IRS Issues Interim Guidance on Abatement of Failure to Deposit Penalty For "Unbanked" Business Taxpayers

Author: Rena Pirsos, XpertHR Legal Editor

June 22, 2015

The IRS has issued a memorandum (#SBSE-04-0615-0045) providing interim guidance on abatement of the failure to deposit penalty under Internal Revenue Code (IRC) § 6656. The guidance applies to businesses that are unable to get a bank account (the unbanked) or make other arrangements for making federal tax deposits of corporate income, employment (Social Security and Medicare) and excise taxes using the Electronic Federal Tax Payment System (EFTPS), as required by IRC rules.

Effective June 9, 2015 through June 9, 2016, the IRS will not impose, or will abate, the failure to deposit penalty if a taxpayer that failed to make federal tax deposits using the EFTPS can show that it made reasonable efforts to secure a bank account during the time period in question. To request this penalty relief, the guidance provides that the unbanked taxpayer must include a signed statement that explains its attempt to get a bank account, along with any supporting documentation (e.g., denied account applications or bank correspondence). The IRS does not require the signed statement to be in any particular format.

The guidance does not apply to taxpayers that can get a bank account but choose not to. The IRS notes that such cases will be handled on a case-by-case basis.

EFTPS has long been used by most businesses to make federal tax deposits. The penalty for failing to deposit via EFTPS (the "failure to deposit penalty") is substantial - 10% of the amount deposited. The penalty does not apply if a taxpayer's deposit failure was due to reasonable cause and not willful neglect.

In determining whether there is reasonable cause, the IRS considers all the facts and circumstances in each case. The IRS generally grants penalty relief on this basis if the taxpayer provides sufficient information showing that it exercised the degree of care that a reasonably prudent taxpayer would but, nevertheless, was still not able to meet its tax deposit obligations.

The IRS will amend certain sections of its Internal Revenue Manual to account for this interim procedure.