a check or draft drawn on and to the order of the depositary. Deposits made using any of the above payment methods are considered immediate credit items as of the date the deposit is remitted to the depositary.

    Note:

    To be considered timely, the funds must be available to the depositary on the deposit due date before the institution's daily cutoff deadline.

  3. Other than an immediate credit item- An authorized depository is not required, but may accept a check drawn on another financial institution, but it is not considered an immediate credit item as of the date the deposit is remitted to the depositary. The FTD is not marked received until the day funds are collected by the depository.

  4. See IRM 20.1.4.14 for information to resolve deposit date problems.

20.1.4.1.3.6  (10-26-2007)
Depositing by Mail to an Authorized Depository (Timely Mailed/Timely paid Provision)

  1. Taxpayers not required to deposit via EFTPS, may deposit by mail. The Internal Revenue Code (IRC section 7502(e)) provides conditions for timely mailed/timely paid FTDs.

  2. Consider the deposit as timely, regardless of the "received date-stamp" , if a taxpayer meets the following conditions:

    1. The taxpayer proves that the deposit was mailed in the U.S. at least two days before the due date,

    2. the depositary which received the FTD is an authorized depository in the taxpayer’s geographic location, and

    3. the deposit is under $20,000, for taxpayers required to deposit more than once a month.

  3. The timely mailed/timely paid provision does not apply when:

    1. the taxpayer mails the deposit to an IRS campus,

    2. the payment is not an immediate credit item,

    3. the deposit is not mailed in the U.S.

  4. To meet timeliness requirements, foreign employers must:

    1. make arrangements with a U.S. depositary to accept the taxpayer’s wire transfer of deposit and prepare an FTD coupon for the customer on or before the deposit due date, or

    2. mail the FTD coupon and a payment instrument in U.S. dollars, to an authorized depository to arrive on or before the deposit due date.

  5. See IRM 20.1.4.14 for information to resolve deposit date problems.

20.1.4.1.3.7  (10-26-2007)
Coupon and Payment Mailed to: Financial Agent, Federal Tax Deposit Processing

  1. A deposit can be made by mailing the coupon and payment to: Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. A check or money order should be made payable to "Financial Agent."

20.1.4.1.4  (10-26-2007)
Who Assesses

  1. Campus Tax Examiners may assess or adjust the penalty based on ROFT information, reasonable cause, statutory waivers, or administrative waivers.

  2. Taxpayer Service Representatives (TSRs), Collection Tax Examiners, and Revenue Officers may recommend assessment or non-assessment of the penalty on secured returns. When there is indication that a taxpayer filed in a previous quarter but no current return is on file, the Service contacts the taxpayer and requests a return. A return obtained in this manner is a "secured" return.

  3. Examination Tax Auditors and Revenue Agents, Collection, TE/GE, and Employment Tax Examiners make penalty assertion determinations on examined and/or secured returns.

20.1.4.1.5  (10-26-2007)
Restrictions on Assessments

  1. For information regarding restrictions on assessment see LEM 20.1.4.1.5.1.

20.1.4.1.5.1  (10-26-2007)
Federal Agencies

  1. According to Policy Statement P–2–4, the IRS does not assert penalties against Federal Agencies.

20.1.4.1.5.2  (10-26-2007)
State and Local Health and Welfare

  1. The IRS determined that the state and local government Health and Welfare agencies, acting as agents under IRC Section 3504 with respect to employers for in-home domestic services for recipients of public assistance, are not subject to Federal tax deposit requirements. They need only to make payments by the due date of the return. Payment(s) does not have to be deposited.

  2. These agencies assume responsibility for reporting and paying FICA and FUTA and any withheld income tax with respect to individuals furnished by the agency, or hired directly by the recipients of public assistance, to provide domestic services (Chore Workers) for recipients on public assistance.

  3. Do not assess any failure to deposit penalty on these entities. In addition, abate the penalty, on modules (for all years) with an unreversed failure to deposit penalty, when working on other issues on these modules.

