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Form 941 Penalties

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In a previous article, we covered some of the basics of Form 941. In this article, we will explore some of the major penalties that may apply for failure to comply with the requirements of Form 941. These penalties may be severe and, in certain circumstances, may even lead to criminal charges.

Failure to File Penalty

The IRS may apply a failure to file penalty for any month, or part of a month, for which a required return is not filed (disregarding extensions). The penalty is 5% of the unpaid tax due on such return, with the maximum penalty typically 25% of the tax owed.

Failure to Pay Penalty

The IRS may also apply a failure to pay penalty for any month, or part of a month, for which the tax due is paid late. This penalty is 0.5% per month of the amount of the tax. In certain circumstances, individual filers may be able to qualify for a reduced penalty of 0.25% per month, if an installment agreement is in effect. The maximum amount of the failure to pay penalty is also 25% of the tax owed.

Interaction between the Failure-to-File and Failure-to-Pay Penalties; Reasonable Cause Defense

If both of the above-mentioned penalties apply to a given month, then the failure to file penalty will be reduced by the amount of the failure to pay penalty. It is important to note that a “reasonable cause” defense is applicable to these penalties – i.e. if the employer’s attorney is able to demonstrate, in writing, that the failure to file or to pay was due to a reasonable cause, then such penalties will be abated by the IRS.

Interest

Interest may also be charged, in addition to any applicable penalties. Interest begins to accrue from the date due of the tax owed on any unpaid amount.

Penalty Rates for Amounts not Properly or Timely Deposited

In general, penalties may also apply if a filer does not make required timely deposits, or if the amounts deposited are less than required. If a filer is able to establish a reasonable cause defense and demonstrates that the failure to comply with the requirements was not due to willfully neglect, then the IRS will not impose the penalties. In certain other circumstances, the IRS may also agree to waive penalties.

For amounts that are not timely or properly deposited, the following penalty rates will apply:

2% – Deposits 1 to 5 days late.
5% – Deposits 6 to 15 days late.
10% – Deposits 16 or more days late.
10%- Amounts paid within 10 days of the date of the first IRS notice requesting the tax due.
10% – Deposits paid directly to the IRS, or paid with a tax return.
15% – Amounts unpaid more than 10 days after the date of the first IRS notice requesting the tax due, or the day on which an IRS
notice and demand for immediate payment was received by afiler, whichever is earlier.

Late deposit penalty amounts are calculated from the due date of the tax liability, and are determined using calendar days.

Trust Fund Penalty

If income, Social Security, or Medicare taxes that are required to be withheld are not withheld or paid, a filer may be personally liable for the Trust Fund Penalty. Important note: use of a third-party payroll service provider or other type of agent will not relieve a required filer of the responsibility of ensuring that deposits are timely and properly deposited, and that returns are filed.

The Trust Fund Penalty is the full amount of the unpaid trust fund tax. The penalty may be imposed on any person determined by the IRS to be responsible for collecting, accounting for, and paying over required taxes, and who acted willfully in not doing so, and the penalty may apply to individuals personally if such unpaid taxes cannot be collected from the employer or business directly.

Criminal Penalties

Those who fail to comply with the bank deposit requirements for the special trust account for the U.S. Government may also be charged with criminal penalties. We will cover the criminal penalties in more detail in future articles.

Averages Failure to Deposit (FTD) Penalty

The IRS may also assess an “averaged” failure to deposit (FTD) penalty of 2% to 10% for filers who are scheduled to make monthly deposits, and who do not properly complete Part 2 of Form 941 when a tax liability listed on Form 941, line 10, equals or exceeds $2,500. The IRS may also assess an “averaged” FTD penalty of 2% to 10% for scheduled semi-weekly depositors who show a tax liability on Form 941, line 10, equaling or exceeding $2,500, and who fail to complete Schedule B of Form 941, fail to attach a properly completed Schedule B of Form 941, or improperly complete Schedule B of Form 941.

The averaged FTD penalty is calculated by distributing a total tax liability listed on Form 941, line 10, equally throughout the tax period. As such, deposits and payments may not be counted as timely because the actual dates of tax liabilities may not be accurately determinable.

Contact Sherayzen Law Office for Legal Help With Negotiating Form 941 Penalties

If you are facing Form 941 penalties, contact Sherayzen Law Office NOW. While the exact options available to you will depend on your particular fact pattern, our experienced tax firm will rigorously represent your interests in IRS negotiations and strive to reduce such penalties, exploring all viable legal options.

Payroll Tax Cut Temporarily Extended into 2012

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The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extended the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through February 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

The IRS warned employers that they should implement the new payroll tax rate as soon as possible in 2012 but not later than January 31, 2012.  If however any extra Social Security tax is withheld in January of 2012, the employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Workers do not need to do anything else; employers and payroll companies should handle the withholding changes.

Recapture Provision

The Act also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year  amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions.  The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. This may change, however, since there is a possibility of a full-year extension of the payroll tax cut being discussed for 2012.

IRS May Issue Additional Guidance

The IRS will closely monitor the situation in case future legislation changes the recapture provision.  The IRS also promises to issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision.

For most employers, the quarterly employment tax return for the quarter ending March 31, 2012 is due on April 30, 2012.