Deferral of penalties for failure to timely deposit employment taxes.

• Author: Bierma, Christa

In a Program Manager Technical Advice memo from the Chief Counsel's office (PMTA 2021-07), the IRS determined that a failure to deposit any portion of the federal employment taxes deferred by Section 2302 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, by the applicable installment due date will result in a penalty under Sec. 6656 that runs from the original due date and applies to the entire deferred amount.

The CARES Act delayed the timing of required federal employment tax deposits for certain employer payroll taxes and self-employment taxes incurred from March 27, 2020 (the date of enactment), through Dec. 31, 2020. The CARES Act treats these amounts as timely paid if 50% of the deferred amount was paid by Dec. 31, 2021, and the remainder by Dec. 31, 2022.

Because these dates fall on (and are immediately followed by two additional) Saturdays, Sundays, or legal holidays, the Chief Counsel memo confirms that the deadlines are actually Jan. 3, 2022, and Jan. 3, 2023, under the rules of Sec. 7503. All employers may avail themselves of the payroll tax deposit deferral.

Applicable employment taxes include:

* The employer's share of Old-Age, Survivors, and Disability Insurance Tax (Social Security) under Sec. 3111(a), which is 6.2% of wages up to the wage base ($137,700 in 2020); and

* The portions of the employer's and employee representatives' shares of Tier 1 Railroad Retirement Tax Act (RRTA) tax under Secs. 3221(a) and 3211(a), respectively, that each correspond to the 6.2% Social Security tax rate due.

Under Sec. 6656, the penalty is 10% of the underpayment if the failure is for more than 15 days and 15% if the tax is not paid within 10 days of the first notice sent to the taxpayer demanding payment. The penalty does not apply: (1) if the failure is due to reasonable cause and not willful neglect; (2) to certain first-time depositors; and (3) to the extent that a failure to deposit any or all of the tax was due to the taxpayer's anticipating refundable credits allowed under COVID-19-relief provisions.

As explained in the instructions to Form 941, Employer's Quarterly Federal Tax Return, and FAQs posted on the IRS website (available at www.irs.gov), the deferred tax may be repaid using the Electronic Federal Tax Payment System (EFTPS) or by mailing in the payment with a 2020 Form 941-V, Payment Voucher.

The IRS gave two examples in the PMTA memo showing that the penalty would apply to the entire amount...