20.1.4.2  (10-26-2007)
Failure-to-Deposit Penalty Rate

  1. The FTD Penalty is charged for any failure to deposit correctly. The three components of a correct deposit are that it is made timely, in the correct amount, and in the correct manner.

    1. A failure to comply with any of these components will subject the deposit to an FTD Penalty.

    2. Because there may be multiple deposits (with each individual deposit subject to scrutiny for compliance) on any one account, the FTD Penalty that is assessed on the account will be a sum of the "time-sensitive" penalty(ies) and/or the "avoidance" penalty(ies).

  2. The FTD Penalty rate changed several times in recent years. Therefore, the percentage rate charged depends on the following:

    • The tax period involved,

    • the number of days a deposit is late,

    • whether it involves a direct payment, and

    • a non-EFT payment when required to use EFTPS

20.1.4.2.1  (10-26-2007)
Time Sensitive Four Tier Penalty System

  1. For deposits required after December 31, 1989, there is a four tier penalty system. The penalty rate assessed depends on the number of days a deposit is late, as shown below:

    1. 2 percent for deposits 1—5 days late,

    2. 5 percent for deposits 6—15 days late,

    3. 10 percent for deposits made 16 or more days late. Also applies to amounts paid within 10 days of the date of the first notice the IRS sent asking for the tax due.

    4. 10 percent for deposits made at an unauthorized financial institution, paid directly to the IRS, or paid with the tax return.

    5. 10 percent for amounts subject to electronic deposit requirements but not deposited using EFTPS.

    6. 15 percent (actually, a 5 percent addition to the 10 percent for late payment in (c) above) for all amounts still unpaid more than 10 days after the date of the first notice that the IRS sent asking for the tax due or the day on which the taxpayer received notice and demand for immediate payment, whichever is earlier. See IRM 20.1.4.11.2.3.

20.1.4.2.2  (10-26-2007)
Deposits

  1. Treasury Regulations state that deposits are due on or before the deposit due date. This due date is the last day the deposit can be considered timely. However, taxpayers may make their deposit any time between the payroll liability incurred date and the deposit due date. They are not required to wait until the due date nor will they receive a penalty for making deposits prior to the due date. An employer is not required to make a deposit more often than a payroll is made. However, 100 percent of the amount required to be deposited is due on the deposit due date unless the employer meets one of the exceptions.

  2. Unless there are specific instructions to the contrary contained in the Treasury Regulations, the due date is extended to the next day that is not a Saturday, Sunday or holiday if:

    1. The deposit due date is a Saturday, Sunday or Federal Holiday (including all legal holidays in the District of Columbia) or

    2. The deposit due date is a legal holiday of a particular state, and the deposit is required to be made in such state.

  3. Treasury Regulations state that deposits are due only on banking days.

    1. In addition to Federal and state banking holidays, Saturdays and Sundays are treated as non-banking days. See IRM 2.3.28 Terminal Responses, for a list of Federal and state banking holidays.

    2. Employers who are required to deposit taxes on a day that is not a banking day will be treated as timely depositing such taxes if they are deposited on the first banking day thereafter. See IRM 20.1.4.3(4).
      i.     See IRM 20.1.4.3.2(1)(b) for a discussion of these rules as applied to employers required to deposit on a monthly basis.
      ii.     See IRM 20.1.4.3.2.2(2) for a discussion of these rules as applied to employers required to deposit on a semi-monthly basis.

  4. Taxpayers are required to deposit their taxes with an authorized depositary. Taxpayers avoid the FTD system when they make payments to other than an authorized depositary. This type of noncompliance is called FTD avoidance and is subject to an FTD penalty. See IRM 20.1.4.2.2.1for De Minimis Exception to Deposit Requirements

  5. Effective October 17, 1995, any non-EFT deposit made by a taxpayer that is required to deposit via EFT is subject to a 10 percent penalty for not being made in the correct manner. The EFT/FTD penalty (referred to as the Avoidance Penalty) may now be assessed against any deposit required to be made after October 16, 1995.

