The IRS recently announced that it erroneously sent failure-to-deposit (“FTD”) penalty notices to certain employers that reduced their employment tax deposits on Form 941 (Employer’s Quarterly Federal Tax Return) in anticipation of claiming sick and family leave credits under the Families First Coronavirus Response Act (“FFCRA”) or the employee retention credit (“ERC”) under the Coronavirus, Aid, Relief and Economic Securities (“CARES”) Act.

In March 2020, Congress passed the FFCRA and the CARES Act to provide relief for employers and employees affected by the COVID-19 Emergency.  The legislation provides for paid sick and expanded family and medical leave as well as an ERC.  The IRS subsequently issued Notice 2020-22 to address relief from late deposit penalties for employment tax deposits that are reduced in anticipation of one of the employer social security tax credits.  (See prior coverage regarding IRS guidance on payroll tax credits under the FFCRA and CARES Act here and our primer on how to claim the credits here.)

Deposit Rules

Employers are generally required to deposit federal employment taxes (federal income tax withholding, FICA taxes, and Railroad Retirement taxes) based upon the time periods described under Treas. Reg. §§ 31.6302-1 and 31.6302-2.  These rules place employers onto monthly or semi-weekly deposit schedules based upon the amount of the employer’s employment tax deposits, although next-day deposits are required when an employer accumulates $100,000 or more of employment taxes.  When an employer fails to timely deposit employment taxes, FTD penalties may be assessed under section 6656.  The FTD penalty rate depends on how late the deposit was made.  The penalty rate is (i) 2% for deposits made not more than 5 days late, (ii) 5% for deposits made not more than 15 days late, and (iii) 10% for deposits made more than 15 days late.  Section 6656 provides for relief from such penalties in cases where the employer establishes reasonable cause.

Erroneous IRS Notices

The IRS announcement states that it is aware that a “small population of employers” that took advantage of the FFCRA and CARES Act by reducing employment tax deposits on the Form 941 may have received notices imposing FTD penalties.  The IRS explained that the cause of the error relates to discrepancies between the liabilities reported in the Schedule B to Form 941 and the amount of the deposits actually made.  (The liabilities reported on Schedule B are not reduced to reflect the credits, so employers claiming the credits will generally report liabilities in excess of deposits.)  Although the IRS attempted to take steps to implement rules to prevent such erroneous penalty notices, the IRS programming glitch appears to arise in situations in which deposits were reduced by amounts in excess of the liability for the employer portion of social security for a particular pay date.  The IRS announcement does not state the specific notice number that will be issued, but it may be a Notice CP161.  (IRS information on understanding Notice CP161 may be found here.)

The IRS states that it is taking action to identify those employers that received the erroneous notices and correct them as soon as possible.  Although the IRS states that employers receiving these erroneous notices do not need to take action, employers that find themselves in this situation should carefully review the notice to ensure that it relates solely to late deposit penalties triggered because of claimed FFCRA credits and ERCs.  Even if the notice does, employers should consider responding to the notice in writing to explain concisely that the reduction in employment tax deposits relates to the credits provided under the FFCRA and the CARES Act.  Calling the IRS to discuss the notice may also be an effective approach, and employers should memorialize their call with the IRS, including the identity of the IRS representative, the date and time of the call, and a summary of the issues discussed.  Such an approach is prudent because it demonstrates an employer’s diligence by responding to IRS correspondence and increases the likelihood that the penalties will be withdrawn by the Service.  Further, in the event that the IRS fails to withdraw the FTD penalties within a reasonable time, an employer is in a better position to contest penalties at a later stage if it has promptly responded to the notice and clearly explains why it believes its position is correct.

The IRS release also states in its announcement that employers should check here for future guidance when reporting liabilities when reducing deposits using Form 941.

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Photo of Michael M. Lloyd Michael M. Lloyd

Michael Lloyd practices in the areas of tax and employee benefits with a focus on information reporting and withholding on cross-border payments (e.g., Forms 1042 and 1042-S) and Foreign Account Tax Compliance Act (FATCA), backup withholding, employment taxation, the treatment of fringe benefits…

Michael Lloyd practices in the areas of tax and employee benefits with a focus on information reporting and withholding on cross-border payments (e.g., Forms 1042 and 1042-S) and Foreign Account Tax Compliance Act (FATCA), backup withholding, employment taxation, the treatment of fringe benefits, cross-border compensation, domestic information reporting (e.g., Forms W-2, 1099, 1095 series returns), penalty abatement, and general tax planning and controversy matters. Michael advises large U.S. and foreign multinationals regarding compliance with information reporting and withholding issues, as well as a range of other federal and state tax issues.

Michael completed a three-year term on the IRS Information Reporting Program Advisory Committee (IRPAC) in 2013, during which time he worked with the IRS on FATCA, the Affordable Care Act (ACA or Obamacare) reporting issues, tip reporting, Form 1099-K reporting issues, and civil penalty administration. He has testified before the U.S. Treasury Department and the IRS regarding proposed federal tax regulations.

Michael’s experience includes serving as Tax Manager for a publicly traded multinational, where he managed federal and state tax examinations and appeals, including matters involving foreign taxes. In addition, he performed domestic and international tax planning, including issues related to the repatriation of foreign earnings, U.S. export tax benefits, research credits, and planning for foreign expansion.

Michael has appeared as a guest speaker on IRS Live and at seminars hosted by Tax Executives Institute (TEI), Thomson Reuters OneSource, IRSCompliance, the American Payroll Association (APA), the Blue Cross and Blue Shield Association, the National Association of College and University Business Officers (NACUBO), and the National Restaurant Association.

Photo of S. Michael Chittenden S. Michael Chittenden

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Michael advises…

Michael Chittenden practices in the areas of tax and employee benefits with a focus on the Foreign Account Tax Compliance Act (FATCA), information reporting (e.g., Forms 1095, 1096, 1098, 1099, W-2, 1042, and 1042-S) and withholding, payroll taxes, and fringe benefits. Michael advises companies on their obligations under FATCA and assists in the development of comprehensive FATCA and Chapter 3 (nonresident alien reporting and withholding) compliance programs.

Michael advises large employers on their employment tax obligations, including the special FICA and FUTA rules for nonqualified deferred compensation, the successor employer rules, the voluntary correction of employment tax mistakes, and the abatement of late deposit and information reporting penalties. In addition, he has also advised large insurance companies and employers on the Affordable Care Act reporting requirements in Sections 6055 and 6056, and advised clients on the application of section 6050W (Form 1099-K reporting), including its application to third-party payment networks.

Michael counsels clients on mobile workforce issues including state income tax withholding for mobile employees and expatriate and inpatriate taxation and reporting.

Michael is a frequent commentator on information withholding, payroll taxes, and fringe benefits and regularly gives presentations on the compliance burdens for companies.