Accounting Best Practices, Fifth Edition

13–22. Reduce Tax Penalties with Internet-Based Penalty Modeling

When a company misses making a tax deposit to the IRS, the IRS always applies the next deposit received to the missing deposit, even though the next deposit received may apply to a different payment period. This creates a cascading series of penalties, because the first penalty will still be recorded in the IRS database as having been received late, as well as the second deposit (since it was applied to the first deposit), and so on. The result can be quite hefty penalty and interest payments that range from 2 percent to 15 percent of each missing deposit.

In 1998, the IRS adopted a new tax law provision that allows taxpayers 90 days from the date of a tax penalty notice to designate how the IRS should apply their deposits to taxes due. The details of this provision are contained within the IRS’ Revenue Procedure 99-10. The IRS also has a “98% Rule” that allows a taxpayer to deposit at least 98 percent of the amount due and still avoid being assigned a penalty for underpayment (though the missing amount must be paid shortly thereafter). One can call the toll-free IRS number listed on the penalty notice to tell the IRS how to allocate deposits in order to avoid the cascading penalties problem; the 98% Rule can be used to shift money around between the various payments due in order to further incrementally reduce the amount of the penalty.

The www.payrollpenalty.com Web site, run by TimeValue Software, allows one to ...