  6. Payments made to an unauthorized depositary include those made directly to IRS. Transaction code (TC) 670 identifies direct payments and generally indicates that an FTD avoidance penalty applies. There are exceptions.

    1. All TC 670 transmitted by EFT are treated as correctly deposited (effective March 1997).

    2. FEDWIRE payments, made by CT–1 filers, are listed as TC 670 with blocking series 700.

    3. Taxpayers in bankruptcy may be ordered by the court to make payments directly to the IRS. In such cases, the FTD avoidance penalty would not apply. If the account has a bankruptcy indicator, TC 520, closing code (CC) 85–89 with freeze code -V or TC 520, CC 81 with freeze code -W, contact the appropriate Special Procedures function to determine if the taxpayer is under court order to make direct payments.

    4. Any TC 670 received after the return has posted (in response to a notice/bill) will not have the avoidance penalty assessed against it. If the taxpayer files the return with a balance owing (has not deposited sufficiently), the notice sent will include the maximum FTD penalty. Payments for delinquent taxes are not to be remitted with a coupon.

  7. Regulations require certain taxes to be paid using deposits. Payments made in a manner other than a deposit may be subject to the FTD avoidance penalty, unless the taxpayer meets an exception. See IRM 20.1.4.8 for the safe harbor exception. See IRM 20.1.4.2.2.1 for the de minimis deposit rule.

20.1.4.2.2.1  (10-26-2007)
De Minimis Exception to Deposit Requirements

  1. While taxpayers must periodically deposit their employment taxes using either the monthly or semiweekly deposit schedule, the de minimis deposit rule allows taxpayers to remit their employment taxes with their return instead.

    Note:

    The ROFT information is not required

    when the de minimis exception for depositing is met. See IRM 20.1.4.1.1.

  2. When the total tax amount exceeds the de minimis for depositing then taxpayers must periodically deposit their employment taxes using their required monthly or semiweekly deposit schedule. Any payment of tax paid directly or remitted with the return is subject to the avoidance penalty. See IRM 20.1.4.2.1(1)(d) for the avoidance penalty rate. The following situations illustrate when the FTD penalty may apply based on the de minimis deposit rule:

    1. Form 941---(200103 and subsequent)--The de minimis exception is applicable for tax amounts less than $2500. If the total tax is $2500 or more, any amount paid with the return is subject to the avoidance penalty. (199809 thru 200012)-- The de minimis exception is applicable for tax amounts less than $1000. If the total tax is $1000 or more, any amount paid with the return is subject to the avoidance penalty. (199806 and before)-- The de minimis exception is applicable for tax amounts less than $500. If the total tax is $500 or more, any amount paid with the return is subject to the avoidance penalty.

    2. Form 943, 945---(200112 and subsequent)-- The de minimis exception is applicable for tax amounts less than $2500. If the total tax is $2500 or more, any amount paid with the return is subject to the avoidance penalty. (199912 thru 200012)-- If the total tax is $1000 or more, any amount paid with the return is subject to the avoidance penalty. (199812 and before)-- The de minimis exception is applicable for tax amounts less than $500. If the total tax is $500 or more, any amount paid with the return is subject to the avoidance penalty.

    3. Form 944---(200612 and subsequent)---If a quarterly liability amount is less than $2500, Master File considers the deposit as timely if received by the last day of the month after the end of a quarter (mirroring the Form 941 quarterly de minimis, discussed above in (a)). Employment taxes accumulated during the fourth quarter can be either deposited by January 31 or remitted with a timely filed return for the return period. See Exhibit 20.1.4-5.

    4. A safe harbor shortfall (of any amount) originating from a monthly depositor may be paid with the return without an avoidance penalty.

