Payroll Tax Penalties

What Types of Penalties Does the IRS Charge on Unpaid Payroll Tax?

The IRS charges 3 Common penalties to delinquent 941 employment tax debts.

Federal Tax Deposit (FTD) penalties are charged for failure to make timely employment tax payments. The penalty is also charged if you fail to use the EFTPS (Electronic Federal Tax Payment System) to pay FTDs.

IRS Publication 746 states the FTD penalty rates:

2% - deposits made 1 to 5 days late,

5% - deposits made 6 to 15 days late,

10% - deposits made 16 days or more late, but on or before the 10th day after the date of the first notice we sent you asking for the tax you owe.

10% - deposits made to an unauthorized financial institution, or payments made directly to the IRS, or paid with your tax return.

10% - Amounts subject to electronic deposit requirements but not deposited using EFTPS.

15% - Amounts still unpaid more than 10 days after the date of the first notice the IRS sent asking for the tax due or the day on which you receive notice and demand for immediate payment, whichever is earlier.

Failure to File (FTF) and Failure to Pay (FTP) are a combined penalty. The IRS charges a combined penalty of 5% of the unpaid tax for each month (or part of a month) the return is late. 4.5% for filing late and 0.5% for paying late. The 0.5% penalty for paying late may continue to accrue after the late return is filed. The combined FTF and FTP penalty maxes out at 25%.

Is the Trust Fund a Tax or a Penalty?

The Trust Fund portion of an employment tax debt can be confusing for a taxpayer experiencing it for the first time. Trust Fund is what people commonly call the Trust Fund Recovery Penalty (TFRP). It is a penalty assessed to an individual in the amount of a specific segment of a business payroll tax liability. It is referred to as the Trust Fund while it is still a business tax liability. Once it is assessed to the individual, it is referred to as a Civil Penalty on letters, notices and other IRS documents.

Since the individual(s) didn't actually accrue the tax debt, it cannot be assessed as a true tax liability and is therefore assessed as a Civil Penalty in the same amount of the business Trust Fund tax. It is not added on to the business debt or collected twice from the individual(s) and business. The Trust Fund may be collected only once, but from more than one source.

This means that if the total Trust Fund is $50,000 and the assessed individual pays $25,000 toward the Civil Penalty (TFRP / Trust Fund), both the individual Civil Penalty and the total business tax debt will be reduced by the $25,000 payment.

The Trust Fund Recovery Penalty is a portion of the business employment tax and therefore the business is not eligible to request abatement or removal of it. However, the individual(s) marked for assessment may protest or appeal the TFRP before it is formally assessed.

I had all but given up on the stress of dealing with the IRS and their aggressive collection techniques, when M&M Financial saved the day by resolving my years' long tax debt, and putting most of my penalties back in my pocket. Thanks a million M&M!
Jeffrey B.
Chicago, IL

Will the IRS Abate, Remove or Reduce Payroll Tax Penalties?

The simple answer is yes. The IRS considers requests for the Abatement of Penalties on a case by case basis. Each case has a different set of circumstances, so it's difficult to say whether the IRS will approve your Penalty Abatement without knowing the specifics of your case. Even then, it can be difficult to predict.

Although you may have been led to believe that one tax resolution company has the inside track on penalty relief or that a specific percentage of your penalties are guaranteed to be removed if you sign up with Company X, that's not how it works. Penalty relief cannot be guaranteed. You must prove to the IRS that the accrual of the tax could not be avoided.

The Service considers Penalty Abatement due to Reasonable Cause, which is described in Internal Revenue Manual section 20.1. And although many tax professionals are very experienced and skilled at developing a compelling case for penalty relief, it cannot be guaranteed.

It is important to us that our potential clients are clear on this point. Although we cannot guarantee penalty relief:

When and Why Will the IRS Remove Employment Tax Penalties?

IRS typically considers penalty abatement after a taxpayer has become current and compliant with its tax responsibilities. Current compliance shows the IRS that the circumstances or mistakes that caused the accrual of the tax have been fixed.

The IRS determines abatement eligibility based on "Reasonable Cause", which may be found in the Internal Revenue Manual (IRM) section 20.1. FTD, FTF and FTP penalties may be considered for abatement. If you are negotiating with a Revenue Officer, you must submit your request for penalty abatement in writing. It's important that the events surrounding the accrual of the tax debt line up with the tax accrual dates. It is also essential to link your unique set of circumstances to the applicable Reasonable Cause sections in the IRM.

If your Revenue Officer denies your initial penalty abatement request, you may Appeal the determination.

If you have a specific question about the Trust Fund or Payroll Tax Penalties, contact us. We'll give you straight answers to your questions.