Late 941 payments? New IRS program could lead to an unexpected visit
Staying in Compliance with Your 941 Tax Payments Is Easier Thanks to New Help from the IRS. Right?
“Knock, knock.” “Who’s there?” “The IRS.” “Ummm…”
There’s really no funny answer to that “knock-knock” joke. And a new IRS initiative is no joke either.
In case you haven’t heard, the IRS implemented the Early Interaction Initiative on December 8 of last year to help you stay on-track with your payroll tax payments. The program expands use of federal tax deposit alerts (FTD Alerts) to help small business owners like you maintain payroll tax compliance, by reaching out to you if your 941 payments have declined or are late.
The IRS has been sending out these FTD Alerts to taxpayers classified as semiweekly depositors who are behind in their deposits, since 2007. Often, it’s a case of a small business owner who has come into hardship and fallen behind on payroll taxes, but just as often there are other logical reasons to explain the decline in deposits. For example, payroll cutbacks.
In the past, FTD Alerts analysis was conducted in the twelfth cycle week of each calendar quarter: March, June, September, and December.
The difference is in the timing. Under the new pilot program, the IRS is accelerating the timeline to send out FTD Alerts as early as five weeks after an issue is detected.
These alerts offer “helpful information and guidance” through letters, automated phone messages, other communications…and in some instances a visit from an IRS revenue officer at the place of business. Primarily if the taxpayer is viewed as a “pyramider” “repeater” or “potential noncompliant.”
According to the IRS press release, the new initiative is intended to help you. In this case to help you “stay in compliance and avoid needless interest and penalty charges.”
Results Have Been Favorable, but There Are Concerns
Though it appears the IRS is getting positive results from the new initiative in the form of more payments and better taxpayer compliance, concerns have been raised about the process by some tax consultants.
One possible downside of the program is that small business owners may not have time to gather needed information before the IRS shows up on the doorstep demanding information about their late 941 deposits and payments. Or even worse, they may not have time to contact their CPA to get representation and advice.
Two, for some, the visit will seem to come completely out of the blue because many times small business owners don’t realize there is a payroll tax problem. That can happen when an employer uses a third-party payroll service provider that has fallen behind on filing 941 tax forms and making deposits, but hasn’t communicated that fact.
Let us help with your cash flow management challenges. Apply now.
As you likely know, there are two schedules for making deposits of payroll taxes: monthly and semi-weekly. The timing and frequency of your deposits if you file Form 941 are determined on an annual basis based on deposit history during a look-back period ending on June 30 of the preceding year.
You are a monthly depositor for the entire calendar year if the aggregate amount of employment taxes reported for the look-back period is $50,000 or less. If you accumulate a tax liability of $100,000 or more on any day during a deposit period, you must deposit the tax by the next business day, whether you are a monthly or semiweekly schedule depositor.
941 Late Payment Penalties
Many small business owners do not appreciate how severe financial consequences of not paying these payroll taxes on time can be. Here’s a quick review of the penalties:
Failure to Deposit Penalty Rates for Unpaid Tax:
- 1-5 days late: 2%
- 6-15 days late: 5%
- 16 or more days late: 10%
- More than 10 days after the first IRS bill: 15%
In addition to those deposit penalties, you will also be subject to penalties ranging from 5% per month to a maximum of 25% if you file your 940 form, 941 form, or 944 form late, or don’t pay the amount due on the return.
And…in addition to penalties, you also must pay interest based on rates that are set quarterly. That interest rate has recently varied between 3–6%.
So obviously, your best bet is to make your 941 tax payments on time. But if that’s the boat you find yourself in, consider how to get back on-track.
Clearly, with its Early Interactive Initiative, the IRS wants you to know you’re being watched, and watched more closely than before. Which is, let’s face it, not necessarily a bad thing. Despite the fact that any contact with the IRS is often a source of anxiety, ultimately it’s good to be informed early on in the process to avoid deepening payroll issues with the IRS.
Cash Flow Management and 941 Payments
If you are experiencing cash flow management challenges that have led, or could lead, to problems paying 941 taxes on time, consider an invoice or receivables factoring arrangement with MP Star Financial.
Invoice factoring lets your company get paid on your accounts receivable faster, and allows you to make your 941 payments without borrowing from a bank or other source. Receivables factoring is easy to arrange, the costs are minimal, and you can be paid on your invoices in just one or two business days, not weeks. Call now for more information. 800-833-3765 Ext. 150.