    5. Form 940--If the TC 150 is less than $500, any amount paid with the return is not subject to the avoidance penalty.

    6. Form 720—(200112) and subsequent)--If the amount from Form 720, Part I is over $2,500, the amount paid with the return may be subject to the avoidance penalty , unless a safe harbor Rule applies. (200109) and before)--If the amount from Form 720, Part I is over $2,000, the amount paid with the return may be subject to the avoidance penalty , unless a safe harbor Rule applies.

    7. Form CT-1---(200112 and subsequent)--If the TC 150 is $2500 or more, any amount paid with the return is subject to the avoidance penalty. (199912 thru 200012)-- If the TC 150 is $1000 or more, any amount paid with the return is subject to the avoidance penalty. (199312 thru 199812)-- If the TC 150 is $500 or more, any amount paid with the return is subject to the avoidance penalty. (199212 and before)--If the amount paid with the return exceeds $100, it is subject to the avoidance penalty.

20.1.4.2.3  (10-26-2007)
Deposit Due Dates

  1. The deposit due dates are determined by the deposit requirements, which vary according to the tax form involved and the amount of tax.

  2. Before determining the deposit due dates. See Exhibit 20.1.4-4, LEM 20.1.4.2.2 and LEM20.1.4.8.5. See IRM 20.1.4.8 of this handbook, for information specific to Form 720.

20.1.4.2.4  (10-26-2007)
Banking Day

  1. Once a bank is recognized by the Federal Reserve Bank (FRB) and considered an authorized financial institution, it can accept tax deposits.

  2. The FRB has established 2:00 p.m. as the federal banking day’s closing time.

  3. Banks may be open for business (for the convenience of their customers) later than the regulated bank day cut-off.

  4. A bank may have lobby/drive-through hours until 4:00 p.m. However, you may notice postings such as "All deposits made after 2:00 p.m. will be credited to the next business day." For example:

    1. Taxpayer A has a deposit due on Wednesday. His bank, an authorized financial institution, has 3:00 p.m. as its banking day cut-off time. This bank has lobby hours Monday through Friday until 5:30 p.m.

    2. Taxpayer A makes his FTD deposit at 5:00 p.m. on Wednesday. The bank teller’s stamp on his FTD coupon, Form 8109, will reflect receipt of this deposit on Thursday’s business day. The teller’s stamp may carry additional information, such as, the time and date received or a designation of the calendar day the deposit was received, if this day is different from the business day received.

    3. The Advice of Credit (AOC) and the IRS TC 650 posting date would carry Thursday’s date. This taxpayer will be subject to a 2% FTD penalty for being one day late.

  5. The example above is not one of a misdated deposit, unless the bank held the deposit. In the example above, a misdated deposit would be evidenced by the coupon carrying the Thursday’s date, but the AOC would show a date for Friday or later. See IRM 20.1.4.14 for more information on misdated deposits.

  6. FMS Regulations extend only to the stamping and acceptance of the coupon and the AOC. What and how much information is contained on the taxpayer’s receipt from the bank varies from bank to bank.

  7. In the example in (4) above, the taxpayer’s receipt could, in fact, be stamped with the Wednesday calendar date, while the coupon is, also correctly, stamped with the Thursday business date. In these cases if there is also a time stamp, and it gives any indication of being past a normal bank business day cut off time, it is still the taxpayers responsibility (the burden of proof rests with the taxpayer) to prove (with a statement from the bank) that the payment was made on the correct day.

20.1.4.2.5  (10-26-2007)
Bank Holidays

  1. Bank holidays are days authorized by the individual states banking regulations for banks within their state to be closed. Banks don’t have to close on these days but are allowed by the state controlling authority to be closed for business if they choose to do so. See IRM 20.1.4.2.2(4) for information on how bank holidays affect deposits due dates.

    1. Though not all states recognize banking holidays, some states authorize several state holidays.

    2. IRM 2.3.28 lists the state banking holidays allowed for each state.

    3. Both Master File and IDRS are programmed to recognize state bank holidays. See IRM 20.1.4.11.2.1.

20.1.4.2.6  (10-26-2007)
Application of Payments

  1. Payments are identified on Master File as follows:

    • TC 610—Payment received with a return—depending on the reason for the payment with the return, this payment may be liable for the avoidance portion of the FTD penalty.

