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Chief Counsel Addresses Late Payments of Taxes Deferred Under CARES Act
(Parker Tax Publishing September 2021)
The Office of Chief Counsel advised that if any portion of an employer's Code Sec. 3111(a) tax (i.e., the employer's portion of social security taxes), the payment and deposit due dates of which are deferred under Section 2302 of the Coronavirus Aid, Relief, and Economic Security Act, is not deposited by the applicable installment due date, the deferral of the deposit due date is invalidated for all of the employer's deferred tax, rather than just the remaining delinquent portion. The result is that the Code Sec. 6656 penalty for failure to deposit taxes applies to the entire deferred amount. PMTA 2021-7.
Background
Code Sec. 3111(a) imposes on every employer an excise tax (the employer's portion of social security tax) equal to 6.2 percent of the wages paid by the employer. An employer's Code Sec. 3111(a) taxes are generally subject to the deposit rules in Reg. Sec. 31.6302-1. Under Reg. Sec. 31.6302-1(c) and (h), an employer that is a monthly depositor is required to deposit the Code Sec. 3111(a) tax by electronic funds transfer no later than the 15th day of the calendar month following the month in which the employer paid wages to employees. Employers with larger employment tax obligations are subject to the semi-weekly deposit due dates under Reg. Sec. 31.6302-1(c)(2). Reg. Sec. 31.6302-1(c)(3) provides that if on any day within its regular deposit period, any employer has accumulated $100,000 or more of employment taxes, those taxes must be deposited the next business day. Certain safe harbor and de minimis exceptions may apply under Reg. Sec. 31.6302-1(f).
Most employers report their employment tax liability and the deposits they have made on a quarterly Form 941, Employer's QUARTERLY Federal Tax Return. An employer who both files Form 944, Employer's ANNUAL Federal Tax Return, and has a small employment tax liability as described in Reg. Sec. 31.6302-1(c)(5), is generally not subject to these deposit rules but may remit employment taxes with its timely filed Form 944.
Code Sec. 3221(a) imposes on every employer that is subject to the Railroad Retirement Tax Act (RRTA), an excise tax (the employer's share of the social security portion of RRTA tax) that is similar to the excise tax imposed under Code Sec. 3111(a). An employer's Code Sec. 3221(a) taxes are subject to deposit rules provided in Reg. Sec. 31.6302-2 that are similar to the deposit rules under Reg, Sec. 31.6302-1.
Code Sec. 6656 generally imposes a failure-to-deposit penalty on any person required to deposit taxes who fails to do so, including Code Sec. 3111(a) and Code Sec. 3221(a) taxes. The amount of the penalty depends on how delinquent the deposit is. Under Code Sec. 6656(b)(1)(A)(iii), the penalty is 10 percent of the underpayment if the failure is for more than 15 days. If the tax is not paid within 10 days of the first notice sent to the taxpayer demanding payment of any delinquent amount, Code Sec. 6656(b)(1)(B) increases the penalty to 15 percent of the underpayment of the tax. Under Code Sec. 6656(a), the penalty does not apply if the failure is due to reasonable cause and not due to willful neglect. In addition, certain first-time depositors may be excepted from the penalty under Code Sec. 6656(c) and (d) and Reg. Sec. 301.6656-1(a) and (b). Relief from the Code Sec. 6656 penalty may also be available under Notice 2020-22, to the extent that a failure to deposit (or a reduction of the amount of the deposit) was due to the anticipation of certain refundable credits allowed under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (Pub. L. 116-136) and related Coronavirus relief.
Section 2302(a)(1) of the CARES Act postpones the due date for the payment of certain employment taxes. Section 2302(a)(2) provides that deposits of those taxes will not be treated as due on the dates required by Reg. Sec. 31.6302-1 and Reg. Sec. 31.6302-2, if certain conditions are met. Specifically, Section 2302(a)(2) of the CARES Act provides that, notwithstanding Code Sec. 6302, an employer will be treated as having timely made all deposits of "applicable employment taxes" that are required to be made for such taxes during the "payroll tax deferral period" if all such deposits are made not later than the "applicable date."
