IRS Extends Employment Tax Deposit Penalty Relief for Employer Credits

The IRS has extended the penalty relief provided in Notice 2020-22, 2020-17 I.R.B. 664, for failure to deposit employment taxes to eligible employers that reduce their required deposits in anticipation of the following credits:


  • the paid sick and family leave credits under the Families First Coronavirus Response Act (Families First Act) (P.L. 116-127), as amended by the COVID-related Tax Relief Act of 2020 (Tax Relief Act) (Division N of P.L. 116-260), for qualified leave wages paid with respect to the period beginning January 1, 2021, and ending March 31, 2021;

  • the paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, added by the American Rescue Plan Act of 2021 (ARP) (P.L. 117-2), for qualified leave wages paid with respect to the period beginning April 1, 2021, and ending September 30, 2021;

  • the employee retention credit under section 2301 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) (P.L. 116-136), as amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Relief Act) (Division EE of P.L. 116-260), for qualified wages paid with respect to the period beginning January 1, 2021, and ending June 30, 2021;

  • the employee retention credit under Code Sec. 3134, added by the ARP, for qualified wages paid with respect to the period beginning July 1, 2021, and ending December 31, 2021; and

  • the COBRA Continuation Coverage Premium Assistance credit under Code Sec. 6432, added by the ARP, for continuation coverage premiums not paid by assistance eligible individuals under section 9501(a)(1) of the ARP, during the period beginning April 1, 2021, and ending September 30, 2021.


Background


Eligible employers claim the paid sick and family leave credits under the Families First Act, and the employee retention credit under the CARES Act, against the employer’s share of the Old Age, Survivors, and Disability Insurance (Social Security) portion of FICA tax under Code Sec. 3111(a). Employers that are eligible for the paid sick and family leave credits under Code Secs. 3131, 3132, and 3133, the employee retention credit under Code Sec. 3134, or the COBRA Continuation Coverage credit under Code Sec. 6432, can claim the credit(s) against the employer’s share of the Hospital Insurance (Medicare) portion of FICA tax under Code Sec. 3111(b). The credits are also available to eligible railroad employers for the attributable Railroad Retirement Tax Act (RRTA) taxes under Code Sec. 3221(a).

These refundable tax credits are reported on the employer’s employment tax return for reporting its liability for FICA tax, which for most employers is the quarterly Form 941. Certain employers may claim an advance payment of the refundable credits by filing Form 7200, Advance Payment of Employer Credits Due to COVID-19.

Code Sec. 6656 imposes a penalty for failure to timely deposit required tax amounts, unless the failure is due to reasonable cause and not willful neglect. Failure to deposit employment taxes required under Code Sec. 6302 generally subjects an employer to the penalty. The various legislative acts and provisions implementing the refundable employment tax credits described above either instruct the IRS to waive the penalty or authorize guidance that provides penalty relief.

Paid Sick and Family Leave Credit Penalty Relief


An employer can reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of the applicable paid sick or family leave credit anticipated for the calendar quarter prior to the required deposit, as long as:

  • the employer paid qualified leave wages, qualified health plan expenses, or qualified collectively bargained contributions, for the period beginning on April 1, 2021, and ending on September 30, 2021, to its employees in the calendar quarter prior to the time of the required deposit,

  • the amount of employment taxes that the employer does not timely deposit is less than or equal to its anticipated applicable paid leave credits claimed for the calendar quarter as of the time of the required deposit, and

  • the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.


The total amount of the deposit reduction cannot be more than the total amount of the employer’s anticipated paid leave credits as of the time of the required deposit, minus any amount of those anticipated credits that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Employee Retention Credit Penalty Relief


After a reduction, if any, of an employment tax deposit by the amount of the anticipated paid sick or family leave credits, an employer may further reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of its applicable employee retention credit anticipated for the calendar quarter prior to the required deposit, as long as:

  • the employer paid qualified retention wages for the period beginning January 1, 2021 and ending December 31, 2021, to its employees in the calendar quarter prior to the time of the required deposit,

  • the amount of employment taxes that the employer does not timely deposit—reduced by the amount of employment taxes not deposited in anticipation of the paid leave credits claimed— is less than or equal to the amount of the employer’s anticipated applicable employee retention credits for the calendar quarter as of the time of the required deposit, and

  • the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.