    • TC 670–Subsequent payment— See IRM 20.1.4.14.2 for possible FTD avoidance penalty.

    • TC 650–Federal Tax Deposit,

    • TC 700—Credit Applied,

    • TC 706—Overpayment Offset into a Balance Due Module

    • TC 760—Substantiated Credit Payment Allowance,

    • TC 710—Overpayment Credit Applied from Prior Tax Period,

    • TC 716—Generated Overpayment Applied from Prior Tax Period.

  2. On a TC 706 overpayment, Master File will only use the credit against the 4th Tier 15 percent Penalty amount. Otherwise the credit is not recognized in the penalty calculation.

  3. If the TC 716 Credit Availability Date is not present (e.g., on CP 194, BMFOL, etc.), Master File will use the first day of the tax period as the credit effective date.

  4. On a TC 710 credit transfer, Master File will use the first day of the tax period as the credit effective date.

  5. For periods after December 31, 2001, deposits are applied to the most recently ended deposit period or periods within the specified tax period to which the deposit relates as provided for in Rev. Proc. 2001-58. The application of deposits to the most recently ended deposit period will, in some cases, prevent the cascading penalties where a depositor either fails to make deposits or makes late deposits. See the job aid on the Most Recent Payment Allocation Method located in Chapter 7 of IRM 21 Job Aids.

  6. For periods beginning April 1, 1991 through December 31, 2001, deposits are applied in date-made order against deposit liabilities in due-date order. This is referred to as the FIFO (first in, first out) method of assigning deposits to liabilities.

    1. Accordingly, apply deposits (deposit, payment, credit) in date-made order to the first liability (in due date order) within the same return period. Satisfy the oldest liability first. Liability age is determined by the liabilities incurred date.

    2. All credits will be arranged by date order to determine the next available credit. The Credit type (the origin of the credit) does not affect its date-made order. However, an avoidance penalty may not be appropriate. For example: A taxpayer has liabilities of $1,000 in April, May and June. The taxpayer is required to deposit monthly and makes timely deposits of $1,000 on May 15, June 15 and July 15. A direct payment of $3,000 is received on April 7 and is applied to this quarter. An incorrect manner (avoidance penalty) may not be an appropriate penalty in this situation.

    3. Effective April 1, 1991, the amount required to be deposited is determined by (100% of) the liability amount and not the undeposited amount.

20.1.4.3  (10-26-2007)
Employment Tax Forms 941, 943, 944, 945, and CT-1

  1. Beginning January 1, 2002, if an employer accumulates less than a $2500 tax liability during a return period, no deposits are required. This amount may be paid with a timely filed tax return. Amounts of $2500 or more must be deposited.

  2. Beginning January 1, 1993, taxpayers follow a pre-determined deposit schedule, under which the frequency of deposits generally remains consistent throughout the year.

  3. Under either the old or new system, an employer is not required to make a deposit more often than a payroll is made. However, 100 percent of the amount required to be deposited is due on the deposit due date unless the employer meets one of the safe harbor exceptions.

  4. The regulations provide that if taxes are required to be deposited on any day that is not a banking day, the taxes will be treated as timely deposited if deposited on the first banking day thereafter.

20.1.4.3.1  (10-26-2007)
Lookback Periods for Employment Tax (Forms 941, 943, 944, 945, and CT-1)

  1. An employer is either a "monthly depositor" or a "semi-weekly depositor" for a calendar year based on an annual determination of the aggregate amount of employment taxes reported during the employer’s "lookback period."

    1. Form 941—For quarterly return filers, the "lookback period" for each calendar year is the twelve month period ended the preceding June 30. For example, the lookback period for calendar year 2007 is the period July 1, 2005 to June 30, 2006 (which encompasses the quarters ended 200509, 200512, 200603, and 200606).