Under Section 2302(d) of the CARES Act, the term "applicable employment taxes" includes taxes imposed under Code Sec. 3111(a) and so much of the taxes imposed under Code Sec. 3221(a) as are attributable to the rate in effect under Code Sec. 3111(a). The term "payroll tax deferral period" means the period beginning on the date of enactment of the CARES Act, March 27, 2020, and ending before January 1, 2021. The term "applicable date" means December 31, 2021, with respect to 50 percent of the amount of tax deferred under Section 2302(a); and December 31, 2022, with respect to the remaining tax so deferred. If an employer pays any amount before the applicable dates, any such payment is first applied to reduce the employer's liability for an amount due on December 31, 2021, and then to the amount due on December 31, 2022. In other words, Section 2302(a)(2) of the CARES Act allows an employer to defer, without incurring a penalty under Code Sec. 6656, its deposits of the applicable employment taxes until December 31, 2021 and December 31, 2022, provided that the conditions stated in Section 2302(a)(2) of the CARES Act are satisfied.
In PMTA 2021-7. the Chief Counsel's Office addressed the question of whether, if any portion of an employer's "applicable employment taxes" which are deferred under Section 2302(a)(2) of the CARES Act is not deposited by the applicable installment due date, the deferral of the deposit due date is invalidated for all of the employer's deferred tax, or just the remaining delinquent portion. The Chief Counsel's Office was also asked whether the Code Sec. 6656 penalty for failure to deposit taxes applies to the entire deferred amount, assuming no exception to the penalty applies.
PMTA 2021-7
The Chief Counsel's Office responded that Section 2302(a)(2) of the CARES Act conditions the deferral of deposits on the deposit of all deferred amounts by the applicable installment due dates. Specifically, the deferral of the deposits is valid provided "all such deposits are made not later than the applicable date." Thus, the Chief Counsel's Office concluded that if any portion of the deposit is not made by the applicable date - whether December 31, 2021, as to the first installment, or December 31, 2022, as to the second installment - then the deferral is completely invalid. In that event, the deposits were due on the usual deposit due dates provided in Reg. Sec. 31.6302-1 and Reg. Sec. 31.6302-2, which would be the due dates used in determining any penalties under Code Sec. 6656.
The Chief Counsel's Office provided the following examples to illustrate the application of the penalty for late tax payments:
Example: Employer ABC deferred, under Section 2302(a)(2) of the CARES Act, the deposit for $50,000 of Code Sec. 3111(a) taxes - the maximum amount of ABC's Code Sec. 3111(a) taxes for the 2020 tax year allowed to be deferred. As a result, ABC must deposit $25,000 by December 31, 2021, and the remaining $25,000 by December 31, 2022. For the 2020 tax year, ABC deposits $5,000 on December 31, 2021, and makes no other deposits in 2021. ABC's failure to deposit is not due to reasonable cause and no other exception applies. The 10 percent penalty under Code Sec. 6656(b)(1)(A)(iii), for failure to deposit tax for more than 15 days, applies to the entire $50,000, and the penalty amount is $5,000. Because the first installment of $25,000, due on December 31, 2021, was not deposited by that date, the CARES Act deferral provision is invalidated as to the entire $50,000. If, on February 7, 2022, the IRS issues a notice demanding payment of the balance of the first installment, and ABC does not pay the full amount demanded by February 17, 2022, the penalty rate increases to 15 percent.
Example: Assume the same facts as above except that, for the 2020 tax year, ABC deposits $25,000 on December 31, 2021, and deposits the remaining $25,000 on February 28, 2023. The 10 percent penalty under Code Sec. 6656(b)(1)(A)(iii), for failure to deposit tax for more than 15 days, applies to the entire $50,000, and the penalty amount is $5,000. Because the second installment of $25,000, due on December 31, 2022, was not timely deposited, the deferral is invalidated as to the entire $50,000. If, on February 6, 2023, the IRS issues a notice demanding payment of the second installment of $25,000, and ABC does not pay the full amount demanded by February 16, 2023, the penalty rate increases to 15 percent.
For a discussion of the COVID-related deferral of employment taxes under the CARES Act, see Parker Tax ¶252,103. For a discussion the penalty for failure to deposit employment taxes, see Parker Tax ¶252,135.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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