According to Payroll tax penalties, Sec. 6656, when you are not able to deposit the taxes then it becomes a very catastrophic situation. A business generally faces a payroll penalty when it gets very difficult for it to afford especially for new businesses or the businesses with poor cash flow. Businesses can eliminate the payroll tax penalty by practicing a few things.
The initial thing to look for is asking the IRS to terminate the payroll tax penalty. This is significant if the underpayment of payroll tax deposit is a special case but not a rule. Taking an example, if a new business was unable to pay its first payroll deposit on time but it timely paid all the other payroll deposits then there is likelihood that the business gets rid of the payroll penalty. Taking another example of a business with a continuous history of paying the payroll deposits on a timely basis but unfortunately, it became late only for one deposit then for IRS to eliminate the payroll tax penalty, the employer has to show this as an unexpected event. And if the payroll text penalty is not eliminated then the employer has to find out some other strategy that works for him.
The employer can also take help from the “First Time Abatement” requesting the IRS. A business with no penalty for the initial 3 years can request for a “First Time Abatement”. Upon receiving an assessment letter for payroll tax penalties, you can request for “First Time Abatement” of the penalty if you are eligible and if you are not then you need to go for a “reasonable cause” argument. It is a good idea to try a reasonable cause argument first. You can also try reasonable cause much frequently when it is needed. The First Time Abatement is referred to as a get out of jail card that you can take help from once every three years.
If the employer skipped some of the payroll tax payments every quarter then he might be using the IRC §6656(e). IRC §6656(e) allows the taxpayer to assign the payroll deposits to payroll liabilities for a time period of a quarter. This is helpful in reducing the penalties to a remarkable level. This complicated calculation is automatically simplified by the IRS Interest & Penalty Calculator by the use of the IRC §6656(e). To perform this calculation, simply run the IRS Interest & Penalty Calculator and prepare a schedule of payroll deposit penalties. You have to respond to the IRS payroll tax notice within 90 days of the notice. In its response, you must include these lines “Pursuant to IRC §6656(e), the taxpayer by means of this, requests the payroll tax deposit to be applied to the payroll tax liabilities as specified by the attached schedule of the payroll deposit penalties”. Also, don’t forget to add a copy of the payroll deposit penalties schedule. This strategy has proved to be very helpful for some businesses.