    2. Form 941 with an intervening Form 944in lookback period— If there is an intervening Form 944 filing in either year of the Form 941 lookback quarters then the lookback period is defined as the second calendar year preceding the current calendar year. The lookback tax could be either the combined quarterly Form 941 tax amounts or Form 944 tax amount (depending on which type of return(s) are posted).

    3. The lookback quarterlytax liability amounts for Form 941 filers can be accessed through use of command code BMFOL definer "K"

    4. Forms 943, 944, 945 and CT–1—For annual return filers, the "lookback period" is defined as the second calendar year preceding the current calendar year. For example, the lookback period for calendar year 2006 is calendar year 2004.

      Note:

      When determining the Form 944 lookback tax amount if there are Form 941 filings in the lookback period then use the total Form 941 quarterly tax amounts. For example, the lookback period for a 2007 Form 944 filer with quarterly Form 941 filings in 2005 is the period January 1, 2005 to December 31, 2005 (which would encompass the Form 941 quarters ended 200503, 200506, 200509, and 200512).

  2. A new employer is treated as having employment tax liabilities of zero for any quarter or year of the lookback period before the date the employer started or acquired its Business.

  3. Effective with the November, 1996 mail out, the deposit status information courtesy notice ( CP136,136B,137,137A and 137B) will be sent to employers only if their deposit status (determined by the annual lookback analysis) changed from the prior year. Taxpayers should validate the information contained in the courtesy notice ( CP136,136B,137,137A and 137B). If the lookback liability amount(s) listed on the notice differ from the taxpayer’s records, then it is the taxpayer’s responsibility to determine which deposit schedule to follow. The notice history on accounts that were issued a ( CP) 136,136B,137,137A or 137B can be accessed through the use of Command Code (CC) BMFOL with definer"D" .

  4. Taxpayers should continue depositing following the deposit schedule they were last issued unless

    • a deposit status information courtesy notice in (3) above is received by the Service or

    • their current circumstances warrant a change (e.g., incurring a $100,000 liability)

    • Deposit status changed due to the taxpayer analysis of the lookback period.

  5. The fact that the taxpayer and/or third party did not receive a deposit status information notice in any of the previous or subsequent years, or did not compare the lookback tax liability amount(s) listed on the deposit status information notice against their tax records, is not grounds for granting a FTD Penalty abatement. Sufficient information is readily available (e.g., Pub 15, Circular E) for the taxpayer to determine the appropriate lookback period, whether the lookback threshold has been met or exceeded and whether the taxpayer has incurred any extraordinary circumstances that would affect the deposit schedule he is currently following.

20.1.4.3.2  (10-26-2007)
Monthly Depositors (Forms 941, 943, 944, 945, and CT-1)

  1. If the employer reported Employment Taxes of $50,000 or less during the one year lookback period, the employer is a monthly depositor and generally must deposit employment taxes on a monthly basis during the calendar year.

    1. Under the monthly rule, each month’s taxes are required to be deposited on or before the 15th day of the following month.

    2. If the 15th of the following month falls on a Saturday, Sunday, Federal or State legal holiday, the employer will have until the next banking day to make a timely deposit.

    3. Monthly depositors must enter the Monthly Summary of Federal Tax Liability on the face of the tax return.

20.1.4.3.2.1  (10-26-2007)
Semi-weekly Depositors (Forms 941, 943, 944, 945, and CT-1)

  1. If the employer reported Employment Taxes of more than $50,000 during the one year lookback period, the employer must deposit using the semi-weekly rules. Under this rule, the day a deposit is due is determined by the day of the payroll.

    1. The deposit for a pay date of Wednesday, Thursday or Friday must be made on or before the following Wednesday.

    2. The deposit for a pay date of Saturday, Sunday, Monday or Tuesday must be made on or before the following Friday.

    3. The semi-weekly rule does not require an employer to make deposits twice a week (semi-weekly). Rather, the deposit