The total amount of any deposit reduction cannot be more than the total amount of the employer’s anticipated employee retention credit as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

COBRA Continuation Coverage Credit Penalty Relief


After a reduction, if any, of an employment tax deposit by the amount of the anticipated paid sick or family leave credits and the anticipated employee retention credit, an employer may further reduce an employment tax deposit for a calendar quarter without a penalty, by the amount of the employer’s COBRA continuation coverage credit anticipated for the calendar quarter prior to the required deposit, as long as:

  • the employer is a “person to whom premiums are payable,”

  • the amount of employment taxes that the employer does not timely deposit—reduced by the amount of employment taxes not deposited in anticipation of the paid leave credits and the employee retention credits claimed—is less than or equal to the amount of the employer’s anticipated credits under Code Sec. 6432 for the calendar quarter as of the time of the required deposit, and

  • the employer did not seek payment of an advance credit by filing Form 7200 for the anticipated credits it relied upon to reduce its deposits.


The total amount of any deposit reduction cannot be more than the total amount of the employer’s anticipated COBRA continuation coverage credit as of the time of the required deposit, minus any amount of the anticipated credit that had previously been used (1) to reduce a prior required deposit in the calendar quarter and obtain this relief or (2) to seek payment of an advance credit.

Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense.  Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board.  Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Newport Beach and Yorba Linda, California

Tel: (949) 397-2292 (Newport Beach Office)

Tel: (714) 463-4430 (Yorba Linda Office)

9th Circuit Ruling Prohibits IRS from Charging Multiple Foreign Bank Account Report Non-Willful Penalties

In a case of first impression, the Court of Appeals for the Ninth Circuit ruled that the IRS can impose only one non-willful penalty under 31 USC 5321(a)(5)(A) when an untimely, but accurate, Report of Foreign Bank and Financial Accounts (FBAR) is filed, no matter the number of foreign financial accounts. The circuit court reversed and remanded a district court's judgment in an action for tax penalties and interest involving an individual’s failure to report foreign financial accounts.

The taxpayer had fourteen financial accounts in the United Kingdom from which she received interest and dividends. However, the taxpayer failed to report the interest and dividends from these accounts on her tax return for the tax year at issue or disclose the accounts to the IRS. Subsequently, the taxpayer participated in the IRS's Offshore Voluntary Disclosure Program and submitted an FBAR listing her multiple foreign accounts. The taxpayer also amended her tax return for the tax year at issue to include the interest and dividends from those accounts.

The IRS concluded that the taxpayer had committed thirteen non-willful violations of the reporting requirements—one for each account she failed to timely report for the tax year at issue—and sued the taxpayer for civil penalties. The district court agreed with the government that the relevant statutes and regulations authorized the IRS to assess one penalty for each non-reported account.

The Ninth Circuit examined the statutory and regulatory scheme for reporting a relationship with a foreign financial agency under 31 USC 5314, and found that it authorizes a single non-willful penalty for the failure to file a timely FBAR. The court held that under the statutory and regulatory scheme, the taxpayer’s conduct in failing to timely file the FBAR amounted to one non-willful violation.

The government argued that, based on the statutory scheme as a whole and legislative intent, the amount of the penalty can be assessed on a per-account basis. The court was not persuaded: it found nothing in the statute or regulations to suggest that the penalty can be calculated on a per-account basis for a single failure to file a timely FBAR that is otherwise accurate.

Reversing and remanding an unpublished DC Calif. decision.

Wilson Tax Law Group, APLC (www.wilsontaxlaw.com) is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense.  Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board.  Wilson Tax Law Group is exclusively comprised of former IRS litigators and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division and Criminal Division.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Newport Beach and Yorba Linda, California

Tel: (949) 397-2292 (Newport Beach Office)

Tel: (714) 463-4430 (Yorba Linda Office)

IRS Announces Issuing Refunds for Compensation Overpayments

On July 13, 2021, the IRS announced it would issue another round of refunds this week to nearly 4 million taxpayers who overpaid their taxes...